So we can continue to argue about the nature of the Great Recession. Or we can look at the long-term trends of American employment and the trends of the global economy. As I show in the chart below, from the mid-1980s to about 2007 the U.S. labor force began to become a lot less employable and to become more job-constrained.
There have been several factors which have impacted the job market, these include declining labor force participation and the aging of the population, as well as the changing nature of the workforce. The following chart illustrates the changes in the U.S. labor force and the share of the labor force that is in employment.
The decline of the labor force by a full percentage point between October 1990 and October 2007 implies that the nation lost 2.96 million workers or 2,500,000. That is equivalent to taking 11.6% of the labor force out of the workforce each month. For every full percentage point of the decline in the labor force, the labor force became 8.6% less employable. In fact, for every tenth part percentage point decline in jobs the U.S. labor force shrank by 1.4%, which is equivalent to taking every tenth part percentage point out of the labor force, assuming we aren’t talking about some sort of labor-saving technology. If you haven’t heard of the term “austerity” or the “Laffer Curve,” it’s worth a look now. I’ve included some links below which explain what Laffer means and how it functions as we approach 2014 and beyond. Laffer’s Curve Laffer’s Curve shows that reducing taxes and government spending causes both the private and the public sectors to do a smaller share of their work, meaning less work.
Laffer Curve in 2014 and Beyond There are many reasons that I believe that the Fed has been too slow in raising interest rates. In September, the Federal Open Market Committee (FOMC) kept rates at their near-zero level for the first time since 2008. As with the Fed’s response to the dot com bubble it was an ill-advised move. I believe that the Fed needs to increase interest rates sooner than later. Right now it seems too late. Why? Because the U.S. is going through the same sort of economy-wide slowdown that it experienced in the early 2000s and as more Americans enter the labor force the economic “recovery” is going to take longer to come.
The fact that we haven’t hit the “economic cliff” is not likely because of the recent rate increase. Economists don’t think that the rate increase was strong enough to prevent recession. The fact that we haven’t hit the “economic cliff” is not likely because of the relative strength at the Fed and the fact that the government and the private sector are spending more, rather than saving more.
FOMC’s Rate Rise - The Weakness at the Fed The fact that our economy is still in a rut is not a reason to worry. Yes, one can still end up stuck in a rut. But our economy has more upside than downside. To understand the likelihood of a recession, it is important to look at the U.S. overshooting its “natural” growth rate. The chart below shows real GDP growth over the past two decades. The blue line is the stock market’s return over the two-decades time period.
The red line, for GDP growth, is the GDP growth from the beginning of the industrial revolution to the late 1970s. The two lines are about the same. One is about where we were in the mid-1980s, and the other is where we are today. For the time period of 1980 to 2007, growth averaged 1.71%. Since the late 1970s, however, we’ve been at the bottom of both lines so far, as this chart shows. Today Americans are less than 6% of the GDP and the U.S. is less than 10% of the world economy. We used to have a decent cushion of potential. If we were stronger, unemployment would be lower. As it stands, we are in a rut just like the one we’ve been in for years. The Fed could keep rates low and perhaps end up in a recession, but they would be in trouble. As I have repeatedly pointed out in this blog, I believe that the Fed’s policies are the primary factor behind the slow recovery from the Great Recession. Most economists agree that the most accurate diagnosis of the Great Recession was taken by Adam Davidson. Davidson pointed out that, “