[OPE] Jobless recovery redux: Krugman and IMF say the same thing

Paul Krugman ("Green shoots and glimmers", NYT April 16, 2009) says almost exactly the same thing as I wrote before on OPE-L on 11 and 14 April):

"The most you can say is that there are scattered signs that things are getting worse more slowly - that the economy isn't plunging quite as fast as it was. (...) The 2001 recession officially lasted only eight months, ending in November of that year. But unemployment kept rising for another year and a half. The same thing happened after the 1990-91 recession. And there's every reason to believe that it will happen this time too. Don't be surprised if unemployment keeps rising right through 2010. Why? "V-shaped" recoveries, in which employment comes roaring back, take place only when there's a lot of pent-up demand. In 1982, for example, housing was crushed by high interest rates, so when the Fed eased up, home sales surged. That's not what's going on this time: today, the economy is depressed, loosely speaking, because we ran up too much debt and built too many shopping malls, and nobody is in the mood for a new burst of spending." http://www.nytimes.com/2009/04/17/opinion/17krugman.html?em

In this scenario, the phrase "jobless recovery" actually understates the situation, since a weak recovery in real net output would be accompanied by an increase in net unemployment and underemployment, i.e. not just "no net extra" of jobs, but a "net decline" of jobs, basically because a whole chunk of people is effectively cut out of the market.

In fact the IMF now (April 16) projects a parallel with the Great Depression. A chapter of the April 2009 World Economic Outlook inventorizes all the recessions there have been around the world since 1960: http://www.imf.org/external/pubs/ft/weo/2009/01/pdf/c3.pdf

"So, what did we find? First, relative to other recessions, recessions associated with financial crisis are longer and more severe. Also, recoveries to pre-crisis output levels from such recessions are typically slower. On average, financial crisis-associated recessions last one and a half years or two quarters longer than other recessions. Furthermore, after the start of such recessions, it takes almost three years to get back to pre-recession output levels, which is more than one and a half years longer than in the case of other recessions. (...) Second, we found that globally synchronized recessions are also longer and deeper than other recessions and recoveries, and they are more sluggish. So this is sobering evidence for today, given that we have both financial sector driven and globally synchronized recessions. It turns out that in our sample such a combination is rare, and the past suggests that such recessions last almost two years and that it takes over three and a half years for economies to return to pre-crisis output levels. We also investigated whether macroeconomic policies help mitigate recessions and strengthen recoveries. Our findings suggest that expansionary macroeconomic policies have been associated with shorter recessions and stronger recoveries. Also, while the effects of monetary policy have weakened the recessions associated with financial crisis, that of fiscal policy is to strengthen. (...) We also find evidence that suggests that the impact of fiscal policy on the strength of the recovery is smaller for economies that have high public debt levels. To conclude, the current recessions are likely to be unusually severe, and the forthcoming recoveries sluggish. Aggressive monetary and, particularly, fiscal policies could strengthen and bring forward recoveries." http://www.imf.org/external/np/tr/2009/tr041609.htm

Actually, 35 years ago, Ernest Mandel and Winfried Wolf proved that the 1974/75 slump was a "synchronized" economic crisis - they showed empirically that the timing and amplitude of fluctuations in real GDP growth internationally became more and more alike from the 1950s onwards, explaining this in terms of growing volumes of foreign trade and the growing importance of multinational enterprises (see Ernest Mandel and Winfried Wolf, "Ende der Krise oder Krise ohne Ende? - Bilanz der Weltwirtschaftsrezession und der Krise in der Bundesrepublik". Klaus Wagenbach edition, Berlin, 1977 - a compilation of articles). Wolf's bit on synchronization dit not appear in Mandel's English version, called The Second Slump (Verso 1978) however.

Jurriaan

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Received on Sat Apr 18 06:37:48 2009