Historically GDP Growth Is Off by 11.9% and Labor Markets Should’ve Already Bounced

Forbes, August 30, 2011. © 2011 Forbes.com LLC™. All Rights Reserved.

“[This] recession has turned into a prolonged and very unusual slump in growth, preventing a labor-market recovery,” explained Dimitri Papadimitriou, head of the Levy Economics Institute, in a recent paper called Not Your Father’s Recession. The economist makes the argument that post-crisis GDP growth rates are about 11.9% off of historical standards, which, along with the employment-to-population ratio, suggest the current macroeconomic environment is a lot more challenging than in other recessions and will need the intervention of government to recover.

“Considering the already severe slump in job creation, it hardly matters whether such a downturn would constitute the second dip of a ‘double-dip’ recession, a continuation of the ‘Great Recession,’ or a confirmation that the economy has entered a Japanese-style ‘lost decade,’” wrote Papadimitriou, adding that a labor-market recovery appears unlikely without help from the government, and the data proves it.

Economics hasn’t come to terms with the possibility of a market economy stagnating over a protracted period because its models are based on constant growth. The reality is that market economies have grown relentlessly during the XX century.

Papadimitriou illustrates it with a chart overlaying an exponential growth line to an inflation adjusted-GDP series from 1967 to today. The match is almost exact all the way to 2007; today, real GDP is “11.9 per cent less than one would have expected based on earlier data.”

It’s no surprise that a depressed U.S. economy has kept output at multi-year lows. Recent revisions show Q2 GDP growing at a meager 1%, suggesting post-recession growth came from now-exhausted stimulus packages. Papadimitriou takes it one step further, arguing that average GDP, as illustrated by 12-quater, 20-quarter, and 28-quarter moving averages, has been declining since 2000.

One of the most worrying signs of the U.S.’ generalized economic weakness is the state of labor markets, particularly when compared with other post-recession recoveries.

Employment-to-population ratios bottom out 18 to 37 months after the onset of the recession in each of the previous six cases of output contraction. This time around, 43 months after the beginning of the recession, the trend continues to be negative, with the ratio down 4.6% to 58.1% in what has been almost four years of negligible recovery in labor markets.

With Chairman Ben Bernanke choosing to stay on the sidelines and the private sector immersed in a cycle of deleveraging, Papadimitriou points the finger at government, noting “the [federal] government has barely begun the task of creating the new jobs needed to deal with this disaster.”

Further stimulus will face staunch opposition in Congress, with Tea Party candidates taking the reins of the Republican Party on a cut spending-platform. The White House has leaked, though, an announcement that President Obama will unveil a new jobs plan, which is expected to be some sort of stimulus, in September.

It remains to be seen whether the situation in Europe will worsen, or if a moderate improvement in economic conditions in the second half of the year, coupled with Obama’s coming plan, will help push the economy out of the gutter.