{"id":13007,"date":"2011-01-04T17:38:05","date_gmt":"2011-01-04T06:38:05","guid":{"rendered":"https:\/\/billmitchell.org\/blog\/?p=13007"},"modified":"2011-01-04T17:38:05","modified_gmt":"2011-01-04T06:38:05","slug":"the-aftermath-of-recessions","status":"publish","type":"post","link":"https:\/\/billmitchell.org\/blog\/?p=13007","title":{"rendered":"The aftermath of recessions"},"content":{"rendered":"

\t\t\t\tIn Paul Krugman’s New York Times Op Ed (January 2, 2011) – Deep Hole Economics<\/a> we are advised not to get carried away with the signs that the US economy is at last showing signs of consistent growth. I discussed the positive movements in the US jobless claims data in this blog – The year is nearly done … but spending still equals income<\/a> – last week. Krugman’s point is that while growth is good, the US economy has a huge aftermath (high unemployment) to deal with even once growth returns. The political imperative therefore is to ensure that growth is maximised and not to withdraw fiscal support as soon as the “green shoots” bob up. It is a point that most commentators are ignoring. So can we make sense of this caution?
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\nKrugman said:<\/p>\n

\nIf there’s one piece of economic wisdom I hope people will grasp this year, it’s this: Even though we may finally have stopped digging, we’re still near the bottom of a very deep hole.\n<\/p><\/blockquote>\n

Recessions impact on a number of economic aggregates in addition to the most visible impact – the rise in unemployment. The great American economist Arthur Okun coined the term “The Tip of the Iceberg” and I borrowed that for the title of a book I co-authored in 2001. The point is that the costs of recession and the resulting persistent unemployment extend well beyond the loss of jobs. Productivity is lower, participation rates are lower, the quality of work suffers and real wages typically fall.<\/p>\n

Within this context, Okun outlined his upgrading hypothesis (in the 1960s and 1970s) and the related high-pressure economy model, which provided a coherent rationale for Keynesian demand-stimulus policy positions. Two references are Okun, A.M. (1973) ‘Upward Mobility in a High-Pressure Economy’, Brookings Papers on Economic Activity<\/em>, 1: 207-252 and Okun, A.M. (1983) Economics for Policymaking<\/em>, Cambridge, MIT Press.<\/p>\n

Okun (1983: 171) believed that:<\/p>\n

\n… unemployment was merely the tip of the iceberg that forms in a cold economy. The difference between unemployment rates of 5 percent and 4 percent extends far beyond the creation of jobs for 1 percent of the labor force. The submerged part of the iceberg includes (a) additional jobs for people who do not actively seek work in a slack labor market but nonetheless take jobs when they become available; (b) a longer workweek reflecting less part-time and more overtime employment; and (c) extra productivity – more output per man-hour – from fuller and more efficient use of labor and capital.\n<\/p><\/blockquote>\n

The positive side of this thinking is that disadvantaged groups in the economy were considered to achieve upward mobility as a result of higher economic activity. The saying that was attached to this line of reasoning was “all boats (large or small) rise on the high tide”.<\/p>\n

Okun’s (1973) results are summarised as follows:<\/p>\n