ECON More on why unemployment is not going away soon, if ever.

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http://www.outsidethebeltway.com/

The BEA has revised its estimates for the third quarter’s growth down to 2.8% from 3.5%. This is also a bit below the expected growth of 2.9% for the quarter.

The main factors behind the downgrade: consumers didn’t spend as much, commercial construction was weaker and the nation’s trade deficit was more of a drag on growth. Businesses also trimmed more of their stockpiles, another restraining factor.

Still, the good news is that the economy finally started to grow again, after a record four straight losing quarters. The bad news is that the rebound, now and in the months ahead, probably will be lethargic.

The worst recession since the 1930s is very likely over, but the economy’s return to good health will take time, Fed officials and economists say.

So much for the strong, above normal growth that some have predicted. Not sure why they predicted this given that the last two recessions have followed this pattern. Yes, recessions from earlier decades tended to show higher than average growth, but that no longer seems to hold.

I like Arnold Kling’s recalculation view of the economy. Arnold explains the notion of recalculation thus,

But I think that the simplifying assumption of homogeneous output, labor, and capital is equally dangerous. My claim (which is not original with me–it is recognizably Austrian) is that a recession can be thought of as a recalculation. Imagine a central planner who decides to radically change plans. He has a huge recalculation to make in order to figure out where to allocate labor and capital. He says to some people, “Wait a minute. I am thinking. Some of you just have to stand idle while I figure this out.”

The market economy is like that central planner. We are undergoing a Great Recalculation.

Greg Mankiw brought this issue up by referring to the possibility of a unit root. In statistical models a unit root means that when you have a change it is permanent. To tie it to the current situation, if we have over invested in housing, then it is unlikely we can ever get back to where we were before the bubble bursts. This doesn’t mean we can’t have growth or even robust growth, but it isn’t going to be like previous recessions and recoveries a sharp decline in unemployment and output followed by and approximately equal rebound and then return to trend. We might simply return to trend from the lower level of unemployment and output. The following graph shows the two situations.


In macro, we teach that there are different types of unemployment: structural unemployment, where there is a mismatch between skills and needs; frictional unemployment, where the skills and jobs match up in theory, but in practice people are stuck in the search process having not yet found the right match; and cyclical unemployment, where people are unemployed because of inadequate aggregate demand.

If Kling is right, then we are going to see structural unemployment because the economy is undergoing a structural change. Moving resources between sectors of the economy, and as a result we’ll likely see more people in the mismatch of skills problem than cyclical unemployment.

Back to Kling,

Up until about 1980, most of the unemployment in a recession was unemployment that I would recognize as cyclical. However, certainly since 2000, most of the unemployment has not met my definition of cyclical.

The old-fashioned inventory recessions involved one class of miscalculations–firms over-produced relative to demand, and then had to cut back for a while. Those miscalculations are less important today, in part because computerized inventory and integrated supply chains tighten the connection between production plans and reality, and in part because a lot of the actual production of stuff for U.S. consumption is done overseas, so our inventory miscalculations affect foreign workers relatively more and U.S. workers relatively less.

So while the stimulus might have lessened the impact of the recession, I don’t think it would ever get us back to the blue line. The only way to do that would be to have incredibly massive stimulus which is just not possible nor would it be sustainable.

I had been ranting for some time that "recovery" is not going to include employment for the simple reason that the old jobs are not coming back and there is no reason to believe that the labor force is ready for the new jobs. Compounding the felony is the fact that retirement at age 55 is gone. People are going to have to work a lot longer, thus not releasing jobs that might have gone to workers entering the work force.

Life is going to be hard on the young. The day of instant goodies is gone.
I can remember a lawyer in my youth, his first 'sofa' was an automobile back seat set on crates. And they used that for some years before they felt they could afford the real thing. Those days are back.

BTW, there is a chart that follows this article on the link that is absolutely mind boggling until you realize it explains all kinds of things. Be sure to take a look at it

[Volleyball Granny]

You've heard of corporate downsizing? We're going into personal downsizing...

[Troke]

The really Bad News is that new jobs are going to have to be created by New Business, not the old line business that is obsolete. So what does the Adm do?

Make sure nobody can start a New Business.

Unbelievable!

[Richard]

What are these "new jobs", the prospects for the over 55s is practically zero, mild recovery or not, far worse than for young people.

[summerthyme]

"Retirement" at 55 was NEVER practical or possible- the only reason it was possible for one (maybe one and a half) generation(s) was because of the insane market bubbles of the past 30 years.

With an expected lifespan of almost 85 years old (for anyone reasonably healthy who has reached 55), the "retire at 55" idea was insane- it meant 30 years of "leisure" (in the dreams- or nightmares- of most). Since most people not working basic blue collar jobs went to college first and started working full time at 22 or 24- that meant that they literally were going to be retired for almost as many- if not more- years than they worked.

Dumb, unworkable, impractical and totally unsustainable.

Summerthyme

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...Dumb, unworkable, impractical and totally unsustainable..."

Yup. As I have posted before, my Grandfather farmed to 72 and then kept coming out to help until he could no longer see well enough to drive.

My uncle turned the farm over at 70 and continued helping until 78 or so.

It will be deja vu all over again for the next generation.

[gunnersmom]

I hope to be able to work right up to the week before I die. I would like to have a vacation before I actually croak, though.

I personally feel leisure time is way over rated. I find that even when I do have a few days off (I do, right now, unasked for, I am down to half time, unfortunately) I just find more work to do.

Keeping your home clean, your laundry done, food canned and prepared take a large portion of any leisure time I have. I was laid off for over three months the summer of 2008 and I can honestly say I didn't stop working, it was just different work.

I just don't get people who can sit on their butts day after day, or "entertain" themselves, or drink or all the time. My mind moves too much, I guess.

[etc]

No, it didn't. The recession / depression we have is largely caused by debt. Stimulus plans just drive us deeper into debt, aggravating the situation, not lessening it.

debt = unemployment, many tons of ink have been spilled explaining that. By Von Mises, and others from the Austrian school of economics.

quote:
So while the stimulus might have lessened the impact of the recession,

[Fred's Horseradish]

I intend to also deliver the food products until I can no longer do so. Then have someone else deliver and collect a % to live on. No relying on SS.

[truthseeker]

Originally Posted by Volleyball Granny

You've heard of corporate downsizing? We're going into personal downsizing...

Yep, The US economy is the largest in the world. Our economic ballon was hidden by size and fueled by credit/debt. Everone glares at China's 10% growth rate. When comparing to economies that are half the size and less(everyone else) of the US's are growth was amazing. A few years back when we had 5% and 7% growth was in physical terms in China . There economy is have the size, so added growth would double to 10% to 14%.

The glut is over useless and uneeded services are going to get smashed by this glut. There is alot of need uneeded products products in producing nations. That was the cause of their growth. The US has alot of uneeded services and that has been alot of our growth.

The contraction is going to be steep.

[blueridge]

True ('U6') un & under employment rate currently well into the double digits - the "new norm".

Wonder if this is what so many voters thought they were voting for last November???


Real Change is almost certainly coming in November 2010. Finally, something to REALLY hope & work for.