Here's a depressing thought: We might never fully recover from the Great Recession. Growth might never pick up enough to get us back to our pre-Lehman trend. We'll just be worse off, forever.
We're talking about this now because there's recently been a disconnect between jobs and GDP data. Jobs number say the recovery is accelerating. GDP numbers say it's not. (This is somewhat a reversal of the last three years, when jobs were lagging behind GDP.) The most likely answer to this apparent puzzle is that there isn't a puzzle at all. GDP growth will be revised upwards, and the numbers will all make sense. That might already be happening.
But Greg Ip at The Economist proposes a bleak alternative: Perhaps we simply can't grow as fast as we used to. Less growth would be needed to create more jobs -- which almost sounds like a good thing. It's not. It would mean we'd have to work more to be richer. Or, to put a more dispiriting spin on it, we are permanently poorer after the Great Recession. Unfortunately, we have a reason to take this pessimistic scenario seriously: It's happened before.
Sweden and South Korea both suffered through financial crises in the 1990s from which they never completely recovered. The below charts from The Economist compare their long-term pre-crisis growth trends versus what actually happened. It's not a pretty picture.
Both Sweden and South Korea are growing, relatively rich economies. But neither country ever caught back up to their trend output after their financial crisis. There are three broad reasons why. First, the bubble years may have led us to slightly overestimate how much these economies could actually produce. Second, these crises coincided to a degree with aging populations that meant growth would naturally come down. And third, prolonged unemployment may have hurt their economies' long-term prospects. It's this last possibility that is the most troubling.
You don't have to be an economist to know that long-term unemployment is bad. But economists, of course, have their own lingo for just why it's so bad. They call it hysteresis. The basic idea is that people who are unemployed for too long become unemployable. People lose skills the longer they are out of work, which, insidiously, makes employers less likely to hire them, which makes their loss of skills all the worse. Even when the economy is humming again, they remain in the shadows. Unemployment settles at a new, worse equilibrium. Of course, fewer people working means we produce less as a society, all else equal. We are collectively poorer.
This should terrify our policymakers. Here's a chart of the average length of unemployment, going back to 1950.
Long-term unemployment is twice as bad as it's ever been in the postwar period. This could be the most urgent problem our economy faces. The longer we wait, the higher the cost is to our long-term prosperity. Regrettably, Congress is hopeless -- they can't even do the easy things -- which leaves this job solely to the Fed. Bernanke has done a lot to support the recovery, but he can do more. Now is not the time to worry about doing too much. A full recovery is worth 3 or 4 percent inflation. The alternative is simply much, much worse.