This Is Not the Recovery You Were Looking For

I have severely mixed feelings about Robert Barro’s most recent op-ed in the Wall Street Journal. On the one hand I think this description, pointing out how even taking the nature of the late recession into account growth during the recovery is lower than it should have been, is spot on:

The pattern of strong recoveries following sharp downturns is clear when one examines the history of economic disasters. The worst depressions relate to wartime destruction, and the subsequent peacetime periods typically exhibit strong growth. Examples include the high post-World War II growth rates in Japan, Germany and much of Western Europe.

The pattern applies also to non-war depressions, including the Great Depression of the 1930s. U.S. GDP growth from 1933 to 1940—starting from the trough of the Depression and ending before the economy was heavily influenced by World War II—was a remarkable 7% per year, despite the 1937-38 recession.

A better argument can be made that recoveries are typically sluggish following a real-estate crash and prolonged declines in housing prices, as the U.S. has recently experienced. In a study of international housing crises published May 2 by Global Economics Weekly, Jose Ursua examines long-term house-price data for 11 countries, including the U.S. His sample included 65 housing busts, defined as falls in average house prices by at least 15%. The bottom line is that housing crises do impede subsequent recoveries.

However, the average GDP growth rate during the U.S. recovery since 2009 remains nearly 2% per year lower than would be expected, according to the Ursua study. That is, after factoring in the estimated impact of the typical housing bust, Mr. Ursua found that the U.S. growth rate since 2009 should have averaged a little over 4%, rather than the 2.4% we’ve experienced.

And, with some reservations some of which Dr. Barro mentions in passing in his op-ed, I agree with his diagnosis:

What’s interfering with a real recovery? Perhaps the Obama administration should stop casting blame elsewhere and examine the policies it has implemented to ease the pain of recession and falling housing prices. (Some of those, to be fair, were initiated under the Bush administration.)

I agree with Dr. Barro that policy errors beginning during the Bush Administration and continuing in the Obama Administration have made the recovery much weaker than it might have been. I don’t think I agree with him on which policies were in error.

I disagree with him on his prescription, that we should roll back the “safety net” policies that have been put in place since the recession, e.g. repeated extensions of unemployment benefits. Let me explain why.

I think he’s probably right at the margins. I think there are probably people who have not taken jobs they might have because the jobs that were on offer paid less than they were used to making, that they were doing things they didn’t care to do, or that were in places to which they were unwilling or unable to relocate. However, I don’t think that the numbers of such people explain the very large number of long-term unemployed or its twin, the large increase in people who’ve gone on the Social Security Disability roster.

Consider, for example, the number of online “Help Wanted” postings for Orange County, California. That has, essentially, been flat since late in 2008. See also the precipitous decline in newspaper “Help Wanted” advertisements since 2006. Both contrast starkly with the national statistics on online “Help Wanted” postings which have grown considerably over the period.

I think that the picture that emerges is of a recession that continues in full force in some areas of the country with other areas in robust recovery or never having experienced a downturn. Or even a recession in some segments of populations in some areas. Getting someone who earned an income in the fourth or even fifth quintiles of income earners to accept a job in retail sales or flipping burgers won’t produce the recovery we need, either. And those individuals are unlikely to relocate to take such a job, either, particularly when their spouses have jobs that are supporting the family now.

So, consider incentives when evaluating policy initiatives? Definitely. But focus on the incentives for those who are starting or developing businesses. I believe that’s where the potential is.