10 March 2014

A Very Bad, No Good Recession is Followed by a Very Slow, Fairly Anemic Recovery

The average downturn since World War II
Jobs Lost: 2 million
Months to regain lost jobs: 10
Length of Recovery: 59 months
Ratio of Jobs Gained During Recovery to Lost in Recession: 6X
Ratio of Months Recovering to Months in Recession: 3X

Put simply, on average it took the economy less than a year to regain the jobs lost in a recession. On top of that, the average recovery kept going about 4 more years after recovering the lost jobs, creating about 6 times as many jobs as was lost. On average we gained about 11 million jobs in a recovery after losing about 2 million during a downturn.

The Great Recession and current recovery
Jobs Lost: 8.7 million
Months to regain lost jobs: 48 (and counting)
Length of recovery: 48 (and counting)
Ratio of Jobs Gained During Recovery to Lost in Recession: 0.9X
Ratio of Months Recovering to Months in Recession: 1.9X

That is, 4 years into the recovery, the economy has not yet created as many jobs as was destroyed during the Great Recession. During the 2 years of the Great Recession, we lost jobs 3X faster than average for a recession. Since then, we are growing jobs more slowly than average. That's a terrible combination and it explains why 4 years is still not enough to fully recover.

At our current rate of job creation, it will take 4 more months to completely recover the jobs lost between Feb 2008 and Feb 2010.

At some point policy makers have to realize that the policies that yielded us such spectacular job creation rates in the last half of the 20th century are in need of revision. This century seems different.  We've never had a better educated workforce or more capital available for credit or investment. Still, the economy is creating jobs more slowly than it used to.

In 1873, Walter Bagehot wrote Lombard Street, explaining the role of central bankers to provide credit and liquidity during a crisis. An economy limited by capital was not able to create jobs or wealth; good policy during the Industrial Economy meant abundant capital. By early in the 20th century, the leading economies of the day were increasingly reliant on an educated workforce; economic development had to include public education, from kindergarten to universities and good policy during the Information Economy meant an abundance of knowledge workers.

And policy makers still focus on just those two things: capital and knowledge workers. They don't demonstrate an awareness that anything has changed in this century.  For them, if only we put money into education and capital markets, the economy will respond with more jobs, more wealth, more growth. That linkage seems a little less obvious in this new century.

Until policy makers in this century find similarly creative ways to stimulate the supply of entrepreneurs, our economy will continue to fall far short of its potential. We have unprecedented access to finance, information, and education. Our technologies are as promising as ever. Consumer markets are emerging in China, India and around the world; billions more are now connected to the global economy as consumers and workers. We have an abundance of everything except entrepreneurs.

Few people in 1900 would have believed that simply being upper middle class would mean staying in school into one's mid-20s. Few people in 1800 would have believed that it would take trillions in easy credit to keep an economy running at full employment. Today, few people can comprehend how much we need to popularize entrepreneurship to hit a new rate of job creation.

Entrepreneurship creates jobs, not capital or education. Today we can automate manual labor with machines and knowledge work with software. It takes fewer people to create value which means we need more entrepreneurs to create jobs at a rate that will lead to full employment. To create jobs more quickly than we automate them is going to require unprecedented levels of entrepreneurship. For this reason alone entrepreneurship - and not capital or knowledge workers - now limits our economic development and growth.

Someone is going to begin working towards policy that encourages entrepreneurship in the same way that in past centuries leading communities began implementing policy that created more capital or knowledge workers. Until that happens, we will just need to lower our expectations.

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