by Don Peck
Most recessions end when people start spending freely again, and consumer spending has risen since the depths of the crisis. But given the size of the bust, a large, sustained consumer boom seems unlikely in the near future. The ratio of household debt to disposable income, about 85 percent in the mid-1990s, was almost 120 percent near the end of 2010, down just a little from its 130 percent peak. It is not merely animal spirits that are keeping people from spending freely (though those spirits are dour). Heavy debt and large losses of wealth have forced spending onto a lower path. Household “deleveraging” is likely to take years to complete.
In the long run, the prescription for the U.S. economy is clear: exports need to grow and consumer spending needs to shift from America to Asia, where savings and surpluses are high. If Asian consumers can be persuaded to save less and spend more, exports can power U.S. growth and job creation while American consumers rebuild their finances and settle into sustainable lifestyles. That transition is essential not just for the health of the U.S. economy, but for the sustainability of global economic growth.
But as Raghuram Rajan, an economist at the University of Chicago and the former chief economist of the International Monetary Fund, wrote in his recent book about the crisis, Fault Lines: How Hidden Fractures Still Threaten the World Economy, the cultural and institutional barriers to spending in Asia are exceedingly high. China’s resistance in 2010 to measures that might substantially depreciate the dollar (making U.S. exports more competitive and Chinese imports less attractive) underscores that point. Meanwhile, Europe and Japan—both major markets for U.S. exports—remain weak. And in any case, exports make up only about 13 percent of total U.S. production; even if they grow quickly, the base is so small that the overall impact will be muted for quite some time.
One big reason the economy stabilized in 2009 was the stimulus. The Congressional Budget Office estimates that even in the fourth quarter of 2010, the stimulus buoyed output by perhaps 2 percent and full-time equivalent employment by perhaps 3 million jobs, although its impact was by then declining. The stimulus will continue to trickle into the economy for the next year or so, but as a concentrated force, it’s largely spent. The extension of the Bush tax cuts at the end of 2010 delayed fiscal contraction, and other measures in the bill provided some new stimulus for 2011. But with federal government debt nearing historic highs, the prospects for further action look limited today. The president’s federal budget proposal for fiscal year 2012 projected a deficit of some $1.6 trillion in 2011. When fiscal contraction begins—as, sooner or later, it must—it will inevitably begin to drag growth down, rather than pump it up.
BY THE MIDDLE of 2010, according to one survey, 55 percent of American workers had experienced a job loss, a reduction in hours, an involuntary change to part-time status, or a pay cut since the recession began. In January 2011, almost 14 million people were unemployed, and the average duration of unemployment, more than nine months, was longer than it had ever been since the Bureau of Labor Statistics began tracking that figure in 1948. Unemployment benefits have been extended to ninety-nine weeks in many states, but even so, nearly 4 million people exhausted them in 2010. In February 2011, the percentage of the population that was employed was at its lowest point since the recession had begun; the apparent improvement in the unemployment rate in the months before that was the result of people leaving the workforce altogether, or deferring entry into it.
According to Andrew Oswald, an economist at the University of Warwick, in the United Kingdom, and a pioneer in the field of happiness studies, no other circumstance produces a larger decline in mental health and well-being than being involuntarily out of work for six months or more. It is the worst thing that can happen, he says, equivalent to the death of a spouse, and “a kind of bereavement” in its own right. Only a small fraction of the decline can be tied directly to losing a paycheck, Oswald notes; most of it appears to be the result of a tarnished identity and a loss of self-worth. Unemployment leaves psychological scars that remain even after work is found again. And because the happiness of family members is usually closely related, the misery spreads throughout the home.
Especially in middle-aged people, long accustomed to the routine of the office or factory, unemployment seems to produce a crippling disorientation. At a series of workshops for the unemployed that I attended around Philadelphia in late 2009, the participants—mostly men, and most of them older than forty—described the erosion of their identities, the isolation of being jobless, and the indignities of downward mobility. Over lunch I spoke with one attendee, Gus Poulos, a Vietnam-era veteran who had begun his career as a refrigeration mechanic before going to night school and becoming an accountant. He was trim and powerfully built, and looked much younger than his fifty-nine years. For seven years, until he was laid off in December 2008, he was a senior financial analyst for a local hospital.
Poulos said that his frustration had built and built over the past year. “You apply for so many jobs and just never hear anything,” he told me. “You’re one of my few interviews. I’m just glad to have an interview with anybody,” even a reporter. Poulos said he was an optimist by nature, and had always believed that with preparation and steady effort, he could overcome whatever obstacles life put before him. But sometime in the past year, he’d lost that sense, and at times he felt aimless and adrift. “That’s never been who I am,” he said. “But now, it’s who I am.”
Recently he’d gotten a part-time job as a cashier at Walmart, for $8.50 an hour. “They say, ‘Do you want it?’ And in my head, I thought, ‘No.’ And I raised my hand and said, ‘Yes.’ ” Poulos and his wife met when they were both working as supermarket cashiers, four decades earlier—it had been one of his first jobs. “Now, here I am again.”
Poulos’s wife was still working—as a quality-control analyst at a food company—and that had been a blessing. But both were feeling the strain, financial and emotional, of his situation. She commutes about a hundred miles every weekday, which makes for long days. His hours at Walmart were on weekends, so he didn’t see her much anymore and didn’t have much of a social life.
Some neighbors were at the Walmart a couple of weeks earlier, he said, and he rang up their purchase. “Maybe they were used to seeing me in a different setting,” he said—in a suit as he left for work in the morning, or walking the dog in the neighborhood. Or “maybe they were daydreaming.” But they didn’t greet him, and he didn’t say anything. He looked down at his soup, pushing it around the bowl with his spoon for a few seconds before looking back up at me. “I know they knew me,” he said. “I’ve been in their home.”
A 2010 study sponsored by Rutgers University found a host of social and psychological ailments among people who’d been unemployed for seven months or more: 63 percent were suffering from sleep loss, 46 percent said they’d become quick to anger, and 14 percent had developed a substance dependency. A majority were avoiding social encounters with friends and acquaintances, and 52 percent said relationships within their family had become strained. Like other studies of long-term unemployment, the report describes a growing isolation, a warping of family dynamics, and a slow separation from mainstream society.
There is unemployment, a brief and relatively routine transitional state that results from the rise and fall of companies in any economy, and there is unemployment—chronic, all-consuming. The former is a necessary lubricant in any engine of economic growth. The latter is a pestilence that slowly eats away at people, families, and, if it spreads widely enough, society itself. Indeed, history suggests that it is perhaps society’s most noxious ill.
SINCE THE CRASH, periods of optimism have come and gone like the seasons—2009 gave us the “green shoots” of an economic spring, and 2010 a “recovery summer.” And of course the economy has improved overall. Yet with each passing year, government and private forecasts have continued to push a full jobs recovery further and further into the future. In January 2009, a White House study predicted that, assu
ming the stimulus legislation passed, the unemployment rate would be about 7 percent by the end of 2010. As the end of 2010 approached, the Fed estimated that the unemployment rate would still be a full point higher than that when we ring in 2013. If the labor recovery follows the same basic path as it did in the previous two recessions, in 1991 and 2001, unemployment will still be nearly 8 percent in 2014. Even if jobs grow as fast and consistently as they did in the mid-1990s, it will not fall below 6 percent until 2016.
No one knows how fast jobs will come back—or where the unemployment rate will ultimately settle. The only theoretical limit on job growth is labor supply, and a lot more labor is sitting idle today than usual. Major technological breakthroughs—notoriously difficult to predict—could add speed and durability to the recovery. Smart government action or a rapid acceleration of global growth could do the same. Yet by many measures, the rate of innovation in the United States has been low for more than a decade—with the housing bubble, we simply didn’t notice. And the trend following recent downturns has been toward slower recoveries, not faster ones. Jobs came back more slowly after the 1990 recession than they had in the previous recession in 1981, and more slowly after the recession of 2001 than they had in 1991. Indeed, American workers never fully recovered from the 2001 recession: the share of the population with a job never again reached its previous peak before this downturn began.
As of early 2011, the economy sits in a hole more than 11 million jobs deep—that’s the number required to get back to 5 percent unemployment, the rate we had before the recession started, and one that’s been more or less typical for a generation. And because the population is growing and new people are continually coming onto the job market, we need to produce roughly 1.5 million new jobs a year—about 125,000 a month—just to keep from sinking deeper. Even as demand grows, the process of matching some workers with new jobs is likely to be slow and arduous. Over the past thirty years, temporary layoffs have gradually given way to the permanent elimination of jobs, the result of workforce restructuring. More than half of all the jobs lost in the Great Recession were lost forever. And while businesses are slowly creating new jobs as the economy grows, many have different skill requirements than the old ones. “In a sense,” says Gary Burtless, a labor economist at the Brookings Institution, “every time someone’s laid off now, they need to start all over. They don’t even know what industry they’ll be in next.”
IN 2010, THE phone maker Sony Ericsson announced that it was looking to hire 180 new workers in the vicinity of Atlanta, Georgia. But the good news was tempered. An ad for one of the jobs, placed on the recruiting website the People Place, noted the following restriction, in all caps: “NO UNEMPLOYED CANDIDATES WILL BE CONSIDERED AT ALL.”
Ads like this one have been popping up more frequently over the past year or so; CNN, the Huffington Post, and other news outlets have highlighted many examples, involving a wide range of jobs—tax managers, quality engineers, marketing professionals, grocery-store managers, restaurant staff. Sometimes the ads disappear once the media calls attention to them (a spokesperson for Sony Ericsson said its ad was a mistake). But new ones continue to appear. “I think it is more prevalent than it used to be,” said Rich Thomson, a vice president at Adecco, the world’s largest staffing firm, midway through 2010; several companies had recently told him they were restricting their candidate pools in a similar fashion.
To a certain extent, these restrictions are an unjust by-product of the desperation of many unemployed Americans, who have inundated companies with applications, sometimes indiscriminately. And of course, they also show the extent to which it is still a buyer’s market, in which employers can afford to be extraordinarily selective. But these restrictions may portend something more enduring, as well. Temporary unemployment can become permanent after a time; companies sometimes ignore people who have been out of a job for a year or two, and the economy—somewhat shrunken—just moves on without them.
The economic term for this phenomenon is hysteresis, and it can be one of the worst consequences of a very long recession. When people are idle for long periods, their skills erode and their behavior may change, making some of them unqualified even for work they once did well. Their social networks shrink, eliminating word-of-mouth recommendations. And employers, perhaps suspecting personal or professional dysfunction even where it is absent, may begin to overlook them en masse, instead seeking to outbid one another for current or recently unemployed workers once demand returns. That can ultimately lead to higher inflation, until the central bank takes steps to depress demand again. The economy is left with a higher “natural” rate of unemployment, a smaller working population, and lower output potential for years to come.
The blight of high unemployment that afflicted much of Europe in the 1980s and ’90s is a case in point, and an important cautionary tale. The persistence of high unemployment resulted from several factors, including overly rigid labor markets in some countries and welfare programs that dulled the incentive to find a job in many others. But analysis by the Johns Hopkins economist Lawrence Ball reveals that much of it was the result of hysteresis caused by a long period of disinflation and weak demand in the early and mid-1980s. In some countries, the natural rate of unemployment rose by five to nine percentage points.
The scars from this period will be deepest for the unemployed, but they will be felt by others as well. Communities marked by high, persistent unemployment devolve over time; social institutions wither, families disintegrate, and social problems multiply. Many American inner cities still bear scars from the sudden loss of manufacturing, and the attendant rise in male unemployment, in the 1970s. Parts of Europe now struggle with a burgeoning underclass. When geographically concentrated, idleness and all its attendant problems are easily passed from one generation to the next.
American politics have grown meaner as economic anxiety has lingered. Anti-immigrant sentiment has risen, and support for the poor has fallen. By many measures, trust—which to a large degree separates successful societies from unsuccessful ones—has diminished. The number of active militias in the United States increased from 43 to 330 between 2007 and 2010. And while frustrations will ebb when the economy improves enough, ideas and attitudes carry their own momentum. Once they become sufficiently commonplace, they are never quickly vanquished.
One reason the problems ushered in by the Great Recession are so urgent is that once too much time passes, they no longer can be solved. Once the character of a generation is fully formed, it cannot be unformed; once reactionary sentiments come out of the bottle, they are hard to put back in. And once large numbers of people cross the Rubicon from temporary unemployment to chronic joblessness, they, their families, and their communities can be lost for good. Finding our way to a full recovery from this period, and soon, is not just a matter of alleviating temporary discomfort. By degrees, economic weakness is slowly narrowing the life opportunities of many millions of people, and leaving our national future pinched.
Economies do eventually mend, of course. But recoveries from deep downturns are commonly jagged, with several false starts before growth takes firm hold. One needn’t look too far to find positive omens in the economy today. Business profits approached record levels in 2010, and it already seems to be morning in parts of America, particularly those parts in which the most influential Americans tend to reside. The million-dollar question is how quickly the dawn will come for the rest of the country—and how bright that dawn will be.
2
THE TWO-SPEED
SOCIETY
FOR MORE THAN TWO YEARS NOW, THE BLOGGER ANDREW SULLIVAN has been regularly posting first-person accounts of the downturn, e-mailed to him by his readers, under the rubric “The View from Your Recession.” Sullivan has a wide and varied readership, spanning generations and classes, and the posts collectively form a sort of oral history of American life since the crash. Many of the stories are heartbreaking—of lost jobs and lost houses; of failed family busin
esses and withered sex lives; of paychecks parsed and retirement savings drawn down to support siblings or parents or grown children who can no longer support themselves; of depression and drinking and lives gone offtrack.
But some of the entries underscore the fact that the recession, of course, hasn’t hit everyone. “We are in our late 20s,” wrote one woman from New England in May 2009. “We bought a house last summer, adopted a dog, and are enjoying our little life in our little town.” She and her husband had gotten their graduate degrees some time ago, and she was working in university administration. “Everywhere I look,” she wrote, “my life is unaffected by the recession. Truthfully, if I did not watch the news or read your blog every day, I would not believe that there is a serious economic crisis going on.”
Another writer noted that while he felt for those who were suffering, his high-paying career as a software engineer was going like gangbusters; the main impact the recession had had on him was to reduce the price of fine wine, which he was buying in bulk. Yet another, formerly in finance, had lost his young business (in wine distribution, as it happens) early in the recession, but a friend who had faith in him had invested $2 million in a new start-up he was running, which was growing quickly. (Among others writing in to say that business was booming, with varying degrees of chagrin, were the partner of a real-estate agent who’d had the vision to quickly specialize in foreclosed properties, a lawyer whose firm handled personal bankruptcies, and a freelance writer specializing in résumé-writing assistance.)