Arnold Kling  

Leamer on the Current Recession

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Obviously, I am going through Macroeconomic Patterns and Stories chapter by chapter. It is really too bad that he positioned it as a textbook, because I think that the rest of the profession needs to read it.

Anyway, he signed the preface "8 February 2007," and in chapter 9 he forecast the characteristics of the next recession.

As of 2006, there has been no "recovery" of jobs in manufacturing in either durables or nondurables, and employment levels in those sectors are very low by historical standards. Thus it seems unlikely that there could be another bout of substantial job loss in those sectors...

Exceptional job growth is confined to construction...if we go to recession levels we could lose something like 1 million construction jobs...with 133 million payroll jobs, that is only 1/133 = 0.8% of jobs

So, how did things turn out? Go to these slides from early 2009, and look at slide 27 "Manufacturing Forms the Largest Share of Job Loss (not this time!)." Indeed, by the end of 2008 construction had lost more total jobs than manufacturing (which is not typical), but the really eye-popping losses were in "other," where over 2 million jobs were lost, more than double the job losses in manufacturing and construction combined.

On p. 124 of his book, Leamer writes,

it is mostly manufacturing and construction where the job losses occur. On average about 70% of the job losses occur in these sectors

He also regards the 2001 recession as an anomaly, because job losses were relatively higher outside of those two sectors.

My guess is that if you looked at things relative to trend, the huge share of job losses in non-manufacturing, non-construction and the relatively small share of job losses in manufacturing in 2008 would look even more striking.

This is not your father's recession. Seeing these differences makes me even more skeptical of those who want to view today's economy through the lens of a 1960's era macro model.

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COMMENTS (5 to date)
Troy Camplin writes:

Go read what the Austrian economists have been saying. They have been explaining the differences between these two recessions for a while. And why it's taking so long to get out of this recession. Maybe the reason all the neoclassical economists are dumbfounded is because neoclassical economics is deeply, fundamentally wrong about the nature of the economy.

Ted writes:

Uh, I wasn't aware 1960s macro had anything to say about sectoral losses. Most modern general equilibrium models don't include more than three-sectors and don't have enough specification to deal with sectoral losses in this manner anyway. Neither does any macro model.

Also, this book looks naive if this is what Leamer's big insight is. Economies can evolve and change. The distributional impact of recessions isn't constant over time! All shocking news ...

By the way, the impact of this recessions looks pretty much like a nominal shock. This recession looks like I could have used the 1960s macro of Milton Friedman to explain most it.

fundamentalist writes:

Austrian econ would say the job losses occur in capital goods industries, which includes manufacturing, but isn't limited to it. There should be job losses in mining, including the oil industry. But there are a lot of service industries closely tied to capital goods, such as finance, engineering, etc. And hotels depend upon business travel and conventions in the capital goods industries.

fundamentalist writes:

PS, how has software done? That is a major capital good today.

Troy Camplin writes:


Maybe you should come over to the Austrians' blogs. That's not what they've been saying at all. The malinvestments involve *new* capital. That's why there was an Internet bubble -- and bust. And that's why this time it primarily involved housing and, thus, builders, etc. involved in building housing. The reason why that was the new capital investment and, thus, the malinvestment, had everything to do with the incentives the federal government was creating to get more and more people into housing. The Austrian stroy involves the consequences of artificially low interest rates (and I don't know how anyone can deny that that had a huge effect -- anyone who denies it is just denying reality and the fact that interest rates have a truly significant effect on people's spending, investing, etc.) and the effect of malinvestment on making people switch from manufacturing goods to going into finance/investments. In the Austrian story, the sectors hit first and hardest are those where the malinvestment occured. That's clearly what happened in this and the last recession. And our government keeps doing more of what caused the problem in the first place. And they are engaging in activities which prevent the reallocation of capital to more productive sectors. Thus, our stagnation and a threat of a double dip.

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