Why has the worst recession since the 1930′s had such a mild effect on America?

One of the oddities of this recession is the widespread opposition to government actions mitigating its effects.  Doing almost nothing (except tax cuts) has almost become the official policy of the Republican Party, and libertarian sites such as the Instapundit frequently run articles mocking the government’s stimulus programs.

A related conundrum is the stability of spending by US households during a severe recession — despite falling employment (graph and graph), a collapse in hours worked (graph), stagnant wages (now negative YoY for the first time in 50 years; article).  And rising savings (graph)!  How is this possible?  As one economist notes:

In a research note, Carson says job losses in prior downturns have been roughly proportional to the decline in gross domestic product. But in the current recession, the proportion of jobs lost is running about a third greater than the drop in real GDP. (source)

The answer is government aid:  the automatic stabilizers and the stimulus programs.  The government enacted these programs faster than in previous recessions and on a larger scale.  They have buffered the longest and by most measures deepest recession since the 1930’s  (vividly shown by this graph).  Without these measures by now we might have rioting in the streets demanding more government action — instead of “tea parties” protesting high taxes.  (see comment #3 for more about this)

This is sad, people protesting the government actions that mitigate what would otherwise be a horrific downturn.  That does not mean the stimulus was well-designed (it was childishly poorly done), or that the accompanying theft was good (bailing out fat cats in the financial sector).

Looking ahead:  almost anything can happen in the next year.  There are no strong historical precedents for our situation, and we are beyond the limits of conventional economic theory.  We might have a strong recovery, or a dramatic collapse — or anything in between.

Even if we get the expected recovery later this year, unemployment will continue to stagnate through 2010.  If we get only a brief bounce — or don’t even get a bounce — I expect conditions to deteriorate.  Rapidly and severely.  Those tea parties will disappear, as people demand fast, large government action.   Wise or not, that’s what will happen.  Unfortunately, after years of feckless borrowing it will be difficult for the government to meet these expectations.  I’ll discuss that scenario on another day.

(1)  Automatic stabilizers

This graph show the number of people receiving unemployment insurance as a percent of US population.  It’s from Chris Puplava at Financial Sense.

There are several programs paying unemployment claims.  Unemployment insurance pays 26 weeks; now paying 6.0 million people NSA.  During recessions there are other programs enacted, such as the Emergency Unemployment Compensation — now 33 weeks, paying 2.5 million people NSA.   (There are other programs, now paying aprox 400 thousand people but not included in these numbers:  Federal Employees, Newly Discharged Veterans, the Railroad Retirement Board, and Extended Benefits).

The total number now receiving benefits is aprox half again higher than the peak of the horrific 1980-82 recession (3.1% of pop, vs. 1982 peak of 2%). Yet today’s unemployment rate is 14% less (now 9.5% vs. 1982 peak of 11%).

There are many reasons for this, but probably the major one is the longer eligibility for benefits.  Today’s unemployed can receive up to 79 weeks (varying by State and eligibility).  The maximum was 65 weeks in the 1975-78 downturn, and 55 in 1982-1985.  Also supporting household income:  now unemployment benefits automatically qualify families for food stamps.

(2)  The government stimulus

This is well-known, and so needs little explanation.  As an illustration, see this analysis from the government’s most recent Personal Income report (26 June 2009):

Real disposable personal income (DPI) increased 1.6% in May, compared with an increase of 1.2% in April. The May change in DPI was boosted as a result of provisions of the American Recovery and Reinvestment Act of 2009. Provisions of the Act reduced personal current taxes and increased government social benefit payments. Excluding these special factors, which are discussed more fully below, DPI increased $20.6 billion, or 0.2% , in May, following an increase of $101.3 billion, or 0.9%, in April.

For more information

1. “Short-Term Responses to the Recession: The Extension of Unemployment Insurance Benefits“, Congressional Budget Office, February 1991
2. “The Economic Recession of 2007-2009: A Comparative Perspective on Its Duration and the Severity of Its Labor Market Impacts“, Andrew Sum, Ishwar Khatiwada, and Joseph McLaughlin (Center for Labor Market Studies, Northeastern U), April 2009
3. “An Update on State Budget Cuts“, Nicholas Johnson, Phil Oliff, and Jeremy Koulish, Center on  Budget and Policy Priorities, 29 June 2009 — “At Least 39 States Have Imposed Cuts That Hurt Vulnerable Residents; Federal Economic Recovery Funds and State Tax Increases Are Reducing the Harm”
4. “Correcting Five Myths About the Stimulus Bill“, James R. Horney, Nicholas Johnson, and Lawrence J. Haas, Center on  Budget and Policy Priorities, 10 July 2009

For more information from the FM site

To read other articles about these things, see the FM reference page on the right side menu bar.  Of esp interest are:

• About Financial crisis – what’s happening? how will this end?
• About America – how can we reform it?
• Good news about America, a collection of articles!

Some of the posts on this site about solutions:

1. A happy ending to the current economic recession, 12 February 2008 – The political actions which might end this downturn, and their long-term implications.
2. How should we respond to the crisis?, 24 September 2008
3. A solution to our financial crisis, 25 September 2008
4. The last opportunity for effective action before disaster strikes, 3 October 2008 — How to stabilize the financial system.
5. Effective treatment for this crisis will come with “The Master Settlement of 2009″, 5 October 2008
6. Dr. Bush, stabilize the economy – stat!, 7 October 2008
7. The new President will need new solutions for the economic crisis, 9 October 2008
8. The G-7 meeting was the last chance for action before the global recession, 12 October 2008
9. New recommendations to solve our financial crisis (and I admit that I was wrong), 23 October 2008
10. A look ahead to the end of this financial crisis, 30 October 2008
11. Everything you need to know about government stimulus programs (read this – it’s about your money), 30 January 2009
12. Bush’s bailout plan is now Obama’s. His quiet eloquence guides the sheep into the pen, 30 March 2009

.