DeLong on the Jobless Recovery

From an article by Brad DeLong in The Week:

So get ready for another jobless recovery.

The question is, why the shift? Why is a jobless recovery likely now, and why have there been jobless recoveries for the past two decades?

Paul Krugman has a theory: "[Past] recessions . . . were very different. . . . Each of the slumps—1969-70, 1973-75, and the double-dip slump from 1979 to 1982—were caused, basically, by high interest rates imposed by the Fed to control inflation. In each case housing tanked, then bounced back when interest rates were allowed to fall again. Since the mid 1980s, however . . . recessions haven't been deliberately engineered by the Fed, they just happen when credit bubbles or other things get out of hand. . . . [T]hey've proved hard to end . . . precisely because housing—which is the main thing that responds to monetary policy—has to rise above normal levels rather than recover from an interest-imposed slump."

I'm guessing there is another set of factors at work. Manufacturing firms used to think that their most important asset was skilled workers. Hence they hung onto them, "hoarding labor" in recessions. And they especially did not want to let go of their prime productive asset when the recovery began. Skilled workers were the franchise. Now, by contrast, it looks as though firms think that their workers are much more disposable—that it's their brands or their machines or their procedures and organizations that are key assets. They still want to keep their workers happy in general, they just don't care as much about these particular workers.

The hypothesis is that firms believe that their remaining workers will forgive them if they fire large numbers of workers during a recession out of economic necessity, but not at other times. Hence the start of the recovery is a business's last moment to slim down its labor force and become more efficient and profitable in the coming boom.

At least it is likely to be a recovery. The prevailing forecast right now is for real GDP to contract at a rate of one percent per year or less between the first and second quarters of 2009, followed by growth between the second and third quarters at an annual rate of two percent or so. When the NBER Business Cycle Dating Committee gets around to it, it is most likely to call the end of this recession for June 2009, with the second most likely call for April and a date sometime after June 2009 as a less likely possibility.

Yes, that would mean the recession is over right now. One reason for that is the much-maligned stimulus package, which probably boosted the real GDP annual growth rate by about one percentage point in the second quarter of 2009, and will boost it by another two percentage points between now and the summer of 2010. (After that, its effects will not only tail off, but actually exert a drag on subsequent GDP growth, which is why White House Council of Economic Advisers Chair Christina Romer has been warning of the dangers of pulling the plug on economic stimulus too soon.)

Most people don't remember the pain during the early 1990s during that "jobless" recovery. I suspect this one will be even worse since the problem is much bigger. The tragedy is that Obama had a chance to lessen the pain, but he was too timid. (The even bigger tragedy is that Bush had a chance in late 2007 to do some serious stimulus via infrastructure spending but decided that such spendint would take too long and opted to provide a tax cut in Februaray 2008 as a stimulus, probably because that jolt would get favourable ratings in the upcoming November elections. Yes... I'm cynical about the motives of politicians.)