Let’s face it–for all the talk about an economic recovery after the recession, for most working and middle class Americans, their lives are no better. Sure, if you are a corporate shareholder, you have done great! But if you are a working class person, you haven’t. Continued automation and the removal of the last unionized industrial jobs from the nation mean that workers feel ever more alienated from society and politics, helping to elect a monster like Donald Trump. Ryan Cooper argues that the Great Recession never ended:
But the problems are still there — indeed, in some ways things are actually getting worse. The Great Recession never fully ended.
First, recall that an economic crash is caused by a collapse in demand — essentially, total spending plummets throughout the economy. Virtually nobody disagrees that this was the case right after the 2008 financial crisis, but many today think that the demand problem has been solved.
Economist J.W. Mason, a professor at John Jay College and a fellow at the Roosevelt Institute, has compiled a detailed argument that lack of demand is still the major problem in a brilliant paper. The most obvious and jarring part of the case is the fact that from the end of the Second World War to 2007, inflation-adjusted American GDP per person trundled upwards at a rate of 2.2 percent per year. Any periods of slower growth were followed by periods of catch-up faster growth.
But after 2007, there was not only the worst economic crash since the Great Depression, but no catch-up growth whatsoever. On the contrary, the succeeding years after the immediate crash have seen much slower than average growth — and as a result, the gap between what forecasters thought the trajectory of economic output would be in 2006 is actually bigger today than it was in 2010, and getting steadily worse. It sure looks for all the world like the crisis was just never completely fixed:
In other words, it’s quite possible that not only are we very far from maximum economic output — meaning literally trillions of economic output gone unproduced every year, and more importantly millions of people left unemployed for no reason — but also that maximum output might be receding ever further over the horizon.
The second interesting facet of the argument has to do with demographics. When you break out the decline of economic production, about half of it comes from declining labor force participation — that is, the percentage of people employed or looking for work. Inflation paranoiacs argue that this is due to demographic changes, namely the aging of the workforce. To examine this case, Mason conducts a “shift-share analysis,” basically a counterfactual taking the employment rate of various categories of people from 2007, and projecting them onto current, older demographic realities. So measured, demographics explains about 40 percent of the decline in labor force participation.
However, the American population is not just getting older, it’s also getting more educated — which is associated with greater labor force participation. If you include education as a demographic variable, the aging-based decline in the labor force almost totally vanishes. “All else equal, older people are less likely to be employed, and educated people are more likely to be. Over the past decade or two, these two factors have essentially canceled one another out,” Mason writes.
What’s really interesting is Cooper’s comparison of today to 1939:
Taken together, the American economy looks quite similar to that of around 1939 or so. Back then, the New Deal had partially fixed the Great Depression, but had failed to restore full employment due to anxious politicians (including FDR) flipping out about the budget deficit and turning to austerity. It took the stupendous mega-spending of war mobilization to break the political deadlock and restore full employment and production.
In 1939 as today, many argued that limp performance was simply the best that could be done. But it turned out after the war the economy did not collapse back to its prewar levels. Instead (after a brief hiccup from demobilization) it rocketed up into its greatest boom in history. Without the war, it’s easily possible that America would have continued stuck in a quasi-depression indefinitely — as we appear to be today. But conversely, there is every reason to at least try to smash the economy back up to trend with another very large stimulus. Without it, we’re due to start our second Lost Decade next year.
In a new paper out this week, we at the Roosevelt Institute offer support for the emerging consensus that the economy needs policies to boost demand. The paper reviews the available data on where the economy is relative to its potential. We find that the balance of evidence suggests there is still a great deal of space for more expansionary policy.
We offer several lines of argument in support of this conclusion.
GDP has not recovered from the recession. GDP remains about 10 percent below both the long-term trend and the level that was predicted by the CBO and other forecasts prior to the 2008–2009 recession. There is no precedent in the postwar period for such a persistent decline in output. During the sixty years between 1947 and 2007, growth lost in recessions was always regained in the subsequent recovery.
The aging population does not explain low labor force participation. It is true that an aging population should contribute to lower employment, since older people are less likely to work than younger people. But this simple demographic story cannot explain the full fall in employment. Starting from the employment peak in 2000, aging trends only explain about half the decrease in employment that has actually occurred. And there are good reasons to think that even this overstates the role of demographics. First, during the same period, education levels have increased. Historically, higher education has been associated with higher employment rates, just as a share of elderly people has been associated with less employment; statistically, these two effects should just about cancel out. Second, the post-recession fall in employment rates is not concentrated in older age groups, but among people in their 20s — something that a demographic story cannot explain.
The weak economy has held back productivity. About half the shortfall in GDP relative to the pre-2008 trend is explained by exceptionally slow productivity growth — that is, slow growth in output per worker. While many people assume that productivity is the result of technological progress outside the reach of macroeconomic policy, there are good reasons to think that the productivity slowdown is at least in part due to weak demand. Among the many possible links: Business investment, which is essential to raising productivity, has been extraordinarily weak over the past decade, and economists have long believed that demand is a central factor driving investment. And slow wage growth — a sign of labor-market weakness — reduces the incentive to adopt productivity-boosting technology.
Only a demand story makes sense. The overall economic picture is hard to understand except in terms of a continued demand shortfall. If employment is falling due to demographics, that should be associated with rising productivity and wages, as firms compete for scarce labor. If productivity growth is slow because there aren’t any more big innovations to make, that should be associated with faster employment growth and low profits, as firms can no longer find new ways to replace labor with capital. But neither of these scenarios match the actual economy. And both stories predict higher inflation, rather than the persistent low inflation we have actually encouraged. So even if supply-side stories explain individual pieces of macroeconomic data, it is almost impossible to make sense of the big picture without a large fall in aggregate demand.
Austerity is riskier than stimulus. Finally, we argue that, if policymakers are uncertain about how much space the economy has for increased demand, they should consider the balance of risks on each side. Too much stimulus would lead to higher inflation — easy to reverse, and perhaps even desirable, given the continued shortfall of inflation relative to the official 2 percent target. An overheated economy would also see real wages rise faster than productivity. While policymakers often see this as something to avoid, the decline in the wage share over the past decade cannot be reversed without a period of such “excess” wage growth. On the other hand, if there is still an output gap, failure to take aggressive steps to close it means foregoing literally trillions of dollars of useful goods and services and condemning millions of people to joblessness.
In my view, a big part of the solution is a government guarantee of employment. This is a critical part of reorienting an increasingly automated economy to working for everyday Americans who find themselves increasingly unmoored. There’s also a strong racial justice component to this as well, which is why Coretta Scott King fought for this idea.
In 1974 Scott King co-founded the National Committee for Full Employment/Full Employment Action Council (NCFE/FEAC) to fight for legislation that guaranteed jobs for all Americans. Guaranteed jobs for all who wanted them—regardless of race or gender—had long been a goal of Scott King’s and the black freedom movement. But in a time of rising inflation and unemployment, and fearing a growing backlash against the civil rights agenda, Scott King believed that guaranteed jobs were also necessary to mollify fears of economic competition on the part of white workers. In the 1940s her father’s sawmill was burned to the ground two weeks after its opening, following his refusal to sell to it to a white man. She knew that shared feelings of precarity could provoke racist violence just as much as they might elicit solidarity. Scott King’s struggle for guaranteed jobs to anyone who wanted one was as tactical as it was moral.
In current debates, demands for guaranteed jobs and demands for a basic income are often framed as diametrically opposed. But for Scott King and the broader black freedom movement, these were coupled together. Scott King was an ardent advocate for the National Welfare Rights Organization’s calls for a guaranteed annual income (which, in contrast to some basic income schemes, always emphasized the need for a cash benefit of a living wage). But she spent more time campaigning for guaranteed jobs. In these proposals, there were income guarantees that would be provided for those who are unable to work due to age, ability, or care-giving responsibilities. The goal was to expand the welfare state through social movement victories, not impose workfare.
The linked piece goes deep into Scott King’s fight in the 1970s, which is completely left out of the mainstream histories of the civil rights movement. And as Scott King fought for, a renewed Humphrey-Hawkins Full Employment Act that actually guarantees a job would be a great start for the future.