The World Recession is Ending: What Next? Becker

The latest output and unemployment figures for the United States indicate that the recession in this country is very probably finally over, given the usual definitions of the turning points of recessions. Aggregate output fell for the fourth quarter in a row during the second quarter of 2009, but the latest fall was small. All the indications are that American GDP will increase during the current quarter, although not sharply. The unemployment rate actually fell slightly in July. This may be a one-month statistical anomaly since unemployment usually lags the economy, but the rates of fall in jobs and unemployment have been declining for several months now. The recessions in China, India, Brazil, and a few other countries have also ended, so it strongly looks like the world recession is also over. Some countries, like Spain, have still not turned the corner, but they will be helped by the end of the global recession. It was a severe recession, in many respects the most severe global recession since the 1930s, such as the cumulative fall in aggregate output. But even that only amounted to about four percent. Moreover, it was not the most severe in all the important dimensions. For example, the latest unemployment figure for the US is 9.4%, which is high, but well below the 10.8% reached at the end of 1982 after a severe couple of recessions in the early 1980s. Unemployment will probably continue to rise for a while since unemployment usually lags the turn in output. However, it now appears that unemployment will very likely peak below 10.8%, perhaps well below that previous high. In addition, productivity held up better in this recession than in many others. While this has been a severe global recession, it is very far from resembling the Great Depression of the 1930s. That depression had a peak American unemployment of 25%, and over a 20% fall in its output compared to the few percentage point falls in output during this recession. The many comparisons made to the Great Depression by economists and others during the dark months at the end of 2008 and beginning of 2009 now look kind of silly- and I said so at the time- although admittedly there was then considerable uncertainty about how bad this recession would become. Although the severity of the world wide financial crisis was unprecedented (aside from the 1930s depression), the real side of the economy followed traditional recession patterns. For example, as usual, durable outputs, such as of cars, tractors, and houses, fell far more sharply than services, especially than education and health. Much ink was devoted to the many educated employees of the financial sector who lost their jobs, and they did usually have a tough time, but as in previous recessions the least educated were hit the hardest. As of the end of July, the unemployment rate among high school drop outs was 15.4% compared to 9.4% for high school graduates, and only 4.7% for persons with a bachelors degree or higher. In addition, the percentage point increases in unemployment rates during the past year were much higher for the less educated. Similarly, black unemployment clocked in at a 14.5% rate compared to 8.6% for whites, while during the past year black unemployment increased by 4.6 percentage points compared to 3.4 percentage points for whites. The fraction of those unemployed that have been unemployed for six months or longer, at 34%, is one significant employment statistic that is unusually bad during this recession. This is apparently the highest fraction of long-term unemployed Americans for 60 years. How important were monetary and fiscal policies instituted during the past year in preventing a far more serious recession? Only time and further research will permit more confident answers to this question, but I will give my tentative opinion. Fed open market policies that bought financial assets from banks and others, and created huge amounts of excess bank reserves in the process gave banks a financial cushion that helped dampen their retreat from risk. Decisions of The Treasury under both Henry Paulson and Timothy Geithner have been a mixed bag, sometimes helping banks deal with toxic assets, while at other times adding to the uncertainty by being erratic and indecisive. The decisions to let Lehman fail but to merge Bear Stearns and force the merger of Merrill on Bank of America will be debated for a long time. I continue to believe that the bail out of GM and Chrysler by the Bush, and especially by the Obama, administrations were serious mistakes that will eventually cost over $100 billion of taxpayers' monies. It would have been far better to let both companies file for bankruptcy in the Fall of 2008, for they would have emerged from bankruptcy court with lower labor costs and considerably slimmer than they are now. To be sure, Chrysler may have closed shop, not a bad development, and sold its Jeep and one or two other strong divisions to other companies. Not surprisingly, the Obama administration is taking credit for ending the recession. According to the New York Times, President Obama said that his administration had "rescued our economy from catastrophe". The administration in particular is pointing to the stimulus package- the American Recovery and Reinvestment Act- for the relatively good employment report for July. Yet this stimulus package could not yet have had much direct effect on employment since only about $100 billion, or less than 1% of GDP, of the $787 billion in this package has so far entered the economy. And much of that $100 billion has been directed to service sectors that do not have excessive unemployment rates. As I mentioned, some Fed and Treasury policies helped a lot, but the capitalist American economy continues to have strong momentum as well. Recessions always end and usually change into booms. While this has been an unusually long recession, the incentives of firms to find profitable opportunities, and the desires of consumers to spend, contributed in important ways to ending this prolonged recession. Where will the world economy, and the American economy in particular, go from here? Most economists are predicting a flat recovery for the United States that will not take off toward robust growth until late in 2010 or even in 2011. It is notoriously difficult to predict turning points and how fast economies come out of recessions. The 1930s had a fast recovery for a couple of years during 1934-36 before it fell back into another severe depression. One main reason for pessimism about the strength of the recovery is that banks are generally afraid of taking on additional risks since they still hold many assets of dubious value. In addition, companies are also wary of investing and adding to their employment because of the remaining considerable uncertainty about the economy, and because consumers are continuing to rebuild their wealth portfolios after the hits they took from the sharp declines in stock markets. I am more optimistic about the world and US recovery than the consensus, although I do not expect a sharp expansion during the next few months. My reasons for greater optimism include the robust recoveries in China, Brazil, and some other countries that will boost world output, and raise demand for US exports. The large excess reserves created by the Fed- some $800 billion- will induce banks to look for more profitable investments than the meager interest they earn on these reserves. The working down of the housing and auto stocks during the past couple of years will result in demand for new residential construction and cars that will stimulate these depressed industries. Firms are still hiring in large numbers, although less than the number they are letting go. One indication of the growing strength of the US labor market is that- as my colleague Casey Mulligan pointed out to me- seasonally unadjusted employment has risen during this summer. Still, I do have some concerns about the US recovery, beyond the overhang of many billions of dollars of rather worthless assets held by banks. Casey Mulligan has been stressing that the federal government is creating many programs, such as reducing student loan repayments and mortgage payments for persons with low incomes, which discourage the unemployed from finding jobs, and encourage the employed to become unemployed. The proposed caps of various kinds on executive pay, especially in the financial sector, the large government debt being created due to huge fiscal deficits that will put upward pressure on interest rates, the European style reorientation of anti-trust policies toward protecting competitors rather than consumers, the enormous excess reserves that have a considerable inflation potential, the federal government's likely incompetent management of two of the three American auto companies and a major insurance company, and the planned creation of a consumer czar that will interfere with the goods and services offered consumers are examples of policies that are likely to discourage business investment and risk taking. So legitimate reasons exist for concern about the speed and strength of the recovery of the American economy. However, I worry much more about various regulations, spending, and controls being introduced by the present Congress and by President Obama than by intrinsic difficulties in the American economy.

Comments

[Anonymous]

What theory should guide policy makers in navigating between the rocks of laissez-faire bubbles and crashes and the shoals of government paternalism?

[Anonymous]

I hope you're right.

[Anonymous]

What happens next?

As soon as the flag is waved on the present recession, capital will start to flood the financial markets again along with rising interest rates. When this happens though, problems will start to arise. In exponential numbers.

[Anonymous]

What worries me is that the government has created a humongous debt overnight, which it may not be able to repay or service without creating a severe inflation that will render the owed money near-worthless. What do you think about that prospect?

[Anonymous]

On this debate, at the risk of sounding a note of uninformed optimism, I must side with the celebrated economist over the celebrated lawyer, if for no other reason than the plain fact that lawyers earn their keep on bad news.

[Anonymous]

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[Anonymous]

Not if you're listening to the American media. Everyone is still screaming about the recession and how it's bound to get worse any second now. Maybe they're just trying to keep us tuned in...

[Anonymous]

Well ..., I'm glad to see and hear from Gary Becker some optimism along with the Federal Reserve in regards to economic activity. As for the Financial Industry in regards to their creation of exotic financial instruments, such as, derivatives based on the Black-Roach equation, unstable mortgage backed securities, hedging funds, credit/default swaps and the like, all taking place Over The Counter or in the backrooms and hallways of Wall Street. Creating huge "black pools" of money, debt and credit all out of the sight of the Public and Governments. We have a real problem!

Recession or Depression? Definitely a Depression in the making until the massive cash influx. Now a Recession on the rebound? Hopefully, but we can always still backslide into that abyss of Depression. Remember, there are still 15 million Americans deprived of their livelihoods and the number is climbing, Forecosures on the rise, Bankruptcies on the rise. Tent Cities developng around the country. Hunger rising in the Land. Remember, "it ain't over till it's over" and 15 million plus Americans are returned to their livelihoods and once again meeting their financial obligations.

And I always thought that the reason for the existence of the Financial Industry was to provide credit and financial resources for the development of productive Industries that actually added value to materials and so created profit. Not only for the Capitalist, but Labor as well. Guess I was wrong. Welcome to the new Economic paradigm.

[Anonymous]

Whenever someone complains about "tent cities developng [sic] around the country," why do I get this crazy suspicion they did not grow up in the days when folks only had 2 or 3 stations to tune into on the TV? Economic hardship is a concept that exists in relative terms alone. My parents and grandparents would have spit on such whiners.

[Anonymous]

Anon, 12 2009 8:39pm,

I take it you were standing at the California border along with all the other thugs and helped to beat hell out of the Okies as they tried to cross. And I won't even mention the massive destruction of the family farm across the Nation by the Banking System, nor will I raise the issue of massive bread and soup lines that developed as well. As for your "spitting" on such "Whiners", you sir or madam as the case may be, the Nation has no need of the likes of you.

[Anonymous]

That's NICE!!!

[Anonymous]

Fortunately for you, Anonymous at 8:43 a.m., my ancestors fought in General Washington's army, thus guaranteeing your ability to make cheap and impudent comments. Assuming you had any ancestors around at the time, mine undoubtedly would have spit on them. Now, please go out and get a job. If necessary, go stand on a street corner and hire out for day labor. It won't kill you to actually try being a proletarian, as opposed to spending your days in a darkened room littered with old pizza boxes and candy bar wrappers, whining about how tough life is.

[Anonymous]

Thank you Dr. Becker,

This site coupled with your insight continues to be a source of excellent perspective on matters economic.

Tom Philbeck

[Anonymous]

Anon. Aug.13, 2009 10:07pm,

Only as far back as the Revolution? My, My, you are a new comer. My 5-6 Great Grandfather was only a Subaltern in the Pa. Militia during the French and Indian Wars and after moving on down to the New Middle River in the Shenandoah, wild Indian country at the time, later became a scout for General Daniel Morgan and Nathanial Greene all of Continental Army fame. As a matter of fact, two family members were killed in action at Cowpens and Guilford Court House. Later he and his and family helped Danial Boone and Company open up the Cumberland Gap settling Kentucky. They later moved on up into the Northwest Territory carrying Congress's Ordinance for the Territory with them. This Ordinance later become the basis of all the State Constitutions throughout the Midwest and the Western States as well. We were Federalists then and are Federalists now. What happened to you? Become subverted and corrupted by the the Anarcho-Capitalist propoganda? Dumping its hatred and filth across this fair land.

You sir or madam, are the true Anti-American and threat to the continued existence of this Nation.

[Anonymous]

In fact, Anonymous at 10:07 p.m., 8/13/09, based on what you say (assuming its truth), my ancestors preceded yours on this continent by at least a century. My ancestors possibly could be forgiven for allowing yours to enter.

Our Republic was founded upon reason. Give reason a try.

[Anonymous]

Anon. Aug.14, 2009 8:27pm

Well..., so we're finally getting around to fact, reason and truth/falsity, that's a good sign. Now it's time to let the B.S. fall to the wayside and as a great American once commented, "...it has come time to think anew and act anew." For we are caught in times that may very well destroy the Nation and its People.

[Anonymous]

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[Anonymous]

When China passes the U.S. as the world's dominant economy, you can blame our politicians who combine timidity with the single-minded goal of winning elections rather than improving America.

You also can blame the economists, who sell the notion federal debts are unsustainable and cause recessions, inflations, high taxes and high interest rates. Sadly, no evidence supports these beliefs.

--Fact: The U.S. government has the unlimited ability to print money, thus the unlimited ability to "sustain" any size debt.

--Fact; In only 15 years, from 1979 through 1994, taxes were cut and the federal debt grew an astounding 500%. It did not cause inflation or high taxes. Instead, we entered a long period of economic growth, low taxes and moderate interest rates. An identical 500% growth would yield a $72 trillion debt in 2024, and an average deficit of $4 trillion -- and the same kind of economic growth, low taxes and moderate interest rates.

--Fact: All six depressions in U.S. history immediately followed several years of federal surpluses. All recoveries coincided with increases in debt growth.

--Fact: All nine recessions in the past 50 years immediately followed reductions in federal debt growth. All recoveries coincided with increases in debt growth, such as we are seeing, today.
--Fact: There is no historical relationship between high interest rates and slow economic growth. Similarly, low interest rates have not stimulated growth.

--Fact: There is no historical relationship between deficits and tax rates. Without tax increases, there is no mechanism for our grandchildren to pay for deficits.

Email me for data to support each of the above, counter-intuitive facts.

The unsupported fear of federal deficits in the U.S., when compared with the lack of such fear in China, is why we will fail and they will succeed.

Rodger Malcolm Mitchell
[email protected]
http://www.rodgermitchell.com

[Anonymous]

You said, "The 1930s had a fast recovery for a couple of years during 1934-36 before it fell back into another severe depression."
In the period 1929 - 1934, the federal government ran a deficit (i.e., pumped money into the economy). In 1935 deficit growth began to be reduced, actually becoming a surplus (i.e. removed money from the economy). In 1937, the "2nd depression" began. This depression ended with the resumption of deficit growth in 1939.
More recently, every recession in the past 50 years (there have been nine), began with a series of years having reduced deficit growth, and ended with increased deficit growth.
By planning to reduce the deficit when the current recession is "cured," the Obama administration duplicates the errors that extended and worsened the Great Depression.
Because a growing economy requires a growing supply of money, growing deficits are necessary for economic growth.

Rodger Malcolm Mitchell
[email protected]
http://www.rodgermitchell.com

[Anonymous]

First, following the thread on ancestral ties to the Revolution, my ancestors moved from Massachusetts to Georgia at the time of the Revolution. The Graves side of my family came to the colonies in the early 17th Century. I have to wonder if they were loyalists. I hope not since I support the Revolution, but I don't know. My family has been in the South ever since.

Second, here is the key problem resulting from the interventionist efforts by the Fed identified but under-emphasized by Professor Becker: "...the enormous excess reserves that have a considerable inflation potential...."

Yes, we have dodged a bullet because of the aggressive actions of the Fed to re-inflate the money supply after the potential for a staggering correction loomed over the economy after decades of artificially stimulating the economy through excessively low interest rates. That on-going policy by Alan Greenspan set us up for last year's meltdown. The Greenspan strategy operated under the false assumption that as long as the general price level did not rise dramatically the economy was not being inflated by loose credit. What Greenspan and monetarists missed was that inflation is possible without a noticeable rise in the general price level as bubbles are created. That is what we are in the process of repeating.

The increase in credit has been so great in the past few months that it is likely that within the next two years that we will see the price level spike. But even if we do not, bubbles are in the process of developing as we speak and write. Then it will be deja vu all over again.

[Anonymous]

Dear Dr. Becker,

I know you are not generally in the habit of answering questions, but I have one to ask you anyway. Is there any relationship between level of education and unemployment other than a simple inverse correlation? I understand the value of education (my father came to America from Europe to complete his medical training), and agreed when I heard you comment on NPR once that, 'if you don't get an education, you are going to be a loser,' but I think there is a compelling argument that smarter, more capable people tend to become more educated by virtue of their talent (think of it as rational specialization), which is a lurking variable behind both their education and socioeconomic success.

The detailed breakdown of the economic data is interesting, but I am surprised that you failed to specifically mention that the number of people without jobs actually increased by over 200,000;the unemployment rate dropped because of discouraged workers. Also, I think equity markets are a bit over-valued and poised for a pullback, but that's just me trying to beat the market.

Sincerely,

Luca

[Anonymous]

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[Anonymous]

The world may rebound, but the US is headed for a steady decay. We are now a socialist nation headed towards our president's communist ideology, a total pop in this artificial mess is inevitable. We haven't seen the worst boys and girls. There is going to be chaos on our streets. A tax revolt is right around the corner.

Our govt. is bankrupt and the communist in the white house now wants to make more BS promises in a govt. healthcare system? Why not, let's just start the revolution now...!

[Anonymous]

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[Anonymous]

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