This economy could be as good as it gets

September 10, 2012

A familiar refrain that was popular in the early 1990s is making a comeback during the great recession of 2008-2009, which has rocked the economy and labor market for more than five years: Is it possible that the children of this generation will not be as well-off as their parents? The labor market has been hobbled. The duration of unemployment has reached unprecedented levels, and it is now the case that unemployed workers in certain age groups face the prospect of never being employed again. If all of this sounds grim (and it is), consider the possibility that this may be as good as it gets.

It is true that the depth of the recession and the current sluggish recovery are much different than anything we have seen since the Great Depression. But rather than look at the current recession in comparison with previous U.S. recessions, consider its comparison with Europe. The events in Europe that sent crippling shockwaves through much of the world might be of such a magnitude that the current speed of the recovery is fast enough. The current downturn is unusual because it was triggered by a large common shock, rather than the idiosyncratic components that usually put individual countries into a recession. We don’t have a lot of experience with such shocks, so it may be useful to look across countries to see how others have fared.

The U.S. economy accounts for about 22 percent of world GDP; the European Union is about 25 percent. The figure below from compares the 2008 recession and recovery in the U.S. with those in the major economies of Europe. First note that the size of the contraction was much steeper in Germany, the UK and Italy, whose economies fell roughly 6 percent from their peak. In the U.S. it was more like 4 percent. But note as well that the recovery in the U.S. has been steady compared with these countries. All except Germany appear to be headed back into recession.


Many argue that the slow recovery in the U.S. is due to insufficient demand. As seen below, consumption – the biggest component of aggregate demand – never fell below its peak in Germany. In the U.S. it fell, but it has recovered and now looks very similar to where Germany is today.

The unemployment rate in the U.S. rose sharply in the first quarters of the recession, but it started from a level that was lower initially than most of the European comparison group. The U.S. is the only country other than Germany where unemployment has fallen from its peak.

Considering how different the recovery has been across these economies, it seems reasonable to consider the role of policy responses by governments or central banks. The impact of “stimulus” is inherently difficult to measure. A simple measure of the change in government consumption as a percentage of GDP is shown below.  One has to be careful in interpreting such data, but they don’t suggest that the different recoveries are likely connected with governments’ willingness to spend in response to the shocks – all of these governments increased spending – with very different results.

It is worth noting that the continental European economies depicted here all had the same monetary policy, but their economies responded very differently. Moreover, the U.S. the UK and the euro zone economies all engaged in quantitative easing that increased the sizes of their central bank balance sheets by a factor of 2.5 to 3.

There is one notable difference in the European economies. They have been quite variable in the extent that they have reformed labor market institutions and invested in human capital. Germany reformed its labor market beginning in 2003, while Spain and Italy have only now begun to think about it.

The evidence simply doesn’t support the conclusion that governments can mitigate business cycle fluctuations through discretionary changes in aggregate public spending or even unconventional monetary policy.

The U.S. recovery is dismal when compared with other post World War Two recessions, and it is far from where it should be in terms of growth and employment. Labor force participation is the lowest it has been since 1979. But this may be the best that we can expect with the tools that the government has used. The important policy question to ask now is which structural reforms and investments in human capital can make our longer-term growth options better. If we focus on quick monetary or stimulus fixes rather than those questions, then we can’t expect anything better than this slow, painful recovery.


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Corporate tax brackets have been the same for over 25 years.

It is time to raise the 15% Corporate Federal tax rate threshold from $50K to $100K.

It is not a tax reduction, is just avoidance of pure fiscal drag. $50K earned in 1987 are worth even more than $100K today, why taxing them double now?

This will make us more globally competitive and support growth in the long run.

Posted by robb1 | Report as abusive

A major question not addressed in this presentation has to do with the racial / ethnic / sexual / class disparities in the USA, and whether the current politico-economic system is capable of perceiving the growing disunity in the USA. Even if it is, can the current system adapt to the growing disintegration of America as a nation? Or are we witnessing the end of the “immigration / integration” society dreamed of in the 19th century?

The USA is not a corporation able to “lay off” its citizens, however much it would like to be.

Posted by usagadfly | Report as abusive

Corporate tax brackets have been the same for over 25 years.

It is time to raise the 15% Corporate Federal tax rate threshold from $50K to $100K.

It is not a tax reduction, is just avoidance of pure fiscal drag. $50K earned in 1987 are worth even more than $100K today, why taxing them double now?

This will make us more globally competitive and support growth in the long run.

Posted by robb1 | Report as abusive

raise the corporate fed tax rate of 15% from $50K to $ 100K. It has been at $50K for over 25 years. It is not a tax reduction will just adjust for inflation.

Posted by robb1 | Report as abusive

I’m no economist, but your analysis is the most objective one consistent with what seems to be happening here in the United States and even worldwide.

It would have been similarly difficult to “read the tea leaves” as to the effect of the Industrial Revolution on labor “availability” and national productivity from “prior data”. The rules changed.

People once useful and productive with “old skills” became redundant as nations required entirely “new skills” moving into a “new future”. Many incapable of retraining never worked again. It wasn’t personal, but it was catastrophic to many individuals. Today, once more, the rules are changing.

Today’s “profit efficiency” result is more and more related to “just in time” automated production and delivery of just the right number of widgets where and when needed. No longer is it necessary to employ lots of people steadily to lots of things a manufacturer expects to remain “in demand”. No longer are huge warehouses necessary to level out seasonal shortages and production excesses, or the people who built and administered them.

It is inevitable that more and more production jobs will be automated. Computer controlled machines will work 24 hours a day, 7 days a week without complaint, raises, “continuing education”, promotions, time off, breaks, sick leave, medical insurance, families, vacations, or retirement.

Many people were once employed to keep raw materials flowing at just the right pace for timely and efficient widget production and shipping to meet actual marketplace demand. Today, only one or two people can do this quicker and more efficiently with computers.

Profits thus increasingly relate more and more to informational efficiency (Sales/inventory/demand) than to production efficiency, which falls off rapidly at ever-lower production quantities. This is not unlike the changes in society as a majority of Americans left the farm and “subsistence farming” for jobs in the city.

No longer does population growth translate into economic growth. On the family farm, more children meant more labor to crop more land with greater efficiency; whereas in the city, more children mean more unproductive mouths to feed. When parents are employed, each increases the cost of necessary child care and less and less “personal time” is possible.

Increasingly the number of “jobs” necessary for society to function is decreasing even as population is increasing. People without a productive place in society become a challenge for society to educate and employ. As their percentage of society becomes larger, so does their drag on the economy in which they exist. This is the elephant in the room that no one is publicly acknowledging.

Until and unless we discover energy sources and production methods that do not further pollute this big blue marble we live on, mankind’s reproductive efficiency seems likely to turn this planet into a big brown marble utterly devoid of sentient life.

Posted by OneOfTheSheep | Report as abusive

This article manages to put out plenty of text and graphics without really saying anything at all. What structural reforms do you think would lay the foundations for a sustainable recovery? How does a government direct policy to invest in human capital, specifically?

The political climate in the US is not conducive to meaningful reform, and investment in anything besides campaign ads and strike drones seem highly unlikely. This is as good as it gets, alright, now tell us something we don’t know.

Posted by smanchwhich | Report as abusive

This is yet another attempt to “paper over” the eurozone’s economic problems, albeit on a much larger scale than previous endeavors. With a few exceptions, European economies are in or heading for a recession. If you look at a graph of gdp over time, the downward trend appears to be accelerating. Ultimately, central bank easing will not return the world to prosperity. There are too many converging negatives including monumental sovereign debt and an aging boomer generation for which even the healthiest of economies is unprepared.

Posted by gordo53 | Report as abusive

11 september 2012 tuesday

this is what they say: opinion
the great debate
this economy could be as good as it gets
by thomas cooley and peter rupert /
september 10, 2012
“the best that we can expect with the tools
that the government has used”

all i can say:

“sir with high respect, this tools that the
government used is the one responsible in
all the negative developments that is
occurring, happening today.

kindly visit me at my facebook account:

no one until this day, that the trillions of
dollars used to save the u.s. economy is
still not enough. and piling more debts
to an already somber, bleak, frail economy
is very-very threatening, dangerous,
perilous. thanks’

please take care and God bless . . . . . . . raul

Posted by nlcraul | Report as abusive

One short paragraph in this article by two distinguished economists almost says it all:

“The evidence simply doesn’t support the conclusion that governments can mitigate business cycle fluctuations through discretionary changes in aggregate public spending or even unconventional monetary policy”.

This is the truth most politicians cannot acknowledge, or perhaps even know. Stimulus (public spending) or QE 2 – 3 -4? (unconventional monetary policy) are at most marginal, maybe harmful. They do not and cannot address underlying structural problems.

Posted by SayHey | Report as abusive

Our biggest problem is that the remedies being employed now have immense long-term side effects. Record deficit spending will doom future generations to a pseudo financial serfdom. Same thing with printing money. QE is going to produce nothing more than massive inflation across the board soon AND is robbing from our savings. We need solutions to our problems that do not put the pain component off for years or decades. We need to take our medicine now or more appropriately, go through our withdrawl symptoms now instead of postponing them. Eliminate public sector unions now. Reduce entitlement programs now. Slash the size of government now.

Posted by Nickolai | Report as abusive

We live some of the most privileged lives man has ever known and yet we whine. Clearly, we are stupid to be made to see what a terrible time we live in, when in fact we have the softest of lives. Brainwashing I guess. The GOP is pretty angry about not being in power, so I suppose they have to convince us that things are bad. Sure, some people still suffer, but that’s mostly self inflicted. The information is there for them to use to improve their lives, they just refuse to believe it. They have other things they “believe” in. In the end however, everyone dies and so that is the result we all share. However beyond that, we have the possibility of an enjoyable life, as long as we have reasonable desires, and are not perverted by those that lust for power and wealth.

Posted by brotherkenny4 | Report as abusive

I believe from conversations with people all over the country (and other countries too) that the outlook is pessimistic at best if Obama is re-elected. It seems that there are some closet liberal who have drank the cool-aid and are now mindless zombies spitting out liberal talking points in which all common sense has evaporated.
There are too many people living off the government including a huge number committing fraud through false dependant reports and illegal alien fraud. We are no longer a sovereign nation except in name only. Vast areas have become low-income havens and sanctuary cities thanks to inept and corrupt legislators in California primarily.
There is no way to solve this unless we totally collapse and rebuild. We are too far gone to the left which is the road to oblivion. I wish you all well, the ones who deserve it and to the rest of you, you know who you are. We have created a country full of half human bipeds and lazy jelly fish. The rest are intelligent primates praying on the low-life’s by way of laws which they create for their own benefit. The umpires which keep everything in check have either become too old or corrupt. The ball busters and hope builders have been neutralized by the political correctness movement (liberal agenda).

Posted by EagleDriver | Report as abusive

Never have US government policies been so skewed as to allow the enormous outflow of hundreds of thousands a month of high level U.S. jobs, month in, month out, encouraged and rewarded by tax policy; financing policies (Import/Export Bank, Overseas Investment Bank, and the many, many more bilateral and multilateral banks whose excessive lending has placed the burden of bailouts onto the American people. Where was Paul Ryan when our U.S. jobs were sucked out of the U.S.? Or Congress in the main?
The silence spoke volumes about that body.

Never before in my lifetime has the United States government policies favored the outright giveaway of U.S. technology including classified technology and know how, carte blanche, the effect of which strengthens all nations by weakening and disinvestment back into the United States.

Massive and insane immigration policy continues; issuing visas by U.S. Consulates world wide and priiate travel agencies. We have no idea the tens of millions issued visas around the world giving permit to enter the USA. And no better system than was in place on Sept 10, 2001.
It’s too late. When the US Government could have acted it chose not to, delaying, delaying and delaying again until it was a faux accompli; i.e. the Commodities Futures Trading Commission and it’s abject failure to intervene for instance, when oil futures traders drove up the price of gasoline in the U.S., to $4.00/gallon under Bush Jr and again as gasoline prices head back up to $4.00/gallon now in the United States.

We have our own divergent view of our nation and its place in the world~ the globalists whose sole cause is money no matter the attendant cruelty, merciless unemployment, and deadly poverty result to the majority, both in the United States and around the world, especially China where workers there are literally worked to death. And those of us
who will love our nation to our grave, revere those who came before us to build a great nation; those that sacrificed and the millions dead fighting WWII are living in a limbo nightmare.

A time Where culture, art, music, as well as math, geography and science were important in school. Where those with special talent were encouraged and nurtured. Where varying abilities were understood and learned at their own speed.

The very heart and essence of this nation for some reason unknown to me have been overtaken by a cruel, ruthless, egotistical, unkind brash bunch, like the ‘brooks brothers rioters’ in Miami, Fl election 2000. And a Presidential contender hangs his case before the US Supreme Court on the 14th Amendment~ due process clause of the US Constitution….the ballots were cast one way in one district and another way in another district therefore it was ‘unfair’.

This nation is too big so as to be governable and so diverse in native languages non European that communication among people often is impossible.

I pray for America every single night~ I pray that those in positions of power it is a fallacy to believe any single move by ‘the Fed’ will positively effect our economy significantly, but Congress could reinsert Glass Steagal back into the Emergency Banking Act as proposed and adopted by Franklin Delano Roosevelt for starters.

Posted by skyblu5555 | Report as abusive

Which specific sectors do you think, might potentially do well post crisis? There is already a report in Reuters on “Small Businesses” picking up in August. Do you think start-ups and small businesses can help the economy to get growth back on track? How significant and desirable would it be for the relatively smaller businesses and startups which are relatively lesser organized to drive growth post this crisis? Apart from decisions on economic stimulus and interest rates, what “Strategic” decisions related to local and international trade and employment (say reducing or encouraging outsourcing)is desirable and may be expected?

I am new here and would be glad even if you answer a couple of these questions for me.

Posted by Sandip27 | Report as abusive

Read out the article on
“4G iPhone5 sounds death knell for 3G”

Posted by GugaHS | Report as abusive

After Bush and Obama, together with their like minded brethren in the U.S. Congress, we can be assured that right now will definitely be as good as it gets. Once the bills from their free spending orgy come due, then I can see no way forward but downhill.

The southern European countries are not that much different than us, except that uncontrolled immigration is turning us rapidly into a polyglot tower of babel. The southern Europeans remain relatively free from this curse, and so even they enjoy a certain advantage over the United States. I wonder how much longer the securities of the U.S. government will continue to be rated investment grade? I sure don’t want to be holding them.

Posted by nikacat | Report as abusive