The worst recession in 70 years, not the worst recovery
In the Wall Street Journal last week, Edward Lazear penned a column titled The Worst Economic Recovery in History. Let’s take this claim to the data. The figure below directly compares job growth in the recovery from the Great Recession (labeled “2007 recession”) to job growth in the recoveries from the three prior recessions:
It’s clear from the figure that jobs fell much further and faster during the Great Recession than in previous recessions. But looking to the right of the dotted line, we see that job growth in the current recovery is actually stronger than job growth in the recovery following the recession of 2001, and not that much weaker than the recovery following the recession of 1990. The recovery following the 1981 recession outpaces all three by far, but that should not be a shock. The 1990, 2001, and 2007 recessions were all associated with financial crises (savings and loan crisis, dot-com bubble, and housing bust, respectively) and it’s obvious by now that recoveries from such recessions require much stronger medicine. The 1981 recession, by contrast, was largely caused by the Federal Reserve Board raising interest rates to curb inflation. This gave the Fed lots of room to lower rates to provide a boost from interest-sensitive goods, (namely housing and durable goods,) leading to strong job growth. With interest rates currently near zero, that lever has not been available in the Great Recession and its aftermath. (As an aside, it’s worth mentioning the extraordinarily fast growth of government spending that buoyed the 1981 recovery.)
The above figure underscores that the key difference between the job situation at this point in the economic recovery, compared with the same point in the last two recoveries, is the length and severity of the recession that preceded them. In other words, it’s not that job growth in the current recovery is uniquely terrible—it is pretty much in line with the weak recoveries following the last two recessions—it is the Great Recession (and in particular the job loss from Sept. 2008–June 2009) that was uniquely terrible.
Of course, this in no way lets today’s policymakers off the hook; the nation’s labor market remains incredibly weak and the current pace of job growth will needlessly condemn millions of Americans to joblessness for years to come. The key problem in the current economy is depressed demand for goods and services, which (since workers provide goods and services) translates into depressed demand for workers. Effective responses, however, have been hamstrung by destructive orthodoxy. I strongly agree with Lazear that we must “move to a set of economic policies that are aimed at growing the economy.” But his list of policies are either irrelevant (regulatory burden) or actually destructive (cutting government spending) to prospects for a rapid recovery.