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A fast recovery? Or a slow one?

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Neil Irwin has a good piece taking issue with the sudden spurt of economic optimism. The question, he argues, isn't whether we're recovering. It's how fast we're recovering. Three quarters after recovery began in the 1981 recession, GDP growth was 8.3 percent. Three quarters after recovery began in this recession, it was 5 percent. Employment was up 1.5 percent. Right now, it's down 0.6 percent. You can see all this in the charts atop this post, and you can click on them for a larger version.

There are a couple of possible reasons for this. Neil points to the de-leveraging that still has to happen: In 2000, household debt was about 70 percent of GDP. Right now, it's at 94 percent of GDP, which is down from 96 percent in 2007. To get to 70 percent, Neil says, "Americans would need to pay down $3.4 trillion in debt -- and if they do, that money wouldn't be available to spend on goods and services. No one knows where household debt levels will settle, but assuming that they are lower than the ultra-leveraged 2005-2008 period, getting Americans' balance sheets in line will be a drag on economic activity."

Another issue came up in my interview yesterday with labor economist Larry Mishel. Recent recessions have been met with sharp increases in productivity growth. We lost jobs, but the workers who still had jobs compensated by producing more. We've actually seen productivity growth of 5 percent this year, which is very high. The forecasts, however, expect it to settle down next year. If that proves false, it'll be very rough on jobs: For every percentage point faster it is than expectations, that's a million and a half jobs that we won't get, at least if it's not matched by faster-than-expected growth.

It's worth saying here that a permanently higher productivity level is actually good for the economy in the long run. But for the purposes of this discussion, there's no doubt that it'll slow the recovery down.

By Ezra Klein  |  April 14, 2010; 9:15 AM ET
Categories:  Economy  
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Comments

1981 is probably a terrible comparison, and other historical recessions are poor ones too. 1981 (like other recessions) experienced a policy induced recession -- the Fed (Paul Volcker) cranked up rates to "break the stranglehold of inflation, etc" and later on, the economy was "restarted" with monetary policy by bring rates down. We are now already at zero short term rates -- the tool that turned things around in 1981 (and in other recessions) is not available. I don't know how useful the comparisons among other economic variables can be.

Posted by: bdballard | April 14, 2010 9:24 AM | Report abuse

as a regular person, it is very difficult to understand what to make out of the vastness of understanding the economy.
i try to read what i can, and then i come away, still wondering....are things getting better, or not?

my distinctly middle-class neighbors all seem to be hanging in there, with home improvements, vacations and the latest electronic stuff. i imagine they are all breathing easier to see their portfolios doing better.
but for the younger people that i speak with, there are absolutely no jobs available, and no hiring.
their schools are badly hit with budget cuts.
.........
so, i wonder, are things staying the same, or getting better?
or getting worse?
i read things, but i just cant make heads or tails out things.
for some, things are getting better.
for others, things are staying the same.
for some, they are getting worse.
is what everything always seems to come down to.

in any season, it is good to be lucky.


Posted by: jkaren | April 14, 2010 9:46 AM | Report abuse

This isn't a "sophisticated" economic analysis, but I have to wonder how much of that anemic employment growth is due to globalization.

In the early 1980's, a business' only option to replace the workers it had laid off was to hire from the same pool of (American) workers.

In the early 2010's, a worker in the developing world will almost always be more economically efficient, save for in the most localized (e.g. construction, retail) or most highly-skilled industries.

Moreover, it seems like employers would actually be more slow and deliberate in taking on new highly-skilled workers b/c they represent much longer term investments. To the extent the "I need 100 people to staff this factory FAST" effect will happen in response to rising economic fortunes, it's probably going to happen in China.

Posted by: NS12345 | April 14, 2010 10:20 AM | Report abuse

on the good news front Intel's stock was up big at the EOD yesterday. Good words from their CFO about who is buying their products that could translate into corporate job growth.


http://www.nytimes.com/2010/04/14/technology/14chip.html?hpw


also back in 1980 I expect we didn't see the population growth in the US that we do now as we'd need 100k+ jobs added just to break even. Add that in with efficiencies that allow employers to do more with less and i also expect its going to be slow growth for some industries and find it hard to believe we'll ever get to 5% unemployment again.

Posted by: visionbrkr | April 14, 2010 10:27 AM | Report abuse

I wonder if we could be reaching, maybe for the first time in history, a point of diminishing returns regarding the economic benefits of productivity growth. Maybe at a certain level of national wealth, continued productivity growth serves mostly to concentrate new wealth. Then again, economic changes always surprise us, and we have always shown remarkable adaptivity to changing conditions. Our employment markets may adapt more effectively to globalization than we give them credit for. Also, globalization may reach a wall, where its overall growth could slow (hopefully without backsliding).

Posted by: jduptonma | April 14, 2010 10:38 AM | Report abuse

I can confidently state that GDP growth might be strong, might be slow, or might even be negative.

Posted by: ostap666 | April 14, 2010 10:40 AM | Report abuse

Why should debt at 70% of GDP be our target, rather than 94%? If interest rates are lower by an proportionate amount, the effective debt burden on a household in terms of cash out the door. Back in 2000, many fixed 30yr mortgages were set at 7%-8%. Now fixed rate mortgages are about 5%.

http://mortgage-x.com/general/historical_rates.asp

Mortgages are the main component of household debt (and I'd imagine the vast majority of that increase from 70% to 94%). If the average interest rate on debt fell from 7.75% in 2000 to 5.25% currently, then interest payments on the debt would have fallen from 5.4% of GDP to 4.9% of GDP. I think the real issue is the distribution of debt and the amount of individual borrower leverage, not the aggregate number as percent of GDP.

Also a question - why wouldn't that $3.4 trillion be available to spend on goods and services? Suppose that you and I each make $1,000/yr, and that I owe you $200 and we both normally save $200/yr. If I pay you back that $200, my consumption falls from $800 to $600, but you can increase your consumption from $800 to $1,000.

In real life, the debt is paid back to the bank. But consumers are deleveraging, so it's not as if the bank is going to lend it to another consumer, right? Well the bank might decide that as its loans are paid back that it's capital has been rebuilt and it is willing to re-establish/increase dividends to shareholders - the shareholders then use that money to buy goods and services.

So I can see how deleveraging can cause economic dislocation as those who are paid back use the money in different ways than those who borrowed it, requiring a shift in production, I don't see how paying off debt makes that money inaccessible from future use.

One more thought - deleveraging can also occur via economic growth. If the nominal economy grows 6%/yr, and debt increases 1%/yr, we're down to 70% of GDP by the end of Obama's 2nd term.

Posted by: justin84 | April 14, 2010 11:37 AM | Report abuse

Productivity can't grow to the sky. There is only so much you can get out of workers, and they are already wporking pretty hard. Besides, sn't "productivity growth" really the share of the increase in the pie that goes to the comnpany rather than the workers?

Posted by: Mimikatz | April 14, 2010 11:44 AM | Report abuse

I think the parallel is the Great Depression and not any of the postwar recessions - unless you want to talk about the 2001 recession as a double-dip with 2008 as the second dip. As Bush said, if you don't go shopping the terznits are gonna win!!! And so shop they did on credit cards and HELOCs.

Say what you will about Helicopter Ben but he DID recognize the crisis for what it was and he DID take steps to avert the wealth destruction spiral we saw in the 1930s. And kudos to President Obama for letting him act. To be fair (and though it pains me no end) I also have to say kudos to Baby Bush for recognizing that things were bad and going to get worse and for the steps he took as well.

I think it IS different today. Are all the jobs coming back? We asked this in the early 2000s and the jobs did not come back. In fact, I believe Bush's job performance was the worst performance in American history. Maybe it's a macro trend beyond anyone's control in which case look for more Dollar General stores out there. Growing inequality could exacerbate the slide of some areas into more second-world status than first-world.

So yes, slow recovery not because anyone has done anything wrong per se (since mid 2008 that is) but more because we really did go right to the edge that time and it's going to take some fundamental restructuring to come back.

Posted by: luko | April 14, 2010 11:53 AM | Report abuse

Mimikatz, historically, productivity growth comes from investments in capital goods (or human capital) that make it possible for workers to do more with a given level of effort. You are right that the productivity growth we're seeing right now has a lot to do with wringing more from those workers who are still employed (this usually occurs as a recession ends, before hiring recommences), but in general productivity growth involves learning to do more with less.

Posted by: bdballard | April 14, 2010 12:01 PM | Report abuse

Neil Irwin's analysis is in line with Paul Zandy's economic assessments and mine in regard to the level of debt that has accumulated since the 1990's.

When the financial crisis began, many of the companies and consumers were loaded on debt. For the companies, it was the Basel II agreement in 2004 that put company's liquidity in other uses but nothing for the loss of investments and structured products, should it collapse. For the consumers, it was the tax policies and lax regulatory at the federal level along with Fed rate bring the loans rate down to its historic lows for ARMs.

When the bubble popped, it left many with debt that could not be repaid quickly and coupled with the job losses and for businesses, like the financial companies going out of business. simply because the liquidity is tied up in hard to sell assets that was paid with borrowed money like Lehman did.

The result is a massive de-leveraging on part of the businesses and consumers and that has a drag on the economy because it is based on spending instead of savings.
On top of that is the banks have to deal with investors who does not want to buy the loan portfolios for fear they made lose money in the process. This has the effect of reducing credit to businesses and consumer making it slower for the economy to recover.

This is in line with the theory called "Paradox of Thrift" where more money saved drags the economy downward slope and more money spent the economy goes on a upward slope.

Another point made by the Tax Policy Center is the level of debt and equity on the consumers' balance sheet at the height of the financial and housing bubble which has been building for years. It needs to come down to a level more in line with the equity level being higher than the debt.

Posted by: beeker25 | April 14, 2010 12:22 PM | Report abuse

Neil Irwin's analysis is in line with Paul Zandy's economic assessments and mine in regard to the level of debt that has accumulated since the 1990's.

When the financial crisis began, many of the companies and consumers were loaded on debt. For the companies, it was the Basel II agreement in 2004 that put company's liquidity in other uses but nothing for the loss of investments and structured products, should it collapse. For the consumers, it was the tax policies and lax regulatory at the federal level along with Fed rate bring the loans rate down to its historic lows for ARMs.

When the bubble popped, it left many with debt that could not be repaid quickly and coupled with the job losses and for businesses, like the financial companies going out of business. simply because the liquidity is tied up in hard to sell assets that was paid with borrowed money like Lehman did.

The result is a massive de-leveraging on part of the businesses and consumers and that has a drag on the economy because it is based on spending instead of savings.
On top of that is the banks have to deal with investors who does not want to buy the loan portfolios for fear they made lose money in the process. This has the effect of reducing credit to businesses and consumer making it slower for the economy to recover.

This is in line with the theory called "Paradox of Thrift" where more money saved drags the economy downward slope and more money spent the economy goes on a upward slope.

Another point made by the Tax Policy Center is the level of debt and equity on the consumers' balance sheet at the height of the financial and housing bubble which has been building for years. It needs to come down to a level more in line with the equity level being higher than the debt.

Posted by: beeker25 | April 14, 2010 12:23 PM | Report abuse

"permanently higher productivity level is actually good for the economy in the long run"

Yes -- good for "the economy," (but who is that?) but "good" for either the planet or people? Can't even be asked, but without asking, we're chasing our tails and possibly drifting toward some huge cliffs ...

Posted by: janinsanfran | April 14, 2010 12:29 PM | Report abuse

janinsanfran, you're conflating productivity improvement and per capita economic growth. It is entirely possible to have improved productivity and to choose to "harvest" that improvement by slowing down the growth of stuff and taking the productivity gains as increased leisure opportunities -- some say this is what European economies have done, relative to the US experience.

Of course, being able to kvetch about the gruesome nature of excess material prosperity is a great situation to be in.

Posted by: bdballard | April 14, 2010 12:48 PM | Report abuse

So for two decades we (consumers) borrowed from our future wealth in order to finance lifestyles that we couldn't afford, and now we're suffering from a lack of present wealth because we already spent it. Is that a good elementary level summary of the current predicament?

Posted by: BigTunaTim | April 14, 2010 1:59 PM | Report abuse

and we paid too much!

Posted by: bdballard | April 14, 2010 2:42 PM | Report abuse

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