Monday, June 28, 2010

Why do recessions matter?

There’s a tendency, and not only among economists, to describe the costs of downturns like the Great Recession in terms of foregone output. (It’s Okun gaps versus Harberger triangles.) And as far as it goes, it’s true. Less coffee and clothes and cars are being produced than would be, if the Lords of Finance hadn’t crashed the economy. But if, as this kind of talk implicitly assumes, the effect of economic life on wellbeing were just through the quantity of goods and services available – if the recession were a problem mainly for car consumers rather than car producers, coffee drinkers rather than coffee growers – it’s hard to see why anyone would care. So the US GDP fell in 2009 – all the way back to its level in 2006. Were we miserable then? This, by the way, was the point of Robert Lucas' notorious 2003 AEA presidential address, where he claimed that the problem of macroeconomics was solved. He didn’t mean there were no more recessions, just that they didn’t matter since their magnitude was small compared with long-term growth – which, as far as measured output goes, is true, and of the Great Recession too. If he was wrong, his liberal critics are wrong as well.

The tendency to reduce economic questions to the aggregate output of goods and services (plus perhaps the quantity of labor input, as a cost) isn’t limited to recessions. You can find the same thing in the also right-as-far-as-it-goes Stern Review on global warming. Tote up the costs in foregone output of climate change, tote up the costs of doing something about it, and compare to see if burning up the planet is a good idea, or not. The problem is, even the upper range of the costs -- 14 percent of world GDP -- is equivalent to just a few years' economic growth. So, again, who cares? I wonder if anyone has tried to do a similar analysis for World War II. They’d no doubt find that policymakers in the 30s should have been indifferent between averting the war, and increasing long-term growth by two or three tenths of a percent.

It’s tempting – to progressives too – to talk as though there’s a single score to measure economic outcomes. But no, this approach won’t do. Recessions are not important (just; really, hardly at all) because of output foregone. Unemployment is not just a reduction in your lifetime income. Indeed, for rich countries especially, long-term growth in output and income is not even a well-defined quantity. The main cost of unemployment is not the goods the unemployed workers aren’t producing. Indeed, as Keynes (and others) pointed out long ago, for many of the unemployed the disutility of labor is negative – there’s a net gain paying people to work, even if they produce nothing.

The real cost of unemployment is the unemployment itself. In part, this is about the loss of income – not the small reduction in aggregate lifetime income, but the large reduction in current income for those whose lose their jobs. The proportion of people without secure access to food, housing and other necessities is a much better measure of the economic costs of recession than the fall in GDP. But even this is the smaller part of the cost of unemployment. The most important thing about work, under capitalism, isn’t that it produces goods and provides an income, but that it is the carrier of self-worth, status and social power. For most of us, our work is our main bond with society at large; surveys agree with practical experience that losing a job is among the more important events in peoples’ lives. ("Individuals in the British Household Panel Survey commonly report employment-related events as major life events but none report that one of the most important things that happened to them in the past year is that they stopped shopping at Sainsburys and started going to Tescos.") Persistent unemployment breaks social bonds, with profound effects that don’t show up in the aggregates.

We all know people who’ve been out of work for a while. Even if they are in no danger of hunger or homelessness, it’s corrosive. The get depressed; they stop socializing; they describe themselves as failures. I’ve just been reading a bit about unemployment in the 1930s. Here’s what happened in Marienthal, an Austrian village where the majority of the population became unemployed after town’s major employer, a textile factory, shut down in 1930:
Isolation was deepened by a decline in newspaper subscriptions. Subscriptions to the Social Democratic paper, which contained intellectual discussions as well as news, dropped by 60 percent. This was not entirely a matter of money, because the paper had a cheaper subscription rate for unemployed workers… Politics, like other leisure activities, should have benefited from the increased availability of time. But this advantage was heavily outweighed by an increase in apathy that reduced all forms of recreational activity. Library usage also declined; both the number of borrowers and the number of books checked out by each borrower fell. … One striking aspect of this lethargy was the fate of a park that had become a focal point of village life. In more prosperous times, villagers sat on its benches and walked on its paths on Sundays, and the grass and shrubs were neatly tended. In the depression, despite the increase in leisure time, the park fell rapidly into disuse and disrepair.
Or again, the testimony of an unemployed worker in 1930s London: “You feel like you’re no good, if you know what I mean. … It isn’t the hard work of tramping about so much, although that is bad enough. It’s the hopelessness of every step you take when you go in search of a job you know isn’t there.”

We’re already seeing some of this today. If unemployment stays near 10 percent for years, as, absent a change in policy, it likely will, we’ll see much more. We'll see a wide swathe of people cut off from the world, apathetic and discouraged, with no recognized place in society. We'll see increasing stress on families and neighborhoods as they have to take up the role of an overstretched safety net. And quite possibly, if it goes on long enough, we'll see a turn away from democracy. These are profound social changes that have only a tenuous connection with how long it takes GDP to return to trend.

We should remember, at least, what the classic political thinkers knew, what Hannah Arendt knew, when she wrote that "a competition between America and Russia with regard to production and standards of living ... may be very interesting in many respects... There is only one question this outcome, whatever it may be, will never be able to decide, and that is which form of government is better." Once past a threshold of sufficiency (which we have long passed) aggregate output and income have nothing to do with the good life. What matters is freedom and dignity, our chances to develop our inner capacities and our relationships with those around us. And that’s what mass unemployment erodes.


  1. I know this is an old post, but I just found it.

    I guess your implication is that hypothetically, if the government had only two choices - 1) pay the unemployed some money, or 2) get the unemployed to do some nominal 9-5 work at zero pay, option 2 would be preferable?

  2. "Once past a threshold of sufficiency (which we have long passed) aggregate output and income have nothing to do with the good life. What matters is freedom and dignity.."

    If this is true, and I don't dispute it, then what is the foundation for the whole project that is economics? At the threshold of sufficiency, do markets begin to fail us as a useful analog for what was once described as the general welfare?