The Great (Structural) Recession

The New Deal attacked the causes of the Depression head-on. It rejected the unregulated market structures and ideology that created the economic inequality of the 1920s. The Obama administration has to do the same thing if we are to end this Great Recession.

The shift since 1980 back to unregulated market structures is the root cause of this recession. Deliberate action brought us the stagnation in wages, the loss of union bargaining power, the plague of home foreclosures and our tax system that is designed to protect the wealthy at the expense of payroll employment.

Virtually all other recessions since the Great Depression have been brought on deliberately by the Federal Reserve because of inflation or fear of inflation. A drop in GDP for two consecutive quarters defined a recession and signaled Fed success in slowing up the economy and dampening inflation. That is cyclical.

This recession is different: it is structural. The National Bureau of Economic Research (NBER), which sets the dates of a recession, did not use their usual rise and fall in GDP as a measure. Instead, they specifically cited a peak in “payroll employment” in December 2007 as the turning point in the economy.

Previously, employment had been considered a lagging indicator. In cyclical terms, employment is neither the determinant of recessions nor the deepest concern of policymakers. The NBER, in its statement setting the onset of this recession as December of 2007, did something unprecedented but appropriate. It said the problem is structural: we worry about employment now.

This change to payroll employment means that the NBER was referencing not a cyclical decline in output or financial activity but the structural drop in basic aggregate demand as reflected in the number of people on a payroll. Payroll employment measures how much workers can buy and therefore predicts subsequent consumption patterns. It is one of the fundamentals

The indicator of a recession changed because of the nature of this recession. This is not something the Fed did because too much aggregate demand was causing inflation. Just the opposite is happening, too little demand is going to cause deflation. We have not seen this type structural “recession” since the 1930s.

When unemployment is recognized as the problem, all the talk about “green shoots” and a slow up in the ball dropping off the table become so much nonsense. All of this happy talk is just confidence building. It ignores the fact that all of the employment numbers are bad, getting worse and have nothing to do with the cyclical patterns of the past 60 years.

The unemployment rate will continue to climb, and probably stall at above 10 percent, at least into the fall -- and no one can see further ahead than that.

Consumer spending, the engine of the economy, cannot recover until workers find a source of income. Unemployed workers can’t maintain spending unless they find a job.

The necessary payroll employment is unlikely to arise from new investment when investors (and paycheck families) are in the process of writing off $4 trillion in debt losses and $20 trillion in the stock market. And, in a worldwide recession, jobs will not come from increased exports. The government stimulus will definitely help but not until the fall and then who knows if it will be enough.

Until this structural problem is addressed, we are going to see workers continue to lose their jobs, their homes, their healthcare and their self-respect. This Great Recession will continue until we recognize that this is not a cyclical downturn that will cure itself.

Our economic team – Larry Summers, Tim Geithner and, mostly, President Obama – has to recognize the structural nature of the problems that an unregulated market imposed on our economy, especially the losses incurred by paycheck families as income was transferred to the wealthy.

In the mid-1970s the richest 1 percent got just 9 percent of the national income. By 2006 they were getting 20 percent. That looting took place at the expense of the bottom 40 percent.

This President should not have to be told that the only successful safety net is a good-paying job.

We have to restructure the job market, get money back in the hands of working families and bail out payroll employment, not rich bankers.