No Free Lunch: Economics for a Fallen World: Third Edition, Revised
Chapter Eighteen: The “macro” view of the economy 460 whereas a mild recession has a slower growth rate upon recovery. This is because much of the reduced consumption during a recession is simply deferred consumption; for example, once the market recovers people will buy the new car they have been putting off. If the recession is deep and severe, there will be more deferred consumption that must occur during the recovery phase. Thus a deeper recession will subsequently have more robust growth than a mild recession. However, the 2007-08 recession did not follow this pattern. A severe recession was not followed by robust growth, even eight years later. A few economists even began calling this the “new normal,” claiming that we have undergone a structural change in the economy that will lead to low growth rates in the future. The relatively robust growth of the first two years of the Trump Administration (prior to his trade wars and COVID-19) suggest that stronger growth is indeed possible. In Figure 18.5 , unemployment is plotted along with GDP growth rate. Periods of recession are indicated in gray, with unemployment sharply rising with recession. For the period of the chart (1980-2015), there were four recessions (we’ll count the double- dip recession in the early ‘80s as one recession). Two were mild (1991, 2001) and had slow recoveries. Two were severe, with the 1980-82 and 2008-09 recessions hitting ~10% unemployment. In the 1980-82 recession, the sharp downturn was matched with a subsequently robust recovery and associated unemployment drop, whereas the 2008-09 recession has had a tepid recovery and a slowly improving job market. Nevertheless in 2016 the unemployment rate is below 5%. But does that indicate we now have a healthy labor market? Some economists say no, that the unemployment rate is not an accurate reflection of the labor market. They suggest looking at the labor force participation rate, which has been dropping steadily for years, but accelerated sharply in the aftermath of the recent recession, as shown in Figure 18.6 . Figure 18.5, Unemployment Rate and RGDP Growth. In this chart, you can see periods of recession leading to higher rates of unemployment, and economic expansions leading to lower unemployment.