Relative to what a consensus forecast might have predicted last October, it appears that:

–Banks are doing somewhat better than expected
–GDP has fallen about as far as expected
–employment has fallen more than expected

If this is a fair characterization, it raises two puzzles.

1. If the bank bailouts worked at saving the banks, then how come we still wound up with such a severe recession?

2. Why is the severity of the recession so much greater in the labor market than in the goods market?

My answer to (1) is that the bailouts were only good for the banks, not for the economy as a whole. Of course, I was never a fan of the bailouts, so you might want to discount my answer as confirmation bias.

My answer to (2) is that we are superimposing a heterogeneous labor force on top of a trend of rapid productivity growth. In some sense, we are seeing an amplified version of what took place from 2001 through 2003. This was dubbed a “jobless recovery,” but I called it a “productivity-cushioned recession.” That is, growth in trend productivity of 2 to 3 percent per year is maintaining output higher than it would be if the trend were less than 2 percent. (Trend productivity growth is productivity growth measured over periods of five years or more, to iron out short-term fluctuations.)

The heterogeneous labor force means that it is very hard to reallocate labor from sectors that decline. Forty years ago, there were lots of industries that employed men with only a high school education. Today, there are fewer such industries, so that when the construction sector and the automobile sector shrink, the job losers have almost nowhere to go. These guys aren’t going to turn into school teachers or nurses next month–or ever. It would be nice if the stimulus were actually creating construction jobs, but the reality is that the net increase in state construction projects is probably infinitesimal, as the states wind up juggling their budgets to keep Medicaid going.

Back when Bryan Caplan first proposed cutting the employer portion of the payroll tax, I jumped to support the idea as a way to maintain labor demand. I view (2) as evidence that Bryan’s idea would have been the best stimulus. Again, you have to discount for confirmation bias.