Today’s Wall Street Journal has a front-page story focusing on the question, “Why does this recovery feel so much like a recession?” ($). It is a question that has perplexed some of the economics professions’ leading macro theorists who predicted months ago that a recovery would be well under way by now. Says the NBER’s Robert Hall: “It seemed like the timing [of the recovery] was immanent.”
The article offers explanations for our quasi-recovery. One is that the very business practices that extended the 90s boom now serve to prolong the ‘00s bust. The trend of increasing marginal productivity from scarce inputs has continued. While this helped firms increase their bottom lines a few years ago, it allows them to avoid re-hiring laid-off workers now. Hence, the unemployment rate continues to rise during a time of positive GDP growth.
Another explanation is that recovering firms are choosing to expand operations in Mexico and other places overseas. Following the recessions of the 70s and 80s, these firms tended to re-hire the workers they were forced to lay off during the bust. No more. “Before the 1991 recession, most people got their old jobs back,” says Brandeis University’s Robert Reich. “After 1991, most people didn’t get their old jobs back. Those jobs went abroad, or they were automated out of existence.”
It seems to me that there are some lessons that should be learned from the study of our slow-going recovery. The first is that increases in GDP growth that are based largely on increases in “G” do not feel like genuine recovery. In an era in which the state is growing at levels greater than what occurred during the heady years of the Great Society, property rights are threatened and the ability of private capital flows to spur wealth creation is hindered.
The second is that efforts by a deflation-obsessed Fed to thwart the economy’s market clearing mechanisms amount to dangerous nonsense that must be stopped now. These efforts not only have the effect of prolonging the economy’s misery, they throw sand in the face of unemployed and unskilled workers whose families would benefit the most from falling prices. The irony is that many of these workers will be forced to become dependent on (and beholden to) the state, robbed of the autonomy that would be encouraged by falling prices and other normal market-clearing processes.
And finally, free trade agreements have particularly pernicious effects when they are struck with countries that offer regulatory and wage environments that are vastly superior than those in the United States. What good are such agreements if U.S. regulators do not accordingly reduce workplace interventions to levels that make capital at least equally at risk at home and abroad? Capital will tend to flow where it is safer and more productive. If we must be denied the ideal of genuine free trade as envisioned by 19th century classical liberals such as Cobden and Bastiat, then can we at least hold the congressional protectors of OSHA, the NLRB, the DHS, the EPA (and all the other creators of regulatory burden) accountable for the damage caused by their workplace interventions?
