August 20, 2011
The Washington Post ran a major article today telling readers that they should just get used to high unemployment. The article presented the view of some economists, that the economy can only recover from a financial crisis after a prolonged period of economic weakness, as somehow reflecting a consensus opinion within the economics profession.
For example, the subhead told readers that while presidential candidates promise a quick recovery, “analysts say this post-recession comeback may take longer.” Since this pessimistic view is far from the consensus within the profession, a real newspaper would have said “some analysts.” Similarly the sentence, “but because of the severity of this recession, and the accompanying crises hitting banks and other lenders, economists believe that recovering from it will be more difficult,” would have the phrase “some economists” in a serious newspaper. (The article does include some dissenters, but it implies that their views are an exception.)
The article then includes a set of charts that show a number of countries in which it took more than a decade for the unemployment rate to return to its pre-crisis level following a financial crisis. It is possible to tell a very different story using a different set of countries as is shown below.
Source: International Monetary Fund.
As can be seen, the unemployment record of these five recent victims of financial crises is mixed. Four years after the crisis (which would be 2012 in the U.S. case) South Korea and Malaysia had unemployment rates that were above the pre-crisis level, although in both cases they were at or below 4.0 percent. Most people in the United States could probably live with this outcome. In the case of both Russia and Mexico the unemployment was below the pre-crisis level four years after the crisis. In Argentina the unemployment rate was 8 full percentage points below the pre-crisis level, although the country had already been in a severe recession prior to the onset of the financial crisis.
The point of this exercise is that it is easy to find countries that were able to recover from the effects of a financial crisis relatively quickly. It is not a pre-ordained fact given to us by God that workers must suffer for years afterward simply because the people who managed the economy were too incompetent to prevent a financial crisis. This is simply an effort by the same group of incompetent economists to excuse their ongoing failure to fix the economy after they wrecked it.
It is also worth noting that this article gets an important fact about the economy and the recovery fundamentally wrong. It told readers that:
“The economy cannot fully heal until consumers and other debtors shed their financial burdens and are able to spend more freely again.”
Actually, the failure of consumers to spend freely is not the economy’s problem, which can be easily seen by looking at the savings rate. Currently the savings rate is near 5 percent of disposable income. Its average over the years prior to the take-off of the stock bubble in 90s was over 8 percent. In other words, consumers are spending freely. The reason why demand remains weak is that over-building of the bubble years has left construction badly depressed. Also, a trade deficit that is close to 4 percent of GDP is effectively draining $600 billion a year out of the economy.
These simple facts would be evident to anyone who has knows the basic national income accounting that is taught in an intro economics class. The Post should be aware of them.
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