[The Soup Nazi]

A Post-Post-Modern Slump
by Paul Krugman
The New York Times, May 13, 2020

Last week’s jobs report was ghastly, and as I pointed out in today’s column, the reality is almost certainly worse: the Bureau of Labor Statistics notes that difficulties in classifying workers idled by the coronavirus probably mean that the true unemployment rate is closer to 20 percent than 15. That’s worse than most of the Great Depression.

The good news, such as it is, is that we’ve probably already taken most of the economic hit from Covid-19. The lockdown of high-viral-risk activities has been fairly comprehensive, and a variety of indicators suggest that the economy more or less stabilized around the middle of last month.

So the question now is: How fast a recovery can we expect?

Economists — like epidemiologists, by the way — rely a lot on history to answer such questions. The problem now is that history gives us an ambiguous answer. It’s not that every economic recovery is different; there are, in fact, clear patterns. But there seems to have been two kinds of recovery, and it’s not immediately clear which — if either — pattern is likely to apply this time.

The figure below shows employment growth in the last six recoveries, with the final month of the recession set equal to 100, and each line labeled by the year in which recovery began.

 

What you see is that before 1990 we tended to have “morning in America” recoveries, in which jobs came roaring back. Since then, however, we’ve had extended “jobless recoveries,” in which G.D.P. is growing but it takes a long time for the jobs to come back.

Why did the recovery story change? Early in the Great Recession, I argued in a blog post titled “Postmodern recessions,” that fast recoveries followed recessions caused by high interest rates, imposed by the Federal Reserve to curb inflation; once the Fed relented, the economy easily sprang back. Later recessions had been caused, instead, by private-sector overreach: the commercial real estate bubble of the 1980s, the tech bubble of the 1990s. These were much harder to cure.

And I predicted, correctly, that the Great Recession, brought on by the collapse of a giant housing bubble, would be followed by another jobless recovery.

So where does the current slump fit? My reluctant conclusion is that it’s more like the pre-1990 slumps than the more modern episodes.

Why reluctant? Well, I was right about the housing bubble, the Great Recession, and a lot of other stuff around then, and it’s always tempting to revisit your greatest hits. And let’s be frank: Given my politics, I don’t like the idea of Donald Trump riding into November on the wave of a rapidly healing economy, and would like to believe that can’t happen.

But Covid-19 is, in some ways, like the spike in interest rates that generated the 1981-82 recession. It’s something imposed on the economy from outside, as it were, rather than the result of private-sector excess, so you’d expect fast recovery once the outside shock recedes.

A fast recovery, however, depends on having the pandemic recede. And that’s why the push from the Trump administration and its allies for a quick reopening of the economy is probably self-destructive. Epidemiologists, who are far more likely to get this right than the rest of us, say that we’re nowhere close to having the virus sufficiently contained to reopen; they’re extremely worried that we may have a second wave.

So if we were patient and self-disciplined, we probably could eventually see rapid recovery. But “self-discipline” isn’t a term many people would apply to Donald Trump.

Quick Hits

Recoveries from financial crises tend to be slow.

Indications of economic stabilization.

More indications, but with a horrifying portrait of who has been hurt.

Covid-19 is spiking in the heartland.

Facing the Music

 

Like everyone, I’m mostly living in old jeans and frayed T-shirts these days. But this ZZ-top cover, by a couple of talented sisters from Atlanta, reminds us about dressing sharp.