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Paul Krugman

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How Bad Things Are

Posted: 05/08/2012 8:19 am

Ruined Lives

There is always some unemployment in a complex, dynamic economy like that of modern America. Every day some businesses fail, taking jobs with them, while others grow and need more staff; workers quit or are fired for idiosyncratic reasons, and their former employers take on replacements. In 2007, when the job market was pretty good, more than 20 million workers quit or were fired, while an even larger number were hired.

All this churning means that some unemployment remains even when times are good, because it often takes time before would-be workers find or accept new jobs. As we saw, there were almost seven million unemployed workers in the fall of 2007 despite a fairly prosperous economy. There were millions of unemployed Americans even at the height of the 1990s boom, when the joke was that anyone who could pass the "mirror test"--that is, anyone whose breath would fog a mirror, indicating that they were actually alive--could find work.

In times of prosperity, however, unemployment is mostly a brief experience. In good times there is a rough match between the number of people seeking work and the number of job openings, and as a result most of the unemployed find work fairly quickly. Of those seven million unemployed Americans before the crisis, fewer than one in five had been out of work as much as six months, fewer than one in ten had been out of work for a year or more.

That situation has changed completely since the crisis. There are now four job seekers for every job opening, which means that workers who lose one job find it very hard to get another. Six million Americans, almost five times as many as in 2007, have been out of work for six months or more; four million have been out of work for more than a year, up from just 700,000 before the crisis.

This is something almost completely new in American experience--I say almost completely, because long-term unemployment was obviously rife during the Great Depression. But there's been nothing like this since. Not since the 1930s have so many Americans found themselves seemingly trapped in a permanent state of joblessness.

Long-term unemployment is deeply demoralizing for workers anywhere. In America, where the social safety net is weaker than in any other advanced country, it can easily become a nightmare. Losing your job often means losing your health insurance. Unemployment benefits, which typically make up only about a third of lost income anyway, run out--over the course of 2010-11 there was a slight fall in the official unemployment rate, but the number of Americans who were unemployed yet receiving no benefits doubled. And as unemployment drags on, household finances fall apart--family savings are depleted, bills can't be paid, homes are lost.

Nor is that all. The causes of long-term unemployment clearly lie with macroeconomic events and policy failures that are beyond any individual's control, yet that does not save the victims from bearing a stigma. Does being unemployed for a long time really erode work skills, and make you a poor hire? Does the fact that you were one of the long-term unemployed indicate that you were a loser in the first place? Maybe not, but many employers think it does, and for the worker that may be all that matters. Lose a job in this economy, and it's very hard to find another; stay unemployed long enough, and you will be considered unemployable.

To all this add the damage to Americans' inner lives. You know what I mean if you know anyone trapped in long-term unemployment; even if he or she isn't in financial distress, the blow to dignity and self-respect can be devastating. And matters are, of course, worse if there is financial distress too. When Ben Bernanke spoke about "happiness research," he emphasized the finding that happiness depends strongly on a sense of being in control of your own life. Think about what happens to that sense of being in control when you want to work, yet many months have gone by and you can't find a job, when the life you built is falling apart because funds are running out. It's no wonder that the evidence suggests that long-term unemployment breeds anxiety and psychological depression.

Meanwhile, there's the plight of those who don't have a job yet, because they're entering the working world for the first time. Truly, this is a terrible time to be young.

Unemployment among young workers, like unemployment for just about every demographic group, roughly doubled in the immediate aftermath of the crisis, then drifted down a bit. But because young workers have a much higher unemployment rate than their elders even in good times, this meant a much larger rise in unemployment relative to the workforce.

And the young workers one might have expected to be best placed to weather the crisis--recent college graduates, who presumably are much more likely than others to have the knowledge and skills a modern economy demands--were by no means insulated. Roughly one in four recent graduates is either unemployed or working only part-time. There has also been a notable drop in wages for those who do have full-time jobs, probably because many of them have had to take low-paying jobs that don't make use of their education.

One more thing: there has been a sharp increase in the number of Americans aged between twenty-four and thirty-four living with their parents. This doesn't represent a sudden rush of filial devotion; it represents a radical reduction in opportunities to leave the nest.

This situation is deeply frustrating for young people. They're supposed to be getting on with their lives, but instead they find themselves in a holding pattern. Many understandably worry about their future. How long a shadow will their current problems cast? When can they expect to fully recover from the bad luck of graduating into a deeply troubled economy?

Basically, never. Lisa Kahn, an economist at Yale's School of Management, has compared the careers of college graduates who received their degrees in years of high unemployment with those who graduated in boom times; the graduates with unlucky timing did significantly worse, not just in the few years after graduation but for their whole working lives. And those past eras of high unemployment were relatively short compared with what we're experiencing now, suggesting that the long-term damage to the lives of young Americans will be much greater this time around.

Dollars and Cents

Money? Did someone mention money? So far, I haven't, at least not directly. And that's deliberate. Although the disaster we're living through is in large part a story of markets and money, a tale of getting and spending gone wrong, what makes it a disaster is the human dimension, not the money lost.

That having been said, we're talking about a lot of money lost.

The measure most commonly used to track overall economic performance is real gross domestic product, or real GDP for short. It's the total value of goods and services produced in an economy, adjusted for inflation; roughly speaking, it's the amount of stuff (including services, of course) that the economy makes in a given period of time. Since income comes from selling stuff, it's also the total amount of income earned, determining the size of the pie that gets sliced between wages, profits, and taxes.

In an average year before the crisis, America's real GDP grew between 2 and 2.5 percent per year. That's because the economy's productive capacity was growing over time: each year there were more willing workers, more machines and structures for those workers to use, and more sophisticated technology to be employed. There were occasional setbacks--recessions--in which the economy briefly shrank instead of growing. I'll talk in the next chapter about why and how that can happen. But these setbacks were normally brief and small, and were followed by bursts of growth as the economy made up the lost ground.

Until the recent crisis, the worst setback experienced by the U.S. economy since the Great Depression was the "double dip" of 1979 to 1982--two recessions in close succession that are best viewed as basically a single slump with a stutter in the middle. At the bottom of that slump, in late 1982, real GDP was 2 percent below its previous peak. But the economy proceeded to bounce back strongly, growing at a 7 percent rate for the next two years--"morning in America"--and then returned to its normal growth track.

The Great Recession--the plunge between late 2007 and the middle of 2009, when the economy stabilized--was steeper and sharper, with real GDP falling 5 percent over the course of eighteen months. More important, however, there has been no strong bounce-back. Growth since the official end of the recession has actually been lower than normal. The result is an economy producing far less than it should.

The Congressional Budget Office (CBO) produces a widely used estimate of "potential" real GDP,
defined as a measure of "sustainable output, in which the intensity of resource use is neither adding to nor subtracting from inflationary pressure." Think of it as what would happen if the economic engine were firing on all cylinders but not overheating--an estimate of what we could and should be achieving. It's pretty close to what you get if you take where the U.S. economy was in 2007, and project what it would be producing now if growth had continued at its long-run average pace.

Some economists argue that estimates like this are misleading, that we've taken a major hit to our productive capacity; I'll explain in chapter 2 why I disagree. For now, however, let's take the CBO estimate at face value. What it says is that as I write these words the U.S. economy is operating about 7 percent below its potential. Or to put it a bit differently, we're currently producing around a trillion dollars less of value each year than we could and should be producing.

That's an amount per year. If you add up the lost value since the slump began, it comes to some $3 trillion. Given the economy's continuing weakness, that number is set to get a lot bigger. At this point we'll be very lucky if we get away with a cumulative output loss of "only" $5 trillion.
These aren't paper losses like the wealth lost when the dot-com or housing bubble collapsed, wealth that was never real in the first place. We're talking here about valuable products that could and should have been manufactured but weren't, wages and profits that could and should have been earned but never materialized. And that's $5 trillion, or $7 trillion, or maybe even more that we'll never get back. The economy will eventually recover, one hopes--but that will, at best, mean getting back to its old trend line, not making up for all the years it spent below that trend line.

I say "at best" advisedly, because there are good reasons to believe that the prolonged weakness of the economy will take a toll on its long-run potential.

Reprinted from End This Depression Now! by Paul Krugman. Copyright © 2012 by Paul Krugman. With the permission of the publisher, W.W. Norton & Company.

 
 
 

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