The Long Recalculation
By Arnold Kling
Focus on the red line, and you’ll see that the recession began in the final quarter of 2006, not the end of 2007. The red line also fell by more, and over a longer period. And today, GDP remains below its levels nearly five years ago. The economy had already run out of steam halfway through Bush’s second term. That’s why I say we are halfway to a lost decade.
He refers to a graph, obviously.
The point that I make often is that the NBER declared the end of the 2001 recession much too early. From an employment standpoint, that recession lasted through most of 2003, perhaps longer.
When one looks at the employment/population ratio as an indicator, the economy has been headed in the wrong direction most of the time since early 2000. The PSST story would be that we had a classic case of exuberance (E) in 1997-1999, with investment in the Internet getting ahead of itself, while the displacement (D) set in around 2000, with a particularly large number of firms realizing the need to adapt by cutting back in 2008. The basic displacement was interrupted in some ways by an E in housing from 2004-2006.
In the future, it may be that the financial crisis will not be the headline story of the past ten years. Instead, economists may focus on the real restructuring that took place. The Internet and globalization reduced the marginal revenue product of large swaths of the American work force. It increased the returns to certain types of capital and, above all, to certain types of innovation.
I think that the policy challenge is to preserve the American dream for people who are not positioned to ride the wave of innovation. I see the American dream as more about being self-supporting than about government redistribution. When President Palin takes office, she should look for ways to reduce the impediments to employing people whose value to firms is less than $50,000 a year. Those impediments include payroll taxes, health insurance requirements, and regulatory compliance costs. Occupational licensing is another frustrating impediment. Finally, we need a drastic reduction in public sector compensation. It is silly for governments to be cutting back on services and employment while keeping salaries and benefits high.
[UPDATE: See Andrew Biggs on public sector compensation. Of course, I do not look to econometric analysis to determine that compensation is too high. All you need to look at are the low quit rates and the high ratio of applicants to openings–and even that ratio if artificially low due to excessive credentialization in government.]