By Ashesh Rambachan –
The Labor Department released its monthly jobs report for October and, at first glance, the report appears to bring a refreshing bit of good news. It must be morning in America again, right?
We are all sick of stories reporting anemic growth and stagnant unemployment. Every week a new statistic shows that the American economy is merely treading water. However, a few weeks ago the Labor Department released its monthly jobs report for October and, at first glance, the report appears to bring a refreshing bit of good news. The economy added 202,000 jobs despite the shutdown and the government narrowly avoided default! Employment gains were revised upward for both August and September! It must be morning in America again, right?
Not exactly. In context, the jobs report is sobering. Despite these strong jobs numbers, the unemployment rate actually increased to 7.2% to 7.3%. Even worse, the rate of labor force participation declined to 62.8%, it’s lowest since 1978. That’s definitely not a sign of strong recovery.
Sadly, we might have to get used to dismal economic performance. A paper titled, “Aggregate Supply in the United States: Recent Developments and Implications for the Conduct of Monetary Policy,” presented at the 14th annual IMF Research Conference, empirically supports pessimism. The paper’s dry title hides its astonishing conclusion. It argues that the American economy is currently operating at “seven percent below the trajectory it appeared to be on prior to 2007.” Seven percent may not sound very scary, but when put in context, its magnitude becomes much more clear. As Paul Krugman noted, operating at 7% below our potential translates into destroying about $1 trillion of wealth every year.
There are several reasons why this is happening. For example, the long-term unemployed are giving up their job search and leaving the labor market all together (See: labor force participation at its lowest level since 1978). Existing businesses are under investing in new technology and products because of inadequate demand. But, papers like these aren’t supposed to be published during an economic recovery, right?
Well, the word “recovery” implies that the American economy is not functioning as it would otherwise. But, what if this is the new normal? At the very same IMF conference, Larry Summers gave a fascinating lecture about the idea of “secular stagnation” (It can be found here. If you don’t have time for the lecture, at least check out Paul Krugman’s article on the topic). “Secular stagnation” refers to an extended period of economic stagnation, in which little to no growth and elevated unemployment becomes the norm. Secular stagnation accurately describes the Japanese economy over the last two decades. During these “lost decades” in Japan, growth barely topped 1% annually and deflation caused the real value of private debt to skyrocket.
Sadly, Larry Summers argues that this may be what is happening to the United States now. He notes that even before the financial crisis, the boom wasn’t that much of a boom. Unemployment wasn’t historically low. Inflation was under control. GDP didn’t explode. Now, after the crisis, the evidence of secular stagnation is all around us. The recent jobs report is a clear example.
Good news today would have been bad news 6 years ago and awful news 10 years ago. So, it is clearly not “Morning in America” and, according to the latest macroeconomic research, it might be still midnight.