A commenter on a recent blog post says “Philip, I know you don’t believe there’s a recession” (based on the fact that the NBER declared the U.S. economy to have come out of the most recent recession in the summer of 2009). It occurred to me that maybe asking whether or not the U.S. economy is in a recession is the wrong question. Now that the world economy is so tightly linked, what does it mean for a single country to be in a “recession”? A recession implies that there is a business cycle within each country that inevitably expands and contracts. Thus if a country is “in recession”, without any changes in laws, education, tax rates, or attitudes, it will inevitably enjoy strong growth when the recession is over.
The world economy has never been in better shape than right now. You might not get that perspective from news articles, but of course they tend to focus on problem spots such as Greece, Ireland, the U.S., etc. There has been a huge amount of growth in the world economy since 2007 (chart). If a country, such as the U.S., has a smaller economy than it did in 2007, does it make sense to say that country is “in a recession” or simply that whatever conditions are necessary for growth in the current world economy are not present in that country? Does it make sense to predict that next year will be different from this year in terms of a business’s willingness to invest in the U.S.?
The existence of growth generates inequality. In a subsistence economy, most people have about the same standard of living. Growth, however, will affect different people to different extents and lead to an inequality of income and wealth. Rather than talk about recession or expansion of a particular economy, would it not make more sense to say that different regions of the world will enjoy a larger or smaller share of the world’s economy growth? Even within the U.S., the expansion periods have not been experienced equally in all regions and industries. Michigan stagnated while North Carolina grew. Investment banks grew fat while other kinds of companies at best stayed even. The U.S. recession is over and yet there are a lot of unemployed Americans. Maybe the answer is that it simply is not productive to consider the concept of a national “recession” at a time when the world economy is exploding with growth.
This has been true of every economic downturn ever – some parts of the economy are doing better than others. There’s even a term “rolling recession” to describe a downturn in successive industries in turn. As such, the word “recession” isn’t all that useful for real use by economists and business people (as opposed to the media) as it’s overly broad.
Big companies tend to lower their dividends in a recession. I would say that big companies such as GE that are increasing dividends are thinking that the recession is over, or acting as if it is.
There are other factors that can keep unemployment high: increased productivity per worker, increased offshoring of jobs, and discouraging older workers from retiring.
I just finished reading a Niall Ferguson book called Colossus, where, in mentioning plenty of stats on growing economies and comparing these to the slowing US economy and the old, Imperial British economy, your argument makes sense (Niall didn’t spell out the argument, but it’s something I too thought of a lot while reading). He’d say something like the world output of the US was, at one point, 60%, but now it’s only 30%. Or the European Union only puts out 10% of the world output, but has a GDP similar to the US. He’d later state, without seemingly figuring in these statements, that economies like India and China are growing at very rapid rates (but having still far smaller GDPs), and that our economy must be slowing down or is in some trouble (or whatnot). I thought it would make more sense to think that other countries are merely catching up, while a country like ours is going to have difficulty branching out in new growth, if they were growing as mildly as the US, we wouldn’t be going bananas over developing countries’ markets. (We can’t exactly take 4/5ths of our population who are farmers, educate them, and put them to work in more economically-thriving areas. This is (probably) naive and obviously simple, but probably has some merits.)
IMO, it would seem pretty weird to talk about a developing country like China growing rapidly, and in the same breathe, talk about our economy declining. Aside from all the economic aspects of why it’s easier for a China to grow far quicker than a US (political aspects are certainly even greater), the simple fact that’s its noticeably growing on the world stage shows that the “world economy” is in fact turning away from mostly stagnant, “old?” economies, to “newer” economies that can grow quickly… these too will most likely slow down and we’ll see the same trend, perhaps, happening in more Latin American and African countries taking on greater shares, thereby lessening others’ shares.
Philip, when we talk about the economy being in a recession, we usually mean that unemployment is higher than normal. (If I understand correctly, you don’t believe that unemployment is higher than normal: you believe that the current unemployment rate reflects a long-term trend, namely that an increasing number of people are simply unemployable.)
The NBER definition is that the economy is in a recession when the economy is actually shrinking (“receding”). The NBER date means that the economy has stopped shrinking and has started expanding. That doesn’t mean that the economy is back to normal; it may take a long time before it gets back to normal.
Wikipedia:
Regarding your argument that if you look at the big picture, the world economy is doing well: it still makes sense to look at economic activity at the national level because labor isn’t (very) mobile across international borders. Within a country, workers can and do move from an economically depressed region to one that’s booming: in Canada, for example, workers move from the Atlantic provinces to Alberta. Over time, this tends to equalize unemployment rates: a boom in one region will lower unemployment rates across the country, and conversely, a regional slump will tend to raise unemployment rates across the country.
But unemployed workers in the US can’t easily move to Canada, no matter how desperate they are. So it’s quite possible for two different countries to have very different unemployment rates for sustained periods of time.
Russil: My issue with the “recession” label is that it implies that the situation will resolve itself with time. The pendulum has swung and it will soon swing back. Worldwide, hundreds of millions of workers were hired since 2008. As it happened, it was not profitable to hire a lot of Americans during that period and therefore most of the world economy’s growth passed us by. Instead of asking “What can we change so that American labor will have a competitive advantage?” we comfort ourselves with “We’re in a recession and therefore everything will be better in a year or two.”
[To answer your comment above, I wouldn’t be surprised if two countries had very different unemployment rates for extended periods. I would not draw the conclusion that one country was in a recession, however, any more than I would say that a poor family on a street was in a “recession” compared to a rich family on the same street. The rich family simply has some skills that employers value more than the skills of the poor family and/or the rich family is willing to work harder (though in our crony capitalist system I guess we need also to admit the possibility that the rich family has a lobbyist!). If Country A has better educated people, spends less on health care, has a more predictable legal system, doesn’t waste as much via government spending, has more efficient transportation, etc., it should find itself with more jobs per capita than Country B.]
It’s not unlike sports teams. When a team is in a “slump”, some fans may just wait for the slump to end through luck. But the coaches and players are probably working hard to diagnose problems and improve their game. Until that happens the slump goes on.
Philip: unfortunately, even if the Keynesian diagnosis is correct – that the slump is basically a technical issue, caused by everyone trying to hold onto more cash at the same time, so that there isn’t enough demand – that does _not_ mean that the situation will correct itself quickly or automatically. Japan’s been trapped in recession for more than a decade now. Krugman has a whole collection of articles on Japan’s recession, dating back to the late 1990s.
In your economic model, what’s been happening with Japan? Why aren’t companies hiring more people in Japan, especially young people? Japan has one of the best-educated workforces in the world, low health care costs, excellent infrastructure.
The conventional-economics answer is that your model is wrong. Most economic activity is in non-tradable goods and services, which aren’t covered by your model. (Think of retail and fast food jobs, or service providers like physicians and plumbers. In these sectors, the number of jobs depends on the number of customers who are willing and able to spend money, not international competitiveness.) Moreover, if you believe that the US is already at full employment – that the unemployed are basically unemployable – then when a company decides to set up shop in the US, or to expand its operations there, it’ll be hiring people who are already employed; they’ll just be changing jobs. In other words, it won’t have any effect on unemployment.
Krugman suggests that the key principle is that a country is a closed system, more or less, while a company is an open system.
Phil,
I don’t think the economy is in a recession nearly as much as people are in
a recession. We have created an environment wherein it takes less
people to do work than in the past, hence we have folks who simply
aren’t needed any longer and I don’t see that changing in the long
term. Sure, Obama can devise another stimulous package that attempts
to throw money at things like infrastructure build-out, etc., but the bottom
line is we are getting smarter and more precise every day, thus making
things more and more streamlined and efficient. Can you name a few jobs
that now take more people and effort today that the same job did
twenty or thirty years ago?
I’d be interested in seeing stats that show who is suffering the most
in today’s economy. I’d wager it isn’t the Phd’s nearly as much
as it is the high school (or worse) grads. I think we are seeing the
real outcome of “progress”, warts and all.
Mark: I can think of two jobs that seem to require far more people and effort than thirty years ago: (1) rearing a child, (2) being a husband! A few decades ago the brats did not expect 24×7 SUV chauffeur service. The wife didn’t expect more more from a husband than bringing home a paycheck.
@philg: I could not have said it any better (your comment #9). I can attest that the many families that I know, those who have a single working parent, and live within their means, are doing far better than those who have two working parents and make far more than the single working parent. Not only is the family happier, but they are living well and taking vacations. The key word here is “living within their means” (no supper-size me home, car, TV, etc. or government Freebies [1])
[1] http://actuallyfree.info/GCC.aspx — Government freebies are made possible through the generous and charitable donations of tax-payers