This Time Really Is Different
By Bryan Caplan
Many people compare today’s recession to the last big one in 1980-82. But Scott Sumner keeps insisting that this one is different. At risk of re-inventing the wheel, I decided to take a look at the nominal GDP (NGDP) data for myself.
The facts are as striking as Scott keeps telling us. Here are the quarterly numbers; here’s the annual rate of change. From October, 1980 to October, 1982, U.S. NGDP rose by 13.6%. From April, 2007 to April, 2009, NGDP rose by 1.1%. From April, 2008 to April, 2009, the growth rate of NGDP was -2.4%. The last time the U.S. had a year of negative NGDP growth was from April, 1957 to April, 1958 – over half a century ago.
Looking at the numbers makes it hard to believe in a quick return to full employment. During the 1980-2 recession, there was high inflation. All employers had to do to get real wages down to full employment levels was (a) avoid nominal wage increases, and (b) wait. Now that we’ve actually got deflation, waiting doesn’t help. Even with a pay freeze, workers are getting more overpaid by the day.
But aren’t labor markets more flexible than they used to be? Many economists I respect say so, but I just don’t see much evidence. Actually, there’s an important reason to think they’re less flexible than they used to be: Inflation’s been so low for so long that man in the street has all but forgotten the distinction between real and nominal wages.
You might respond, “Who cares what workers have forgotten?” But if you’re an employer, you have plenty of reason to care. Normal people – and even some Ph.D. economists I’ve known – bitterly resent nominal wage cuts. Bitter workers are uncooperative and therefore unproductive. Maybe even scary.
Other economists I know keep comparing the performance of the “flexible wage” sectors of the economy to the “rigid wage” sectors. But frankly, I’m not convince that they’re categorizing the sectors correctly. If the main cause of nominal rigidity is simply psychology, the problem could be severe even for the self-employed. Consider: If you had a nanny, would you feel comfortable looking her in the eye to tell her that she’s getting a 2% nominal pay cut to adjust for deflation? I wouldn’t.
Pessimism does not come naturally to me. But even in the 80s, it took about seven years for unemployment to fall a little less than six percentage-points. If NGDP growth stays this low for the next seven years, I could easily see unemployment falling at only half the pace of the 80s recovery. I’m even getting a little worried about losing my bet with John Quiggin, but in the end I think the Europeans will mess up about as badly as we do.
Update: Bob Murphy points out that inflation has been +1.8% since December. It’s worth pointing out, but it’s also worth pointing out that he’s calculating from the local minimum. Even since December, there have been two months with deflation.