Arnold Kling  

Lee Ohanian on the Great Recession

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He talks with Russ Roberts. A few excerpts:


typically in U.S. business cycles, productivity, measured either as total factor productivity or labor productivity--output per hour or output per worker--typically falls significantly during substantial recessions such as those in the 1970s and the 1981-82 recession. In this recession, productivity didn't fall. All the drop in output was accounted for by a drop in labor input, or employment...

So, employment today relative to the working age population is lower now than it was at the NBER-defined 2009 June trough, and it's lower today than it was at the height of the financial crisis when the stock market was falling 20%, everybody thought the world was coming to an end...

There's a 90% drop in investment between 1932 and 1933. It didn't come back really much at all in those recovery years. And my sense is that it didn't come back because businesses looked to the future and said: The long run is not looking very good for this economy. I worry that some of that may be playing a role again today, and the data that leads me to think that might be somewhat of the explanation is that the expansion years, between the 2000-2001 recession and the Great Recession, those are not particularly good years compared to the 1990s and 1980s. So, we seem to have a more sclerotic economy.

Topics I would suggest thinking about: ongoing factor-price equalization and factor substitution; high marginal tax rates for low-skilled workers; not clear what the "next big thing" is going to be, particularly with health care and education taking up so much of spending.


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CATEGORIES: Macroeconomics



COMMENTS (6 to date)
Charlie writes:

At the end he says:

"Well, this is still the place to be. No matter how bad things look here, Europe is a lot worse. One reason maybe why we were so strong in the 1980s and 1990s is because we didn't face a lot of competition. We didn't have China developing the way it was; Latin America was a basket case in the 1980s. We are facing more competition now."

I have no idea what he means. Competition for what, competition for raw materials, immigrants, capital...? There's probably a coherent argument beneath it, but I don't want to guess what it is, and it struck me as strange.

Joe Cushing writes:

Can we stop calling it the great recession and recognize that it is a depression. We are not in recovery because the economy is growing slower than inflation. The economy is depressed.

The reason we are stuck in this smelly rut is because of the massive expansion of the government spending and forced private spending (now recognized as a tax by the Supreme Court) that sucked all the wind out of the private sector. Further, business knows we are just a few years from a massive wave or baby boom retirements. That's when it will be easy for me to get a job but I won't get to keep much of what I earn because I will be working to feed myself and one person who is so wealthy that they don't have to work.

Harold Cockerill writes:

I'm 62 and I don't see myself retiring. I think the future will bring more wealth destruction by people that think themselves smart enough to run an entire modern economy even though they have no experience running something as complicated as a mom and pop store.

We've wasted an immense amount of money and the path of least resistance for paying off the loans will be the printing press. It's easy enough to see what that has done in the past. I think I'm glad I'm not twenty years old.

stephen writes:

too many damn people. or, if you prefer, factor price equalization. one is more mathy

Shayne Cook writes:

@ Charlie:

Actually, you do have some idea of what Ohanian means - you listed some of the impacts of the new global competition. Perhaps I can help clarify some of the things you listed.

competition for raw materials - Exactly. Consider oil for example. Both the U.S. and China are net importers of that global raw material. High oil prices are much bemoaned here in the U.S., and even cited as contributory to recessions, lack of recovery robustness, etc. But U.S. demand for that global raw material is not a significant factor in its high price. There has been a good deal of research on this in the past with the conclusion that it is NOT the largest single-economy demander of oil that sets global price. It is the fastest growing economies that have greatest upward impact on prices of oil - and other global raw materials. It's not a stretch to understand why. The fastest growing economies have both the desire and means to "out-bid" other competing economies for those raw materials, by definition.

immigrants [labor] - Sort of. Actually, immigrants, as a required factor-of-production, are not really required. As a matter of fact, global unskilled labor supply is in extraordinary excess just now. Two of the most significant new U.S. competitors - China and India - have an unskilled labor force in excess of 10 times the total U.S. labor force. They need not "bid" for unskilled labor (immigrants) to support their economies, or their growth rates. That is the most significant contributing factor to persistent U.S. unemployment rates right now. As Ohanian noted, skilled labor unemployment rate is not excessively high in the U.S. It is the unskilled U.S. labor unemployment rate that remains persistently high. Again, no stretch to understand why. Unskilled labor in the U.S. has serious competition with that of emerging economic competitors. Worse, the U.S. unskilled labor force is seriously disadvantaged with regards pricing. Those unskilled folks in China and India are not just willing, but eager, to supply their labor at wage rates approximately 1/10 of even minimum wage rates in the U.S.

capital - Exactly. Capital will flow to whatever/whichever economic constituent promises the best net return, assuming comparable risk. And jurisdictional borders (national borders) do not impede that flow. All of the emerging (fastest growing) economies tend to and have attracted all of the capital they require. Additionally, by virtue of their prior growth and emergence, they've acquired earned capital. The U.S. still has a great deal of previously-earned capital, but has lost its prior status as "the best place to invest". That is the "structural" flaw that Ohanian describes.

@ Harold Cockerill:
I'm not far behind you and I concur with everything you said.

One note though. Like you I don't have an ounce of faith in any/all of the politicians in D.C. - irrespective of what letter they have behind their names on the ballot - and for precisely the reason you noted.

But I still have almost infinite faith in the 310 Million + folks they (allegedly) work for.

Jim Glass writes:

I always like Ohanian and found this discussion informative and interesting -- including for the extra reason here that there was nary a mention of Fed policy or aggregate demand.

Which is sort of like listening to an hour-long interesting and informative discussion about the Titanic which has no mention of the iceberg.

The puzzle and mystery of "sticky wages" that stay so far above the market-clearing rate, that they go on about -- both thru the 1930s and still today -- seems not so puzzling or mysterious to me. There is no need to invoke Hoover or FDR telling businesses "keep wages high!" to explain them. (Really, how often do businesses en masse act against their own self-interest in response to the words of politicians?)

Take the example of a union facing a vote on: "We can all take a 5% pay cut to save all our jobs, or all keep all our pay by laying off the 5% of our lowest-seniority members". In near all such cases the choice is: "we'll keep all our pay and say good-bye to the 5% of our junior members", typically by a vote ratio of up to 95-5.

The same principle applies to non-union businesses. Imposing across-the-board pay cuts is so morale damaging, efficiency damaging (for a list of reasons I could relate but won't in a blog comment), and creates such vulnerability to employee-poaching competitors, that it is the irrational choice in all but extreme and desperate situations. Instead, a percentage of employees gets sacked, and the average wage remains above the clearing rate.

Consider it the Median Voter Theorem in labor markets. If the median employee as part of a significant majority can protect his well-being by throwing a minority of co-workers overboard, that's what will happen.

Which gets back to aggregate demand. If wages are above the market-clearing rate and sticking there, an NGDP increase is needed to reduce them to the market clearing rate. It doesn't matter if the original source of the problem was structural recalculation or inept monetary policy or whatever -- if wages are sticking above the clearing rate, an NGDP increase (split in some ratio between increasing real demand and increasing inflation) is needed to get them back to the clearing rate.

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