Tuesday, September 6, 2011

Was there a structural change in the economy in the late 1970s - early 80s?

(Click on the graph for a larger view.) I really don't know what to make of this graph, other than it is really interesting. My thoughts are below, feel free to share yours.

The lines trace the impact of various recessions on employment. Each color refers to a particular recession. The individual lines trace both the extent of job loss (the deeper the drop, the greater the drop in employment) and the length of time to get back to the pre-recession rate of employment (the further to the right, the longer the recovery takes).

The striking thing about the graph is that something fundamental appears to have occurred around 1980/81. If you look at the lines for the seven recessions that occurred between 1948 and 1980, they all have the same basic V shape. There is also a fairly systematic relationship between the depth of the recession, the length of time until the bottom is reached and the time until employment returns to the pre-recession level. In systemic terms, all recessions up to 1980 behaved in a generally similar fashion.

There is also a noticeable difference between the earlier V shaped recessions and the later ones. The earlier ones (1948, 1953, 1957) have very similar profiles; they were deeper (job losses of 3.4-5.2%) and longer (with 13 months until the bottom) than the later V-shaped recessions. The recessions of 1960, 1969, 1974 and 1980 were shallower (job losses of 1.3-2.7%) and shorter (between 4 and 10 months to the bottom).

The three most recent recessions (1990, 2001, 2007) have a very different profile. Rather than the sharp drop and bounce back of the V shape, the whole process appears to have slowed down. The rate of decline and the rate of recovery are both much slower and the impact of the recession on employment is much longer. The profiles of the three most recent recessions look more like a river basin than the V-shaped valley of the earlier ones. It has taken longer to reach the bottom (24 months, or almost twice as long as the 48-57 recessions) and, once there, the percentage of job losses has flat-lined for close to a year before starting to recover. 

The transition appears to have occurred in 1980/81. This is the only case where there is a double-dip recession. Moreover, where the 1980 recession looks like the smallest of the V-shaped recessions, the 1981 curve has a transitional look. Unlike any of the previous recessions, the bottom comes a few months later and flatlines for a few months before the upsurge in employment occurs. The other point of significance. Where recessions had occurred on a crude 5 year cycle up to 1980, the cycle is more like 9 or 10 years since the 81 recession. This, like the shifting shape, suggests the overall process has slowed.

As noted in an earlier post, there are other indicators that the global economy significantly changed at this time, a period linked with the early phases of economic globalization.

So, to take a shot at translating this into panarchy terms, recessions are a product of the adaptive cycle. Over the period from the late 1950's to 1980, US macro-economic policy became better and better at managing recessions. They continued to come at roughly the same frequency, but they were shorter and shallower than the earlier ones. This could, potentially, indicate an increase in rigidity over time as US macroeconomic policy attempted to 'smooth out' the business cycle. This national level process, around 1980, confronted a different dynamic -- resulting from changes to the higher (global) level cycle associated with economic globalization. In other words, the shift from one form of recession (V-shaped) to another (river-shaped) involves a cross-scale interaction where changes in the global economy (outsourcing of manufacturing and the increasing financialization of the US economy, for example) affect the ability of the US to rebound from recessions and, in particular, to create jobs.

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