The Depression: If Only Things Were That Good
By DAVID LEONHARDT
UNDERNEATH the misery of the Great Depression, the United States economy
was quietly making enormous strides during the 1930s. Television and
nylon stockings were invented. Refrigerators and washing machines turned
into mass-market products. Railroads became faster and roads smoother
and wider. As the economic historian Alexander J. Field has said, the
1930s constituted “the most technologically progressive decade of the
Economists often distinguish between cyclical trends and secular trends
— which is to say, between short-term fluctuations and long-term changes
in the basic structure of the economy. No decade points to the
difference quite like the 1930s: cyclically, the worst decade of the
20th century, and yet, secularly, one of the best.
It would clearly be nice if we could take some comfort from this bit of
history. If anything, though, the lesson of the 1930s may be the
opposite one. The most worrisome aspect about our current slump is that
it combines obvious short-term problems — from the financial crisis —
with less obvious long-term problems. Those long-term problems include a
decade-long slowdown in new-business formation, the stagnation of
educational gains and the rapid growth of industries with mixed
blessings, including finance and health care.
Together, these problems raise the possibility that the United States is
not merely suffering through a normal, if severe, downturn. Instead, it
may have entered a phase in which high unemployment is the norm.
On Friday, the Labor Department reported that job growth was mediocre in
September and that unemployment remained at 9.1 percent. In a recent
survey by the Federal Reserve Bank of Philadelphia, forecasters said the
rate was not likely to fall below 7 percent until at least 2015. After
that, they predicted, it would rarely fall below 6 percent, even in good
Not so long ago, 6 percent was considered a disappointingly high
unemployment rate. From 1995 to 2007, the jobless rate exceeded 6
percent for only a single five-month period in 2003 — and it never
topped 7 percent.
“We’ve got a double-whammy effect,” says John C. Haltiwanger, an
economics professor at the University of Maryland. The cyclical crisis
has come on top of the secular one, and the two are now feeding off each
In the most likely case, the United States has fallen into a period
somewhat similar to the one that Europe has endured for parts of the
last generation; it is rich but struggling. A high unemployment rate
will feed fears of national decline. The political scene may be
tumultuous, as it already is. Many people will find themselves shut out
of the work force.
Almost 6.5 million people have been officially unemployed for at least
six months, and another few million have dropped out of the labor force
— that is, they are no longer looking for work — since 2008. These
hard-core unemployed highlight the nexus between long-term and
short-term economic problems. Most lost their jobs because of the
recession. But many will remain without work long after the economy
begins growing again.
Indeed, they will themselves become a force weighing on the economy.
Fairly or not, employers will be reluctant to hire them. Many with
borderline health problems will end up in the federal disability
program, which has become a shadow welfare program that most
beneficiaries never leave.
For now, the main cause of the economic funk remains the financial
crisis. The bursting of a generation-long, debt-enabled consumer bubble
has left households rebuilding their balance sheets and businesses wary
of hiring until they are confident that consumer spending will pick up.
Even now, sales of many big-ticket items — houses, cars, appliances,
many services — remain far below their pre-crisis peaks.
Although the details of every financial crisis differ, the broad
patterns are similar. The typical crisis leads to almost a decade of
elevated unemployment, according to oft-cited academic research by
Carmen M. Reinhart and Kenneth S. Rogoff. Ms. Reinhart and Mr. Rogoff
date the recent crisis from the summer of 2007, which would mean our
economy was not even halfway through its decade of high unemployment.
Of course, making dark forecasts about the American economy, especially
after a recession, can be dangerous. In just the last 50 years,
doomsayers claimed that the United States was falling behind the Soviet
Union, Japan and Germany, only to be proved wrong each time.
This country continues to have advantages that no other country,
including China, does: the world’s best venture-capital network, a
well-established rule of law, a culture that celebrates risk taking, an
unmatched appeal to immigrants. These strengths often give rise to the
next great industry, even when the strengths are less salient than the
THAT’S part of what happened in the 1930s. It’s also happened in the
1990s, when many people were worrying about a jobless recovery and
economic decline. At a 1992 conference Bill Clinton convened shortly
after his election to talk about the economy, participants recall, no
one mentioned the Internet.
Still, the reasons for concern today are serious. Even before the
financial crisis began, the American economy was not healthy. Job growth
was so weak during the economic expansion from 2001 to 2007 that
employment failed to keep pace with the growing population, and the
share of working adults declined. For the average person with a job,
income growth barely exceeded inflation.
The closest thing to a unified explanation for these problems is a
mirror image of what made the 1930s so important. Then, the United
States was vastly increasing its productive capacity, as Mr. Field
argued in his recent book, “A Great Leap Forward.” Partly because the
Depression was eliminating inefficiencies but mostly because of the
emergence of new technologies, the economy was adding muscle and
shedding fat. Those changes, combined with the vast industrialization
for World War II, made possible the postwar boom.
In recent years, on the other hand, the economy has not done an
especially good job of building its productive capacity. Yes,
innovations like the iPad and Twitter have altered daily life. And, yes,
companies have figured out how to produce just as many goods and
services with fewer workers. But the country has not developed any major
new industries that employ large and growing numbers of workers.
There is no contemporary version of the 1870s railroads, the 1920s auto
industry or even the 1990s Internet sector. Total economic output over
the last decade, as measured by the gross domestic product, has grown
more slowly than in any 10-year period during the 1950s, ’60s, ’70s,
’80s or ’90s.
Perhaps the most important reason, beyond the financial crisis, is the
overall skill level of the work force. The United States is the only
rich country in the world that has not substantially increased the share
of young adults with the equivalent of a bachelor’s degree over the past
three decades. Some less technical measures of human capital, like the
percentage of children living with two parents, have deteriorated. The
country has also chosen not to welcome many scientists and entrepreneurs
who would like to move here.
The relationship between skills and economic success is not an exact
one, yet it is certainly strong enough to notice, and not just in the
reams of peer-reviewed studies on the subject. Australia, New Zealand,
Canada and much of Northern Europe have made considerable educational
progress since the 1980s, for instance. Their unemployment rates, which
were once higher than ours, are now lower. Within this country, the 50
most educated metropolitan areas have an average jobless rate of 7.3
percent, according to Moody’s Analytics; in the 50 least educated, the
average rate is 11.4 percent.
Despite the media’s focus on those college graduates who are struggling,
it’s not much of an exaggeration to say that people with a four-year
degree — who have an unemployment rate of just 4.3 percent — are barely
experiencing an economic downturn.
Economic downturns do often send people streaming back to school, and
this one is no exception. So there is a chance that it will lead to a
surge in skill formation. Yet it seems unlikely to do nearly as much on
that score as the Great Depression, which helped make high school
universal. High school, of course, is free. Today’s educational
frontier, college, is not. In fact, it has become more expensive lately,
as state cutbacks have led to tuition increases.
Beyond education, the American economy seems to be suffering from a
misallocation of resources. Some of this is beyond our control. China’s
artificially low currency has nudged us toward consuming too much and
producing too little. But much of the misallocation is homegrown.
In particular, three giant industries — finance, health care and housing
— now include large amounts of unproductive capacity. Housing may have
shrunk, but it is still a bigger, more subsidized sector in this country
than in many others.
Health care is far larger, with the United States spending at least 50
percent more per person on medical care than any other country, without
getting vastly better results. (Some aspects of our care, like certain
cancer treatments, are better, while others, like medical error rates,
are worse.) The contrast suggests that a significant portion of medical
spending is wasted, be it on approaches that do not make people
healthier or on insurance-company bureaucracy.
In finance, trading volumes have boomed in recent decades, yet it is
unclear how much all the activity has lifted living standards. Paul A.
Volcker, the former Fed chairman, has mischievously said that the only
useful recent financial innovation was the automated teller machine.
Critics like Mr. Volcker argue that much of modern finance amounts to
arbitrage, in which technology and globalization have allowed traders to
profit from being the first to notice small price differences.
In the process, Wall Street has captured a growing share of the world’s
economic pie — thereby increasing inequality — without doing much to
expand the pie. It may even have shrunk the pie, given that a new
International Monetary Fund analysis found that higher inequality leads
to slower economic growth.
The common question with these industries is whether they are using
resources that could do more economic good elsewhere. “The health care
problem is very similar to the finance problem,” says Lawrence F. Katz,
a Harvard economist, “in that incredibly talented people are wasting
their talent on something that is essentially a zero-sum game.”
In the short term, finance, health care and housing provide jobs, as
their lobbyists are quick to point out. But it is hard to see how the
jobs of the future will spring from unnecessary back surgery and
garden-variety arbitrage. They differ from the growth engines of the
past, which delivered fundamental value — faster transportation or new
knowledge — and let other industries then build off those advances.
The United States has long overcome its less dynamic industries by
replacing them with more dynamic ones. The decline of the horse and
buggy, difficult as it may have been for people in the business, created
no macroeconomic problems. The trouble today is that those new
industries don’t seem to be arriving very quickly.
The rate at which new companies are created has been falling for most of
the last decade. So has the pace at which existing companies add
positions. “The current problem is not that we have tons of layoffs,”
Mr. Katz says. “It’s that we don’t have much hiring.”
If history repeats itself, this situation will eventually turn around.
Maybe some American scientist in a laboratory somewhere is about to make
a breakthrough. Maybe an entrepreneur is on the verge of creating a
great new product. Maybe the recent health care and financial-regulation
laws will squeeze the bloat.
For now, the evidence for such optimism remains scant. And the economy
remains millions of jobs away from being even moderately healthy.