These are great graphs! In just a minute or 2, through a series from The Washington Post, you can understand our employment problems.
Our starting point is potential output during the past decade. We see how much we could have produced if our land, labor, and capital had been optimally used. Then by comparing our potential to our actual output, the next three graphs illustrate when we reached our potential and when we were below it. During 2009, with the recession over, we see actual output rise. The problem though, is that the actual output line is still lower than our potential. The result? We have an “output gap”.
Eliminating the output gap with enough jobs is tough because increasingly efficient producers need fewer workers. In addition, our population keeps growing. So, the line representing actual output needs to ascend steeply toward potential output for enough workers to have jobs. As you can see in the last 2 graphs, 3% annual growth is not enough. What do we need? You might want to look at graphs 8 and 9.
The Economic Lesson
There are four kinds of unemployment. 1) Cyclical unemployment that is caused by a dip in the business cycle. 2) Structural unemployment that results from fundamental changes in production such as new technology. 3) Seasonal unemployment that reflects the impact of holidays and the time of the year. 4) Frictional unemployment that will be here always because people are constantly leaving jobs for a variety of personal and professional reasons.
We now know when the recession officially ended. But I still wonder whether we are moving along a “V”, a “U”, a “W” or an “L”.
According to the National Bureau of Economic Research (NBER), the recession began during December, 2007 and ended June, 2009. 18 months, this recession was the longest since WW II. The 1973-75 and 1981-82 recessions lasted 16 months with the 1981-82 recession a part of a “W” which we could call a double dip. Lasting 8 months, the 2001 recession was the same length as the 1990-91 contraction.
I thought it would be interesting to see the connection between (selected) recession years and politics. 1920: switch from incumbent Democrats to Republican Warren G. Harding; 1932: Herbert Hoover loses to Franklin Roosevelt; 1948: incumbent Harry Truman wins; 1980: Ronald Reagan beats Jimmy Carter; 1992 (after 1990-’91 recession): Bill Clinton defeats George H. W. Bush. (“It’s the economy, stupid.” was posted in Bill Clinton’s campaign headquarters as a reminder of their winning message.)
The Economic Lesson
The traditional definition of a recession is 2 consecutive quarters of a shrinking GDP. The NBER, though, uses additional variables such as “aggregate hours of work” and other production and employment data to identify the length of a recession. The 2001 recession, for example, did not have 2 consecutive quarterly GDP declines.
The path of a business cycle moves through an expansion, peak, contraction, and trough. As a result, during December, 2007, we experienced the peak of the previous business cycle and the beginning of a contraction. We now know that the trough, the very bottom of the current cycle, took place during June, 2009. Since then, we have been expandng. With a sluggish expansion, I guess we can eliminate the “V”.
Posted by: adminEcon
Tags: business cycle, NBER, recession
1. Sovereign debt: Contemplating big worries, I could place sovereign debt at the top of the the list. Should we currently be concerned about Greece, Spain and other EU nations with excessive obligations? Beyond, should we be focusing on the U.K. and the U.S.? Referring to the U.S. stimulus, one article quotes Lois Lane saying, in flight, to Superman, “If you’ve got me, who’s got you?”
2. State and local debt: Within the United States, are state and local obligations unmanageable or, will the pressure to cut costs be therapeutic?
3. Exit strategy: Should the Fed’s exit strategy make you lose sleep? Is there a productive way for the Fed to diminish the portfolio it gathered when it was flooding financial intermediaries with cash through quantitative easing?
4. Inflation: Perhaps, instead, inflation looms large as the next big worry. Having deployed a massive stimulus, will inflation hit us on the rebound?
5. Housing: Housing also might make us pause. When the Fed stops buying mortgage backed securities, will potential liquidity for new construction evaporate?
6. Iran: Or, should we just think about Iran and the possibility that oil prices will soar if there is an attack on their nuclear facilities.
7. China: Maybe though, China is the big worry. Will they continue purchasing our debt?
And finally, a small worry…
Will I ever again buy tomato sauce??
The Economic Life
While people repeatedly say, “This time is different,” it never is. The market system will always be subject to business cycles. With GDP relatively high, it will hit a peak. Next a contraction will unfold, then a trough, and finally the new expansion. From Adam Smith onward, these cycles have recurred. Returning to our worry list, I suggest optimism.