Welcome to the Double-Dip Recession

Whether or not the National Bureau of Economic Research ultimately agrees, we are now entering the second dip of a double-dip recession. This is because jobs are what really matter to most Americans, and the employment situation is getting worse, after a scant four months of getting better.

From a theoretical point of view, another recession is what we should expect right now. This is because both GDP and employment are driven by private business investment, and huge tax increases on both business income and capital investment are now only six months away. However, the oncoming recession is also visible in the numbers.

In terms of total employment (BLS Household Survey), there have been nine recessions since 1950. The current downturn is the worst by far. Total employment declined for 25 months from its peak in November 2007, and the total job loss in percentage terms (5.93%) was nearly twice as great as that of any previous post-war recession. The recovery from the employment downturn has also been the most anemic. If the average rate of increase in total employment seen in the past six months were to be sustained (which it probably will not be), it would take until March 2013 to get back to the number of jobs that we had in November 2007. In the meantime, the number of working-age Americans would have increased by almost 10 million.

It is illuminating to compare the current recession with what had previously been considered the most severe post-war downturn, that of 1981-1982. Both recessions were caused by a sudden, sharp decline in the velocity of money. Although only 2.00% of total jobs were lost during the 1981-1982 downturn, the decline in jobs lasted almost as long (20 months vs. 25 months) and the peak unemployment rate was actually higher than that of the current recession (10.8% vs. 10.1%).

The striking difference between the 1981-1982 recession and the current one is in the speed of recovery. By six months after the December 1982 jobs trough, 79% of the lost jobs were back. This time, it's only 15%. During the fifth and sixth month after the employment trough in December 1983, the total number of jobs increased by more than 1%. In contrast, over the past two months, total employment has actually declined by 0.25%.

In the past six months, the "Real Dow" (the Dow Jones Industrial Average divided by the price of gold) has declined by 17.4%. During the same period, the monetary base, which provides the basic "fuel" for demand, has fallen by 1.18%. In contrast, over the comparable period during the recovery from the 1981-1982 recession, the Real Dow was up by 28.4% and the monetary base had increased by 4.00%.

These falling indicators, plus the contraction in total employment during the past two months, suggest that we are heading into another recession - the dreaded "double dip". Unless policy changes are made, the best we can hope for is another "jobless recovery", like the one from the last recession, that of 2001-2002.

What policy changes would be likely to give us a strong recovery in employment? Again, a comparison between the current recession and the sharp downturn of 1981-1982 is illuminating.

After the 1981-1982 recession, total employment began rising the moment that Ronald Reagan's permanent, across-the-board tax cuts were fully in effect (January 1, 1983). Within seven months, all of the lost jobs had been recovered.

In contrast, the current recession has been fought with "stimulus", first $168 billion from Bush and then $782 billion from Obama. The result has been the longest and deepest slide in total employment since the Great Depression, followed by the slowest jobs recovery on record, followed by what is shaping up as another employment downturn. Based upon the evidence, it is more logical to conclude that "stimulus" destroys jobs than that it creates them.

If we want to pull out of the current dip, we will have to cancel all of the tax increases scheduled for January 1, 2011. If we want a strong jobs recovery, we will have to cut taxes from where they are now, starting with the corporate income tax.

The moral of A Tale of Two Recessions is, "tax cuts create jobs, ‘stimulus' does not".