A slightly off-center perspective on monetary problems.
Yesterday on PBS I heard experts speculating about why recent recoveries have seen disappointing job growth. So I decided to take a look at the figures, and found that the entire concept of “jobless recoveries” is largely a myth. I say largely, as a examination of Okun’s Law may be able to find a tiny morsel of truth in the idea, but I found no evidence of any significant mysteries. Indeed no evidence of any jobless recoveries, mysterious or not.
Here are the data on the first 6 quarters of recovery from the last 4 recessions:
Period NGDP growth rate RGDP growth rate Change in jobless rate
1982:4 – 84:2 11.0% 7.7% – 3.4% (points)
1991:2 – 92:4 5.9% 3.1% +0.8%
2001:3 – 03:1 3.8% 1.8% +1.0%
2009:2 – 10:4 3.9% 2.8% -0.1%
The change in the unemployment rate was for the first 18 months after the cyclical trough. In the Reagan recovery, RGDP soared and unemployment fell sharply. In 2002 RGDP growth was well below trend, and unemployment rose. In 2009-10 RGDP grew at trend, and unemployment was stable. No surprises there. Only 1991-92 presents a bit of a puzzle, as RGDP grew at about trend, and unemployment rose 0.8%. But that’s it. Where’s the evidence of a recent trend toward jobless recoveries? What I see isn’t jobless recoveries, but three consecutive recessions where the first 6 quarters saw no recovery at all (relative to trend.) We fell into three deep holes, and started digging sideways.
So yes, the last three recessions have been quite different, but the difference was that during the first 6 quarters of “recovery” there was no recovery at all. And 1983 is not an outlier. We can’t do 1980, because the entire recovery lasted much less than 6 quarters, but previous postwar recessions saw RGDP rise at 5% to 10% rates during the first 6 quarters of recovery.
The real question is why did RGDP rise so slowly during the three most recent recoveries. If you haven’t guessed yet, you’re obviously new to my blog.
There’s no jobless recovery, there’s a jobless lack of recovery, or more accurately a M*V-less lack of recovery.
I don’t want to suggest that this is always a bad thing. The previous two recessions were embedded within the Great Moderation. Perhaps by being relatively stingy during the recovery period the Fed allowed for expansions of greater duration. But in this severe recession there is no excuse for such a stingy monetary policy. A 3.9% NGDP growth rate isn’t even digging sideways; it’s digging sideways and slightly deeper. If it weren’t for a certain degree of wage flexibility, 3.9% NGDP growth would have led to even higher unemployment, as real growth would have been well below trend. Instead, wage growth has slowed just enough to allow this sub-par NGDP growth to produce roughly average RGDP growth. In real terms we are digging sideways.
Of course the recent data are more upbeat, and if Fed forecasts are right we’ll finally get a recovery in 2011. Not clear why they couldn’t have provided a bit more NGDP growth in 2010.
Paul Krugman has noted the anomalous recoveries from recent recessions, and discussed structural issues having to do with balance sheets, bubbles bursting, etc. At some level he may be right, but I think it’s more useful to figure out why those factors led to slow NGDP growth. Did they disrupt the usual relationship between changes in the fed funds target, and changes in NGDP? I’d guess the answer is yes. Perhaps inflation targeting (rather than level targeting) also plays a role. Price level targeting leads to V-shaped recoveries and inflation targeting leads to L-shaped “recoveries.”
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28 Responses to “The myth of the mysterious jobless recoveries.”
Scott This post compares the 1950´s with the “present”. I link the unemployment rate to the depth of the hole and the speed with which the economy “craweld up”. The present hole is deep and the economy is, as you say, crawling sideways. http://thefaintofheart.wordpress.com/2011/03/05/welcome-back-nairu/
Scott wrote: “Perhaps inflation targeting (rather than level targeting) also plays a role. Price level targeting leads to V-shaped recoveries and inflation targeting leads to L-shaped "recoveries."’
I think this gets to the core of it. Before Greenspan we had swift recoveries. We had monetary policy implicitly governed by some form of the Taylor Rule during the Greenspan era which despite attaching some weight to output gaps is still “memoryless” from the standpoint of the price level. And I think I could form a cogent argument that there was a subtle shift towards straight inflation rate targeting under Bernanke that has made the situation, if anything, even worse (empirically this has shown up more in the depth of the recession than the recovery).
In short, if you like jobless recoveries, then you ought to love inflation rate targeting. Just another reason to move to price level targeting, or better yet, to our favorite not-quite-batshit-insane economist’s borderline sociopathic obsession.
Mark Greenspan was “unconsciously” doing NGDP level targeting! I always was amused by his coinage of the term “Appropriate monetary policy”. And it turned out “appropriate”. Inflation targeting at present is a restriction on getting the economy back on track. Europe is about to and maybe the US (if it caves in to the likes of Plosser, Lacker and others)to experience additional unpleasantness
Marcus, Yes, I know you can make that argument, but I would suggest that (especially if one looks at the 1990 recession) the trend in NGDP changed slightly after each recession. This is symptomatic of Greenspan seemingly targeting rates and not levels, and the result was L shaped recoveries from each recession.
Yes, I’m following Europe quite closely (of course). Check this out from the the ECB’s announcement on Thursday:
“The primary objective of the ECB's monetary policy is to maintain price stability. The ECB aims at inflation rates of below, but close to, 2% over the medium term.” http://www.ecb.int/press/pressconf/2011/html/is110303.en.html
This is headline inflation of course, which is projected to be as high as 2.6% this year. Core inflation for the Eurozone remains just 1.0%. (The lunatics!)
The ECB announced that the policy instrument would remain unchanged at 1%, but Trichet made implied that rate hikes are probably coming at the next meeting. Bond markets are now pricing in 0.75 points of rate hikes this year, which would take the rate to 1.75% by the end of 2011. The euro closed just under 1.40 dollars on Friday. This is all very infuriating.
Deja vu, all over again. I remember pointing out to DeLong (back before he decided there was such a thing as losing one too many arguments) that the ‘jobless’ recovery after 2001 was obviously because the recession had been short and mild. Just as the 90-91 recession had been.
The recovery from the deeper and prolonged 81-82 recession had been stronger because of Milton Friedman’s rubber band analogy. Those three recessions and recoveries are perfectly understandable. Not so this one. We should have had a vigorous ’snap back’, but haven’t yet. Rounding up the usual suspect; it’s monetary policy.
You could argue the “snapback” is beginning. Good evidence is mounting that November 10 was the true “trough” and December 10 was the true beginning of the expansion.
But I think Europe may send everything back to hell again before more notable progress by 2012-13 can be made. Especially with those undercapped German banks.
If one wants to know how disastrous the US employment situation is, try this.
Record fiscal stimulus and record unemployment fail. Particularly longer term unemployment. Massive unemployment, huge surge in federal debt and the banks did not get punished: triple fail.
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Scott: if you’ve already mentioned this somewhere on the blog then I apologize, but here’s a video on youtube of you talking about the Great Recession.
http://www.youtube.com/watch?v=VP4IiKxNj8I
The video is actually highlighted for some reason by this conference: http://www.warwickeconomicssummit.com/2011/downloads.cfm
I’m not sure why this particular video is there, given they seem to have had a lot of far more prestigious speakers in the past!
Actually on that page, they’re giving Scott billing ahead of the UK Prime Minister. Wow.
Marcus, Yes, that’s why the 1982 recession is such a good benchmark, it was also deep.
Mark, That’s a good point.
Mark, If Eurozone core inflation was 2.6% and a oil price decline brought headline inflation temporarily down to 1%, would the ECB be cutting rates, or would they point to core inflation? My hunch is that they would not cut rates.
Patrick, Yes, in a way I’m merely stating the obvious–I’m surprised so many people keep talking about a jobless recovery. If there are no jobs, there is no recovery.
The Rage, I agree about the US, but am worried about Europe. Another Greek crisis like May 2010 could hurt the US.
Lorenzo, Yes, that graph actually makes 2009 look much worse than 1982.
CA and Johnleemk, Thanks, I produced that for the Warwick Economic Summit in the UK. I can’t bear to watch myself on film, so I’ve never seen it.
The UE rate can change for two reasons.
1. A person listed as UE can get a job.
2. A person listed as UE can leave the labor force.
The “jobless recoveries” are usually about the latter occurring at a higher rate. The decline in LFPR due to the recession in the mid 70s was reclaimed by 1978, the decline in the early 80s was reclaimed almost entirely by 1985, the early 90s recession by 1996. The 2000 boom had an LFPR peak of 64.6 that has not been equaled and the current LFPR is at 20+ year low.
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