I see that I’m not the only one who’s on the page that I am today on the economy. Gary Becker, Steven Davis, and Kevin Murphy write in an op-ed in the Wall Street Journal:
In terms of U.S. output contractions, the so-called Great Recession was not much more severe than the recessions in 1973-75 and 1981-82. Yet recovery from the latest recession has started out much more slowly. For example, real GDP expanded by 7.7% in 1983 after unemployment peaked at 10.8% in December 1982, whereas GDP grew at an unimpressive annual rate of 2.2% in the third quarter of 2009. Although the fourth quarter is likely to show better numbers—probably much better—there are no signs of an explosive take off from the recession.
We believe two factors are behind this rather tepid rebound. An obvious one is the severe financial crisis that precipitated this recession, with many major financial institutions receiving large bailouts from the federal government. The confidence of bankers and venture capitalists has been shattered, at least for a while, and it will take time for them to recover from the financial turmoil of the past couple of years. The household sector also faces a difficult period of financial retrenchment in the wake of a major collapse in home prices, overextended debt positions for many, and high unemployment.
The second factor is less obvious, but possibly also of great importance. Liberal Democrats won a major victory in the 2008 elections, winning the presidency and large majorities in both the House and Senate. They interpreted this as evidence that a large majority of Americans want major reforms in the economy, health-care and many other areas. So in addition to continuing and extending the Bush-initiated bailout of banks, AIG, General Motors, Chrysler and other companies, Congress and President Obama signaled their intentions to introduce major changes in taxes, government spending and regulations—changes that could radically transform the American economy.
And, since that creates uncertainty, it delays a recovery.
By the way, I believe that I can explain why we’ve seen relatively little change in outputs but significant effects on employment in the current recession. As business succeed and grow they tend to become increasingly bureaucratized.
There are essentially two ways that a business can succeed. One way is it can be a better competitor. It can do things better or cheaper. Bureaucracies, on the other hand, prosper according to their ability to secure larger budgets and accumulate more employees. The larger the department, the greater its influence.
However, to a great degree these bureaucracies are what have been called “self-licking lollipops”. They contribute disproportionately little to the missions of the companies of which they’re a part although they contribute a lot to the careers of the bureaucrats.
In this recession we’re cutting back on bureaucracies. That reduces the number of employees without reducing outputs.
And that brings me to the other way that a business can succeed: rent-seeking. Whether they’re banks or automobile manufacturing companies businesses than can succeed by rent-seeking don’t have to do things better or cheaper. They don’t have to compete successfully. And they don’t have to trim their bureaucracies.
So another good way to delay a recovery is to prevent inefficient companies from taking the steps they ordinarily would need to in order to survive. Welcome to the world of zombie banks, automobile companies that can’t sell cars, sluggish growth, and prolonged double digit unemployment.
By formal training (under Prof Murphy) and by experience I naturally agree with their points, and your follow on observations. With one exception.
I’m actually surprised that unemployment has not risen higher. (It still may – I’m not backing off my 11% prediction yet.) But perhaps the real answer is that it is higher, we just don’t count the people – the so called discouraged workers.
The problem is, if you start doctoring the statistics you get apples and orange comparisons with historical data, and you get politically motivated statistics. Next thing you know, you have worthless data.
Sorta like the AGW’s.
Drew,
That may be because so many people have stopped looking for work and are therefore no longer counted in unemployment numbers, or they are taking part-time jobs. I’ve read estimates that would add another 7% to the number.
Andy –
I know. That’s the point. Unemployment may in fact be much higher.
But as for proving that…….I’m just pointing out that once you start monkeying around with how you have traditionally measured something it becomes difficult to make valid inter-temporal comparisons or avoid political monkey business with the stats.
Didnt Becker used to be an economist? JK. The last two recessions showed slower than previous recovery. They should have noted that. They also manage to ignore (for partisan purposes?) the global nature of this recession. They also rather glibly gloss over the differences between a recession caused by a stock market bubble and one caused by the banking system going down.
I expect a very long recovery with high chances of a second dip. 11% or 12% unemployment would not surprise me. I thought things would be much worse now TBH. It still makes little sense to me that the stock market is doing so well, assuming that the market actually does look ahead.
Steve
One thing really irks me, this assumption; “They interpreted this as evidence that a large majority of Americans want major reforms in the economy, health-care and many other areas.” Why do presidents and their followers enter into their own bubbles when elected? I elected a Dem, because I see the Dem party as being more pacifist. Nothing to do with major reforms, more to do with getting out of two wars, and not starting any more wars. So now I am totally pissed at this huge shift in the opposite direction, and want to put the very people back who….are nuts…. Cheney should shut his big mouth, where are some normal people ?