...there's only a big mystery here if you imagined that the Great Recession and its aftermath was going to look like a pre-1990 business cycle, rather than be another postmodern cycle like those of 1990 and 2001.
It's worth looking, in particular, at how productivity across the cycle has changed. I don't have time this morning for a proper treatment, but look at this figure:
If you squint a bit, you can see that before 1990, recessions were generally accompanied by a fall in productivity, mainly because businesses would hang on to workers, so as to be prepared to ramp up production quickly once recovery got underway. After 1990, this "labor hoarding" effect basically vanished; if anything, productivity growth seemed to accelerate in times of weak demand. Partly this may have reflected structural changes in the economy; it might also reflect the (correct) perception that recovery from financial-crisis-induced recessions is much slower than recovery from recessions created by tight money, imposed by the Fed to control inflation.
And of course, it could also reflect broader changes in class power relations, and changing attitudes of the business class. Any way you slice it, though, squeezing more out of workers during tough times has just got to bring joy to the Scrouge in every businessman. But I digress...
This gets at a broader point: as I see it, one of the problems with policy in the early months of the Obama administration was that top officials (to be fair, like many Wall Street economists) thought of the Great Recession as 1982 redux, rather than as a mega version of 2001.
It wasn't just that Obama's brain trust was almost 20 years behind the times. They weren't even considering that it could be more like the Great Depression. Of course, there's plenty of talk now about how they "pulled us back from the abyss." But if they really believed it was the abyss, they sure didn't act like it. They acted like it was 1983 or earlier--but not 1930s earlier. And yet, the Great Depression wasn't yet the Great Depression at this point in time after the Great Crash. Things looked up for a while, before they headed down, down, down.
But of course, we all know that Obama's economic team is living in a bubble. That should be enough to make us all perpetually uneasy, at best. What's worse, however, is to realize that even the good guys may not have a handle on things. If you follow Krugman's link above, you find this:
Postmodern recessions
Calculated Risk says much of what I'd say about housing and the prospects for quick economic recovery. But I'd like to offer a bit more analysis.
A lot of what we think we know about recession and recovery comes from the experience of the 70s and 80s. But the recessions of that era were very different from the recessions since. Each of the slumps - 1969-70, 1973-75, and the double-dip slump from 1979 to 1982 - were caused, basically, by high interest rates imposed by the Fed to control inflation. In each case housing tanked, then bounced back when interest rates were allowed to fall again.
Since the mid 1980s, however, we've had the "Great Moderation," with inflation quiescent. Post-moderation recessions haven't been deliberately engineered by the Fed, they just happen when credit bubbles or other things get out of hand.
And while they haven't been as deep as the older type of recession, they've proved hard to end (not officially, but in terms of employment), precisely because housing - which is the main thing that responds to monetary policy - has to rise above normal levels rather than recover from an interest-imposed slump.
That's why I think our current problems will last a long time. CR says 2009; I say 2010.
OMG! Was Krugman ever really that optimistic? (And, of course, no one considered him an optimist then!)
