This might be the most important graph in American economics, but in the popular media hardly anybody talks about what it means.



It comes from the blog Calculated Risk (which has been updating it for a long while now), and is based on data from the Bureau of Labor Statistics.

Each colored line represents a different recession in the American economy since World War II, starting with the 1948 recession (in blue). The longest and deepest (in red) is the current recession. The curves are scaled according to the percentage of jobs lost, to make the different recessions more comparable. (Otherwise the 1948 recession would look small just because the economy was smaller then.) The horizontal scale is months, and the recessions are lined up so that Month Zero is when employment bottomed out.

For the purposes of the graph, a recession starts when the number of jobs peaks, and it ends when employment returns to that previous high. That’s a little different than the definitions most economists use. Typically, economists say a recession is over when GDP starts rising again, which is why the Wikipedia says the current recession ended in June, 2009. But employment is what is known in the trade as a “lagging indicator”. In other words, even after the recession is technically over, you’ve still got a lot of jobless people wandering around.

At its simplest level, this jobs-based graph just verifies something you probably already feel in your bones: This recession is longer and deeper than anything we’ve seen since the Depression, and it’s not over yet.

But that’s not what I want to point out. Instead, I want you to notice this: The last three recessions have a different shape from the others. The earlier recessions are short and sharp. Jobs go away fast and come back fast. The job market hits a definite bottom, and 8-10 months later everything is back to normal.

But the recessions of 1990 and 2000 look like smaller versions of the recession we’re in. In each of them, the bottom is flat rather than sharp, and employment doesn’t come all the way back for a long time after that — two years for the 2000 recession and nearly-two-and-counting for the current one.

Therefore: The job market is changing in some long-term way that has little to do with our month-to-month political squabbles. The 1990 recession starts and ends under President Bush the First. The 2000 recession gets started under Clinton and its long, slow recovery happens under Bush II. The worst of the current recession is on Obama’s watch, but the shape and depth of the curve was already well established when he took office.

It’s hard to find a Republican/Democrat pattern here. About all you can say for or against Obama, for example, is that the deep recession curve that had already developed under Bush II has gone on to have the same shape you’d expect from the previous two recessions.

Other simple explanations similarly fall flat. For example, we had a modest budget surplus and no wars at the beginning of the 2000 recession, but a huge deficit and two wars going into the current recession. But the two curves have the same shape.

I’m going to go on to list some characteristics and possible explanations for the new-style recession, but I don’t claim to have answers for it. (There are things I’d like to see done, but ending this article with any policy proposals I can think of would do a disservice to the data. I’m pointing to something solidly real, and my “solutions” would be speculative.) Mainly, I want to offer two principles for critiquing anybody else’s proposals:

If you’re not talking in terms of decades, you’re not dealing with the real problem. Whatever the causes are, they’ve been brewing since at least the late 1980s.

Whatever the causes are, they’ve been brewing since at least the late 1980s. You can’t fine-tune your way out. Any change in policy that is going to make a dent will have to be big and fundamental. If the pattern is unaffected by the differences between Clinton and Bush, or Bush and Obama, we’ve either got to think a lot bigger or accept these long slow recessions as fate.

The old recession pattern. OK, now let me try to express the change in words rather than curves. The old-style recessions fit the inventory-correction model of the business cycle in a manufacturing economy.

To say that in English: Good times cause everybody to get too optimistic at the same time. (GM builds too many cars, contractors put up too many new subdivisions, Sears stocks too much merchandise, and so on.) When this over-optimism starts to become apparent, everybody slams on the brakes at the same time.

So orders drop, factories get shut down, and workers get laid off. But it’s all temporary. After a few months, retailers manage to sell off their overstocked inventories and need to order new stuff again. Then the workers get called back, the factories re-open, and the recession is over.

The last few recessions haven’t looked like that in several ways.

Bubbles. First, financial bubbles play a much bigger role in setting the recession off. The current recession starts with the housing bubble, the 2000 recession with the dot-com bubble, the 1990 recession with the savings-and-loan crisis.

Psychologically, it’s the same cause: Good times make people over-optimistic. But in the old model it was producers who became too optimistic about what they could sell, so they produced more than the market could consume.

In a bubble, on the other hand, it’s speculators who become too optimistic. So condos are built in Florida not because anybody expects people to live in them, but because speculators think they can flip them to other speculators for a quick profit. Or mortgages are written without any expectation that the payments will be made, because investment bankers have figured out a way to package those mortgages into CDOs that the ratings agencies will stamp AAA.

That’s a very different problem than GM building too many Corvettes or Sears stocking too many washing machines.

Bubble-popping recessions are harder to recover from because there is no “normal” to get back to. The NASDAQ stock index peaked over 5000 in March, 2000. That level was justified by visions of limitless future profits that turned out to be imaginary. So even 11 years later, the NASDAQ is still only about half what it was.

Inventory recessions are like taking a wrong turn. Bubble recessions are like dreaming something and then waking up. You can’t just go back.

Job destruction. Partly due to changes in the economy and partly due to changes in the social contract, businesses are now actively looking for ways to get rid of their workers. So the old model (where GM laid off some workers until things got better, then hired them back) looks quaint now.

These days when you lose a job, it’s gone. The company has probably closed the factory for good, merged with a competitor, or otherwise re-engineered its process to get along without you. When demand comes back, your former employer will open a new factory in Mexico or subcontract to a supplier in China or buy robots. At best, it might only threaten to do those things so that it can hire you back as a temporary contractor at half your old rate.

[BTW, this week I ran into a joke that is probably from the 50s or 60s. Union leader Walter Reuther and industrialist Henry Ford II are touring a new highly mechanized Ford plant. “Tell me, Walter,” Ford says, “How do you plan to get these machines to join your union?” Reuther replies: “The same way you’re going to get them to buy your cars.”]

Job recovery takes longer now because the economy has to create brand new jobs, not just re-start the old jobs. This means that the experience of being unemployed is completely different. The laid-off GM worker could collect unemployment, fix up the house, coach Little League, and be reasonably certain to go back to work in a few months.

Today the unemployed have to have a plan, and searching for a new job can be harder and more stressful than working. Worse, the new job often pays significantly less than the lost one.

Inequality. A long-term trend in back of the other trends is increasing inequality. As more and more money flows to the 1%, they don’t need more goods and services; they need more investment opportunities. That restless cash looking for a home pumps up the bubbles, funds the mergers, and buys the robots. But it doesn’t create new markets that need more workers.

What should we do? I’m not sure, but it needs to be much bigger and very, very different from anything currently on the table.