If you want to see what half of a Great Depression (a.k.a. a "Great Recession") looks like, take a look at this graph of the extent and duration of unemployment for each of the last six recessions. It’s a chart compiled and kept up to date by Catherine Rampell, the New York Times Economix blog editor.
The chart shows each recession, with the zero point being the peak level of employment at the recession’s start and then showing the changes and duration in unemployment until unemployment returns to the starting level, whatever that was. We have a long way to go, and it could take years.
As Paul Krugman says of this lastest update, We’re Number One!, or "this is the big one." The depth and duration of this Great Recession’s unemployment scourge is far worse than anything in decades.
A couple other points. First, we can call this a "half depression," because the picture above could easily have been twice as bad if the Federal Reserve, Treasury and Congress under both Administrations had not thrown everything including the kitchen sink to stop a full on depression. That’s the conclusion of a just released but as yet little discussed study (e.g., see DeLong on Leonhart) by economists Alan Binder and Mark Zandi.
Binder/Zandi developed a model to estimate how much GDP would have shrunk and unemployment increased if the federal government had taken none of the monetary and fiscal actions of the last two years. From the initial Times story:
In a new paper, the economists argue that without the Wall Street bailout, the bank stress tests, the emergency lending and asset purchases by the Federal Reserve, and the Obama administration’s fiscal stimulus program, the nation’s gross domestic product would be about 6.5 percent lower this year.[*]
In addition, there would be about 8.5 million fewer jobs, on top of the more than 8 million already lost; and the economy would be experiencing deflation, instead of low inflation. . . .
Mr. Blinder and Mr. Zandi emphasize the sheer size of the fallout from the financial crisis. They estimate the total direct cost of the recession at $1.6 trillion, and the total budgetary cost, after adding in nearly $750 billion in lost revenue from the weaker economy, at $2.35 trillion, or about 16 percent of G.D.P.
As many have noted before, a huge chunk of today’s deficits were caused by the near-depression baked into the cake by 2008. Since this year’s GDP growth is now expected to be about 2.5 to 3.0 percent, the Binder/Zandi study suggests that without massive federal intervention, GDP would have shrunk by about 3-4 percent, instead of growing slowly. Worse, instead of 15 million unemployed, we’d have over 23 million without work. So Binder/Zandi provide support for the Obama Administration’s (and many other economists’) argument that their actions (and the Fed/Treasury bailouts before Obama took office) have at least prevented a depression.
The economists examined the Federal Reserve’s actions, which were about double the size of the ARRA stimulus bill and provided trillions in loans, loan guarantees and asset purchases. These actions thus likely had a greater effect on turning the economy around than the ARRA/stimulus bill alone, though they argue the combined efforts likely reinforced each other. This finding should increase pressure on Bernanke’s Fed to do even more on monetary easing to ensure the economy does not slide back into a recession or worse and to tackle unemployment more aggressively.
A second point from Rampell’s chart is how it helps assign responsibility for the depression/unemployment catastrophe. The worst unemployment level was reached about six months ago, in January/February of 2010, but for a year before that, unemployment had been in free fall. Obama’s ARRA/stimulus didn’t pass until early 2009, and most of it took 6-12 months to kick in.
What the chart tells us is that gross mismanagement by the previous Administration, their financial regulators and regulatory philosophy created conditions for a genuine depression. That depression was only narrowly avoided, so far, by massive interventions by the federal government.
Even then, the Bush Administration’s economic team passed a Great Recession-near-Depression onto the Obama Administration, which has been struggling ever since to turn the economy around.
But this is not just George Bush’s legacy; it’s the legacy of an entire economic philosophy and regulatory attitude, supported as holy doctrine by the entire Republican Party and all too many Democrats. Most still haven’t taken responsibility for this huge failure; instead, they would/could, if allowed to rule again, easily drag us back into a Depression. Voters take note.
Finally, the chart makes clear that the federal government is not even close to doing all it needs to do with stimulus spending and monetary support to reverse course and meaningfully hasten the reduction in unemployment. By any standard, those efforts remain less than half enough; it took a long time for Obama’s advisers to concede this (sort of), and there are growing indications the Federal Reserve recognizes this too. [Update: see Fed member's deflation warning hints at policy shift.]
The Obama Administration now has the responsibility to lead the way out of the catastrophe it obviously inherited from Bush’s economic team and a shared, failed philosophy. That members of that team or those who retain that philosophy still have jobs as economic advisers is both astonishing and dismaying.
And there should be no doubt that Republicans and conservaDems who obstruct (or undermine) direct jobs programs, more stimulus spending, state budget rescues to prevent even more layoffs and so on are still hurting the economy and 15 million unemployed by tying the government’s hands either for political gain or because of their misplaced deficit hysteria. Further obstruction of necessary spending to revive demand is not just foolish; it’s unpatriotic, economically unsound, and morally unconscionable.
Come November, voters should endeavor to remove from office every one of these obstructionists and hysterics, Republican and Democrat alike, before they do even more damage to the country and its future.
JULY 28, 2010 1 P.M. CORRECTION: This article now contains corrected figures for our estimate of 2010 GDP with and without the stimulus. As the article now reflects, GDP in 2010 would be about 11.5% lower without the government’s response, and the fiscal stimulus has raised GDP by about 3.4%.
Update: Dean Baker critiques the study’s assumed counterfactual:
While the analysis of the stimulus is pretty standard and very much in keeping with other estimates, this is not the case with the analysis of the financial sector policies. The problem with the study is the implicit counterfactual. It effectively assumes that if we did not do the TARP and related policies, that we would have done nothing even as the financial sector melted down.
Baker notes it’s unlikely the Government would have done nothing; instead, it could have implemented other financial/monetary strategies that could have produced preferable results.
Brad DeLong, citing Krugman, ARRA: Underpowered from the start
Krugman/DeLong on the dangers of permanently high unemployment; also, How did we know the stimulus was too small?
NYT/Rampell, Bleak outlook for long-term unemployed; also, Job subsidies providing help to private side
NYT, Industries find surging profits in deeper cuts