Understanding the Lesser Depression

**J. Bradford DeLong, U. C. Berkeley, August 2011

(1) Background

1.2 What Happened: A First Cut

The Lesser Depression

The third notable thing about Figure 3 is our current downturn, our Lesser Depression. It is itself unique for three reasons: the size of the downturn, the fact that this time the market economy was not shocked into a downturn by something governments did but rather did it to itself, and the failure—so far—of there to be any meaningful recovery from the downturn.

The Largest: First, as a share of the country’s population and labor force, our current Lesser Depression is by far the largest such downturn we have seen since World War II or indeed since the Great Depression of the 1930s itself (which was a much larger relative macroeconomic disaster than the one we are suffering through now). Our Lesser Depression starts with a large, sudden collapse in the adult civilian employment-to-population rate of a magnitude nearly twice as large as the largest previous such post-World War II downturn—the three percentage point of the civilian adult population decline in the Carter-Reagan-Volcker downturn of 1979-1982.

Market-Generated: Second, the Carter-Reagan downturn and the other largest post-World War downturns were in large part caused by government shocks to the market economy. The Carter-Reagan-Volcker downturn was the result of two large and obvious shocks to the market economy administered by governments: the Iranian Revolution of 1979 and the Saudi Arabian acquiescence in the tripling of world oil prices triggered by the conquest of power in Iran by Ayatollah Khomeini and his allies, and Federal Reserve Chair Paul Volcker’s decision that it was time to bring on an economic downturn and depress the employment-to-population ratio by creating a liquidity squeeze of high interest rates by shrinking the money supply in order to reduce inflation by demonstrating that the Federal Reserve would not keep money cheap enough to make it profitable for private businesses to keep borrowing and spending no matter what. By contrast, the 2007-9 downturn saw no correspondingly-large external shock administered to the market economy by the world’s governments as its cause: no large-scale removal of oil rigs from production, no liquidity squeezes by central banks nothing—this time the market economy did it to itself all by itself.



The Flatline: Third, the downturn of the Lesser Depression has, so far, been followed not by recovery but rather by flatline. The civilian adult employment-to-population ratio in late 2011 is what it was in late 2009. Recovery as measured by the course of the civilian adult employment to population ratio has not just been slower than the downturn: recovery has, so far, been nonexistent.

The civilian adult employment-to-population ratio as of August 2011 is lower than it has been at any moment between today and 1983, back when American feminism was only half-formed. So far, at least, there is not even a hope that its end is in sight. As of this writing in August 2011 economic forecasters are by and large predicting that the employment-to-population as of the end of 2012 is more likely than not to be not lower but rather a little bit higher than it is today.

This failure of recovery is worth underscoring. In 1973-1975 the adult civilian employment-to-population ratio fell by about two-fifths as much as it fell in 2007-2009. In 1979-1982 it fell by about three-fifths as much. But after both of those downturn episodes recovery came swiftly and recovery was rapid: the employment-to-population ratio rose almost but not quite as steeply as it had previously risen, giving the track of the employment-to-population ratio on the graph the appearance of a “V”. That has not been the case in this Lesser Depression: so far, at least, this episode looks more like an “L”.