This Time Really Is Different
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.
Oct 8 2009 at 9:29am
Professor, can you please speak to the never-ending extensions of unemployment benefits to your argument.
My friends that have been laid-off are taking one-year around the world vacations on the government. I am being serious…the minute they get laid-off they walk away from their rented apartments (or sublet the apartment) and then the governemnt pays them anywhere from $1,000-$1,600 a month and they head to cheap places around the world and drink beer and hang on the beach.
I often debate with myself if I should try to get fired since they are having so much fun.
Oct 8 2009 at 10:01am
I think Sumner argues that this recession is the same as the others. Nominal expenditure falls below its trend growth path because the quantity of money grows less than the demand to hold money. Sumner constantly gripes that everyone, including most economists, insist that every recession is different. He disagrees, and says that they are all the result of monetary policy errors.
Oct 8 2009 at 10:20am
I may well have misread him, but if I haven’t then you have. Sumner (here and here) seems to me to be saying the exact opposite of what you argue.
Sumner’s claim is that nearly everyone else thinks that each (including this) recession is different during the recession, but that after the recession, things begin to look as if it was the same old thing again. Sumner argues that the data suggest (if looking closely) that it is the same old thing again, and he is indeed perplexed as to why folks don’t actually do the modern textbook macro which predicts these results.
Oct 8 2009 at 11:05am
Not a proof of people’s attitudes or anything but the fact that in The Office the lack of a cost of living increase was treated as the equivalent of a pay cut is probably pretty telling.
Oct 8 2009 at 11:43am
And the “real” minimum wage keeps going up …
Oct 8 2009 at 11:49am
OK, if workers are being “overpayed” how does a payroll tax make sense? Won’t workers be even MORE overpayed?
Oct 8 2009 at 11:58am
This is why politics and not economics, is “the architectonic,” the master art.
If Obama gets re-elected, the American people are going to get full-blown social democracy. The public sector will grow in size, grow in debt, grow in its responsibilities and its level of control. The private sector will be a weak shell of its former self and become even more uncompetitive. For a glimpse at the future, Americans can look at the state of California, the city of Detroit, or Chicago Public Schools.
If the Republicans manage to win, there is a chance (not a certainty) that the American economy can be reset on sustainable course.
For technical reasons, you only get two choices in American politics.
Either the Republicans (as ineffective, inefficient, and politically clueless as they are) win the next election or the United States is hurrying towards an irreversible decline.
Oct 8 2009 at 12:26pm
Why not PAY workers to take a wage cut?
But which one’s and how much?
There couldn’t be a “knowledge problem” here could there? (just to coin a phrase).
Oct 8 2009 at 12:54pm
Here is one data point.
At my mid sized company last January we were told two things.
1> They would not match contributions to our 401K
2> We would no longer be paid for the first 4 hours of work after 40 hours.
That is a 4% cut and then a 10% cut for a significant portion of our workforce.
There were also no raises this year.
No one quit.
Wages are not “sticky”
Oct 8 2009 at 1:17pm
Greg: “Why not PAY workers to take a wage cut?
But which one’s and how much?
There couldn’t be a “knowledge problem” here could there?”
Something interesting happened in a car plant in the UK a few months ago.
The employees were given the choice of
1. a proportion of job cuts and the same wages.
2. No job cuts but lower working time for all.
They chose 2. Perhaps these sorts of arrangement could help on a local level.
Oct 8 2009 at 2:45pm
Scott Sumner is not insisting that this recession is different. You have completely misread him. Bill Woolsey’s and aretae’s comments are spot on. I look forward to your correction.
Oct 8 2009 at 5:34pm
“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?”
LOL! Have you ever heard of a mortgage? Can you get those to adjust for deflation too?
This stuff is hysterical.
Oct 8 2009 at 6:12pm
I just wanted to bring to your attention this Bob Murphy post taking issue with your analysis. According to Bob, there was some deflation during the first part of 2009, but it’s abated and we’re back to inflation now.
Oct 8 2009 at 9:27pm
Effectively as long as we have monetary and government polities that cause inflation, people will treat the lack of a cost of living increase as a pay cut. What is interesting now is that governmental jobs are competitive in terms of pay with private sector jobs in a lot of fields.
Oct 8 2009 at 10:20pm
Just to clarify, I’m pointing out that the BLS’ numbers show that there has been consistent increases in the CPI since December. (I.e. there was no deflation at all in 2009.) I don’t think workers or employers are making seasonal adjustments when they’re deciding, “Is this guy’s real wage going up or down?”
Also, Bryan didn’t say this, but part of the big fear of a deflationary black hole is that it’s self-fulfilling. As in, prices start falling, but then people demand more cash because of the falling prices, etc. etc. until we have 25% unemployment.
So that’s why I focus on the non-seasonally adjusted prices. It’s significant that every month since December, prices have gone up, except for a slight dip from June to July.
Oct 8 2009 at 10:58pm
I’d call it a pay cut when 8 employees are required to do the work 10 were doing before the recession hit .. this kind of thing is happening all over the country. This is what most of the “productivity” gain is, right?
Does anyone read the newspapers?
Does anyone know anyone with a real job?
Oct 8 2009 at 11:20pm
Bob writes: I don’t think workers or employers are making seasonal adjustments when they’re deciding, “Is this guy’s real wage going up or down?”
The reason why you don’t compare December to August using not seasonally adjusted numbers is because you are mixing the trend with seasonality. To say something intelligent about the trend in the CPI you need to use the seasonally adjusted numbers.
Oct 9 2009 at 8:19am
Bill, aretae, and Tom are right. I am saying this is like other recessions. Bryan Caplan may be referring to some of my statements arguing that the nominal shock was unusually large.
Nov 6 2009 at 11:48am
Two huge deflationary/inflationary forces are the average price of stocks and real estate and the strength of the dollar relative to other currencies. The CPI is not a good measure.
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