Why has the Worst Recession Since the 1930’s had Such a Mild Effect on America?

One of the oddities of this recession is the widespread opposition to government actions mitigating its effects.  Doing almost nothing (except tax cuts) has almost become the official policy of the Republican Party, and libertarian sites such as the Instapundit frequently run articles mocking the government’s stimulus programs.

A related conundrum is the stability of spending by US households during a severe recession — despite falling employment (graph and graph), a collapse in hours worked (graph), stagnant wages (now negative YoY for the first time in 50 years; article).  And rising savings (graph)!  How is this possible?  As one economist notes:

In a research note, Carson says job losses in prior downturns have been roughly proportional to the decline in gross domestic product. But in the current recession, the proportion of jobs lost is running about a third greater than the drop in real GDP. (source)

The answer is government aid:  the automatic stabilizers and the stimulus programs.  The government enacted these programs faster than in previous recessions and on a larger scale.  They have buffered the longest and by most measures deepest recession since the 1930’s  (vividly shown by this graph).  Without these measures by now we might have rioting in the streets demanding more government action – instead of ”tea parties” protesting high taxes.  (see comment #3 for more about this)

This is sad, people protesting the government actions that mitigate what would otherwise be a horrific downturn.  That does not mean the stimulus was well-designed (it was childishly poorly done), or that the accompanying theft was good (bailing out fat cats in the financial sector).

Looking ahead:  almost anything can happen in the next year.  There are no strong historical precedents for our situation, and we are beyond the limits of conventional economic theory.  We might have a strong recovery, or a dramatic collapse — or anything in between.

Even if we get the expected recovery later this year, unemployment will continue to stagnate through 2010.  If we get only a brief bounce — or don’t even get a bounce — I expect conditions to deteriorate.  Rapidly and severely.  Those tea parties will disappear, as people demand fast, large government action.   Wise or not, that’s what will happen.  Unfortunately, after years of feckless borrowing it will be difficult for the government to meet these expectations.  I’ll discuss that scenario on another day.

(1)  Automatic stabilizers

This graph show the number of people receiving unemployment insurance as a percent of US population.  It’s from Mish’s Global Economic Trend Analysis (although he misinterprets its significance).

20090710-claims1.png?w=581&h=414

There are several programs paying unemployment claims.  Unemployment insurance pays 26 weeks; now paying 6.0 million people NSA.  During recessions there are other programs enacted, such as the Emergency Unemployment Compensation — now 33 weeks, paying 2.5 million people NSA.   (There are other programs, now paying aprox 400 thousand people but not included in these numbers:  Federal Employees, Newly Discharged Veterans, the Railroad Retirement Board, and Extended Benefits).

The total number now receiving benefits is aprox half again higher than the peak of the horrific 1980-82 recession (3.1% of pop, vs. 1982 peak of 2%). Yet today’s unemployment rate is 14% less (now 9.5% vs. 1982 peak of 11%).

There are many reasons for this, but probably the major one is the longer eligibility for benefits.  Today’s unemployed can receive up to 79 weeks (varying by State and eligibility).  The maximum was 65 weeks in the 1975-78 downturn, and 55 in 1982-1985.  Also supporting household income:  now unemployment benefits automatically qualify families for food stamps.

(2)  The government stimulus

This is well-known, and so needs little explanation.  As an illustration, see this analysis from the government’s most recent Personal Income report (26 June 2009):

Real disposable personal income (DPI) increased 1.6% in May, compared with an increase of 1.2% in April. The May change in DPI was boosted as a result of provisions of the American Recovery and Reinvestment Act of 2009. Provisions of the Act reduced personal current taxes and increased government social benefit payments. Excluding these special factors, which are discussed more fully below, DPI increased $20.6 billion, or 0.2% , in May, following an increase of $101.3 billion, or 0.9%, in April.

For more information

  1. Short-Term Responses to the Recession: The Extension of Unemployment Insurance Benefits“, Congressional Budget Office, February 1991
  2. The Economic Recession of 2007-2009: A Comparative Perspective on Its Duration and the Severity of Its Labor Market Impacts“, Andrew Sum, Ishwar Khatiwada, and Joseph McLaughlin (Center for Labor Market Studies, Northeastern U), April 2009
  3. An Update on State Budget Cuts“, Nicholas Johnson, Phil Oliff, and Jeremy Koulish, Center on  Budget and Policy Priorities, 29 June 2009 — “At Least 39 States Have Imposed Cuts That Hurt Vulnerable Residents; Federal Economic Recovery Funds and State Tax Increases Are Reducing the Harm”
  4. Correcting Five Myths About the Stimulus Bill“, James R. Horney, Nicholas Johnson, and Lawrence J. Haas, Center on  Budget and Policy Priorities, 10 July 2009

Originally published at Fabius Maximus and reproduced here with the author’s permission.

4 Responses to "Why has the Worst Recession Since the 1930’s had Such a Mild Effect on America?"

  1. AMcRae   July 17, 2009 at 9:04 am

    Obviously to prevent a total economic collapse, the Federal government had to use its borrowing power to stimulate economic activity. But, long term, that borrowed money will need to be paid back, and, so far, the beneficiaries of big chunks of that money have been investment institutions that were largely responsible for the toxic invesmtent instruments that caused the meltdown in the first place. Where is the fundamental restructuring of the US economy to reduce our trade imbalances, re-invigorate our industrial base, reduce consumer debt-financed demand, and achieve some measure of energy self-reliance? One doesn’t actually get well by simply taking pain killers.

    • Greg   July 17, 2009 at 9:49 am

      Excellent point. You don’t cure cancer with pain killers. However, it is also true that much of the federal spending to help big institutions (not just in the financial sector, but also the auto industry) was in the form of loans, some of which are now begining to be repaid. If the aided sectors do recover, the government will get most of that money back.

  2. Dr. Fred in PA   July 17, 2009 at 10:37 pm

    I suspect that we’re going to have more unemployment (12 to 13%), continued stagnation and probably political gridlock as well. The result will be our own brand of Eurosclerosis. As for demands for more government handouts, we’re broke. We need to sweep aside a WHOLE bunch of idiot rules, regulations, piddling taxes and fees and the bureaucrats that administer them. We need to collectively get our butts in gear, get to work and support ourselves and our families.

  3. Guest   July 19, 2009 at 1:34 am

    Absolutely Excellent!, great work Fabius Maximus!