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The Jobless Recovery

Pretty amusing post from Brad DeLong, complaining about a phone-call from a clueless magazine writer:

“…Were [sic] doing a story on the performance of the economy under the different post-World War II presidents, and…”

[DeLong:] “Now presidents don’t control the economy. They influence it. And their policies influence the economy not just while they are in office but afterwards as well.”

“That’s very true. What we are looking for is…”

“Now there are two kinds of stories you could be writing. The positive one would be to start by saying that presidents influence but do not control the economy—that most of what happens is the economy following its own path. It would go on to say that presidential policies do influence the economy, to lay out how policies influence the economy, and to evaluate presidents’ economic policies. The negative one—the actual subtraction from the American people’s knowledge—would be to throw together some simplistic indicators of presidential economic performance over which presidents have little or no control, and rank presidents by those indicators. Which are you doing?”

“The negative one…”

The sad fact of the matter is that too many people (including most journalists) do assign the President too much blame and credit as far as the economy is concerned. A topic I’ve covered somewhat before in regards to the 2001 recession and in my discussion of supply-side economics. Reagan and Clinton often get too much credit for the economic prosperity during their terms, and likewise, Carter and both Bushes get too much blame for the economic problems during their terms.

This “jobless recovery” is no different. I’m no expert, but let me explain how I understand it.

For one thing, the Federal Reserve has a lot more control over the economy than the President has. Secondly, booms and recessions tend to be cyclical, and nobody in government has ever been able to repeal the business cycle. Not the Fed, not Congress, not the President.

So I think it’s a mistake for Democrats to try and attack Dubya on the economy by merely comparing how the economy performed under his watch vs. Clinton’s. Not only is it misleading, but the natural cycle means that a boom will be following this past bust, which could mean the economy could be humming along by the time the election rolls around in November. Democrats who have been whining about the recession have had to change their tune to be whining about the “jobless recovery” and may soon have to change their tune again to whining about inflation fears or high interest rates.

Why the Tech Boom was so long

As for why it’s misleading, let me go into more detail. The tech boom in the Clinton years was quite unusual because of how long it lasted and how low unemployment stayed. Typically, when you have a long period of high economic growth, the unemployment rate drops below a certain point where most economists believe will eventually cause inflation. Basically, when the pool of available workers is too small, this creates an upward pressure on wages, increasing the amount of aggregate demand (more dollars in the hands of consumers means more spending). Normally, such an increase in demand will result in higher prices, and eventually inflation.

However, Greenspan didn’t raise interest rates to stop this, but instead let the boom keep going. Why? Because productivity (the output of each worker) had also increased dramatically. The cause of this increase is still being debated (advances in technology surely has something to do with it). And it’s also unclear whether this increase is permanent. Regardless, the higher productivity meant higher supply, which was able to balance the higher demand and prevent inflation without the Fed having to step in.

The recession and “jobless recovery”

Now, as I discussed before, the 2001 recession happened because the tech bubble resulted in overproduction. In other words, too much supply. This is why most of the discussion on how to fight the recession centered around stimulating demand via tax cuts. So while the tax cut that Dubya passed was hardly the best tax cut to use to fight a recession (especially since it’s pretty much the same tax cut he was pitching long before there was a recession), a tax cut was the right thing to do.

As for the “jobless recovery” (a term that will probably bite Democrats in the ass), the cause should be pretty easy to understand. While there are certainly some strange things going on that aren’t very well understood, the main reason that employment has lagged behind economic growth has little to do with Dubya or with outsourcing. Instead, it has a lot to do with the same reason the tech boom lasted so long: productivity is still very high. That same high productivity that allowed Greenspan to keep interest rates low during the boom also means that companies can produce more output with fewer workers, and thus don’t need to hire as many. It’s pretty much as simple as that.

Of course, nobody is proposing doing anything to cut productivity, thank goodness. This high productivity will, of course, become handy again when this recovery turns into a boom again. Furthermore, higher productivity is one of the main benefits of our free economy. It means more goods at lower costs, which improves the standard of living for everybody — regardless of whether they get an increase in pay. And indeed, there’s actually very little to do. Essentially, we’re paying the price for having such a long boom, which produced so much stuff and increased productivity so much that it’s taking longer than usual for companies to need more workers. But as growth continues, hiring will eventually pick up.

And betting that it won’t happen before November is not one that I would make.

Update 7/6/04

Many of my points are echoed from a Democrat’s point of view by Matthew Yglesias in this column from The American Prospect, and he suggests that Democrats should steer the debate away from the economy and towards social policy issues.