L-Shaped Recovery and the Trampoline Effect

Some years ago, I talked about government interference affecting the economy. There’s a pair of posts: Parabolas and The Trampoline Effect. When there are downturns in the economy, there’s usually a natural rebound, forming a parabola, like a U. The bounce back usually reaches and exceeds the start of the fall pretty quickly. But if government steps in to “help,” or interfere, then you get something more like “help” on a trampoline, when someone steps in purportedly make the bounce higher. That help disturbs the natural up and down, and takes the energy out of the bottom of the bounce, so you don’t go back up. You just sort of stumble, and the trampoline flattens. And then you have to get going again from scratch.

In economist terms, this is an L-shaped recession recovery, instead of the usual U-shaped recovery.

Here’s the definition: 

L shaped recession—refers to a period of stagnant recovery after initial fall in GDP. Even though technically the economy may have positive growth (e.g. 0.5%) it still feels like a recession because growth is very slow and unemployment high.

You know the phrase, about the scariest words: “I’m from the government, and I’m here to help.” Government’s role isn’t to interfere, or intervene. It’s to set up the background for free enterprise to take place. 

Government isn't the only interference that can cause an L-shaped recession, but it's the usual suspect. When we look at the past decade, we see an L-shaped recession/recovery, and it wasn't just bad luck; it was government caused. 

There are a number of measures of how well the economy is doing. Growth in GDP is one. In fact, a recession has a specific definition related to GDP: "a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters."

The converse is that two successive quarters of growth, however minimal, signify the end of the recession. But in an L-shaped recession, getting to technical recovery likely takes longer, probably over a year, rather than merely months. But getting back to starting position can take much longer, multiple years.

The L-shaped recession recovery looks like this:

Such a "recovery" can take so long that various opinions may start calling it a square root-shaped recovery, meaning that, instead of ever getting back up, we should expect a new, permanent, lower growth reality. Obama and George Soros agreed on this "just the new reality" description of the 2008-2009 Great Recession. The malaise economy of Jimmy Carter was also described as a new normal that turned out not to be normal, after a bit of a Reagan tax cut.

And the Great Recession wasn’t a square root-shaped “recovery,” we now know, because the malaise of extremely low growth wasn’t permanent. It went away as soon as we had a government regime change that made necessary changes. They haven’t been extraordinary changes: lower taxes across the board, and concerted attempts to get rid of burdensome regulations.

We didn’t have to get all the way to the ideal lowest possible tax rate, just better. And we didn’t have to get rid of all burdensome regulation, just go in that direction, and stop the threat of ever more regulations that could be placed at any time, causing businesses to be wary about investing and growing. When people are free to make use of their own money, and can plan without government-induced uncertainty, that's the energy we need to get the economy moving back upward.

We can see some examples of the L-shape in various charts. A typical chart for showing recessions is GDP growth. This one, from the Center on Budget and Policy Priorities (CBPP)[i]

Because growth, by definition, rises, in order to see the parabolas and other shapes of recessions and recoveries, you need to turn the chart somewhat sideways, so the rise line is horizontal. The green is to show the L-shape.

Besides GDP growth, there are some other measures. One is unemployment. Here’s a comparison of recent recessions and up to five years out.  In this chart the U-shape, or parabola, is upside down, because we want unemployment to be low. It goes up during the recession and down afterward. You can see that the unemployment spike was a bit higher in 1982, but by one year out had reached its starting point, and then continued dropping. The 2009 recession went higher half a year out, had some downs and ups for a year and a half, and afterward only slowly began dropping back down, taking seven years or more to reach pre-recession rates.

It’s possible for unemployment to go down even though there are more people not employed. Unemployment is measured by taking some combination of people applying for unemployment benefits and polling. That misses people who would be looking for work in a less hopeless economy. People who can’t find work could try to get more education, or could be just staying home. They don’t get counted. So another way to look at economic vitality is the employment-to-population ratio.

This one gives us a really clear picture of the L-shaped recession/recovery. I’ve highlighted the Great Recession in green, and in yellow are a few other more typical recessions with a quick rebound. On this chart, it looks like there might be another L-shaped recession just after 1960.

Another chart that shows the L-shape is average private sector hourly earnings. The housing and banking bubbles burst in the last quarter of 2008, which precipitated the drop. They didn’t start to rise again until 2015, and we’re still quite a distance from the starting point. The source for this chart seemed certain, later in the article, that things would have been much worse without the government interference. It’s hard to show an alternative version to use for comparison, but it is my assertion that government interference caused the intensity of the problem as well as the continuation.

The 1929 market crash was similar. It was beginning to right itself within months, but then government stepped in with one intervention after another, intensifying and continuing the pain for more than a decade. It wasn’t the war that ended the depression, because there was so much to produce for the war; it was that FDR focused on the war instead of the economy, and he largely quit experimenting with ever more interventions.

There was some good news from The Heritage Foundation's 2018 Index of Economic Freedom. We used to be ranked “mostly free,” but had been less free since the beginning of the Obama administration—or maybe since the legislative takeover by Democrats two years before that. Now we’re moving back toward freedom.

The United States, ranked “mostly free,” had not been performing well in the index over the last decade. That precipitous slide has now fortunately come to a halt, with signs of renewed economic growth reinforced by major regulatory and tax reforms that elevate business confidence and investment. It is notable that the U.S. economy grew at a rate of about 3 percent in the last three quarters, something that economists said was very unlikely just a year ago. For the first time in a while, the United States isn’t just economically stronger. It has a real chance to become economically freer in the coming years.

We’ve had two additional quarters of higher growth since that assessment last February. So the news is even better.

When somebody interferes with your jump back up on a trampoline, it takes some regathering your balance and re-energizing your jump. And that gets harder when the “friend” keeps their hand on the trampoline. But once they get out of the way, the energy you put into the jump gets you rising again.

It’s good that happens in the economy too. When we move closer to a free market, not only do we become more prosperous, we become more free.

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[i] CBPP is the source for the remaining graphs in this piece, although some have my marks on them.

Employment Numbers

I was listening to a financial planning show on the radio. They were talking about employment and used the term U6, which I didn’t recognize. So I looked it up:

U3 is the official unemployment rate. U5 includes discouraged workers and all other marginally attached workers. U6 adds on those workers who are part-time purely for economic reasons. The current U6 unemployment rate as of August 2016 is 9.7%.

The source provided a handy chart comparing these three rates: U6 Unemployment Rate

I wondered whether the “as of August 2016” was what we got by August 1^st or August 31^st—which would have come out last Thursday or Friday. It looks like these are the latest, and the rates stayed the same in August as in July.

The Bureau of Labor Statistics provides basic data and some charts.

While I was thinking about employment this Labor Day weekend, I came across a Prager University video describing in more real terms what these numbers mean. Here's part of the transcript, but watch the whole thing below; it's only a minute and a half:

If someone has gotten so frustrated that they’ve stopped looking for work… or just decided that they won’t work anymore, they no longer get counted as unemployed.

So, imagine you had a town with 100 people, and 10 of them were unemployed and trying to find jobs. The unemployment rate would be 10%. Make sense?

So now imagine if five of those people got tired of looking for jobs and decided to move into their parent’s basement… the government would now say that the unemployment rate has gone down to 5%.  Yippee!  Wait now…that doesn’t make sense.

The people in the basement are no longer part of the labor force because they’ve given up… so the labor force participation rate goes down too…

Not exactly a reason to celebrate.

So while the unemployment rate is important, the labor force participation rate, which as you can see, tells the real story.

The U6 number relates, in a way, to the Labor Participation Rate, but it probably tells a fuller story to look at both.

Labor Participation Rate is defined as the percentage of civilians age 16 and older who are in the labor force (gainfully employed), seasonally adjusted. (Calculation formula here.) 

According to the Bureau of Labor Statistics, before the start of the Great Recession in fall 2008, the rate was consistently around 66%. The recession dropped it a percentage point, where it lingered for a year. Then it dropped another point, where it stayed for two years. Then another point for a year. And it has been under 63% for three years now, hanging at 62.8 the past two months.

The Bureau chart only went back to 2006, and I wondered what it was like leading up to that. So I found a chart going back to 1950 (below). 

You have to go back to March 1978 to find that rate again. Before that it was historically lower, in large part to more women staying home.

It rose steadily until through 1989. Then it dipped a bit until the late 1990s. After reaching a 2000 high of 67.3, it dipped and hung around 66% until the Obama administration. From April 2009 it dropped steadily until September 2015, reaching a low of 62.4. So we’re supposed to believe 62.8 is a return to the labor force.

I think we’re supposed to believe this is a new normal. This is what the administration calls recovery.

Chart from FRED

A few weeks ago I reviewed the typical parabolic shape of a recession and recovery, and what I call the Trampoline Effect. If someone interferes with the bounce, with some misguided intention of “helping,” the result is taking the energy out of the expect bounce back up. I think the latest employment numbers are just more evidence of interference preventing recovery.

The interferences we need to get rid of include Obamacare; regulatory agencies doing lawmaking, prosecution, and sentencing; environmentalist overreach; and an atrocious national debt. The list could go on. Let’s pray we get a reprieve sometime soon.

Flat Lining

We haven’t done an economic post in a while. Numbers came out last week, at the end of the month, and we can use those. If you’ve been reading this blog for a while, you might be familiar with The Trampoline Effect. We’re seeing that play out yet again, or still.

Growth was an essentially negligible .1 percent for the first quarter of 2014. By comparison, the average growth during recovery-from-recession quarters since that started getting measured in the 1960s is 4.1%. Average quarterly growth during the Obama presidency, which counts technically as an ongoing “recovery,” is 2.2%. In other words, the growth indicator is half what you’d expect if the economy is in recovery.

Employment is another indicator of recovery. The quarterly report looks positive; down by .4% to 6.3%. There are some provisos, however. The report is that 288,000 people were hired in April. However, simultaneously, estimates show 800,000 people dropped out of the work force—so they’re not counted in the unemployment figures anymore.

These are estimates. There’s a margin of error of around 300,000. So we get a better idea of the real picture averaging out several months. March showed an increase of 500,000 joining the labor force. If you take the two months together, you get an average of 150,000 leaving the labor force for each of those months, which is probably closer to the truth. But if it makes you feel a lot better than only 150,000 a month are so discouraged they are no longer even looking for work, you’re probably a little warped (or probably an Obama acolyte).

Full employment is traditionally considered 5% or better. There’s always some, because there are always individuals changing, or graduating from college and starting out, or deciding to start or stop an entrepreneurial enterprise, etc. So 5% means, if you’re a job seeker, you’ll probably be able to find a job, given a reasonable list of skills and good work ethic. The rate was 4.7% around the time of the 9/11 attack in 2001. That caused a fair amount of economic and social upheaval. Still, the highest annual unemployment was 6% in 2003, garnering a great deal of complaints from the democrats. It dropped down below full employment levels within a year.

You’ll recall that the current recession hit in late 2008, while Bush was still president (but two years into having Congress controlled by the democrats). Unemployment suddenly spiked to 5.8%. Then Obama and company took over—and it "recovered" to 9.3% in 2009, and “recovered” further in the wrong direction to 9.6% in 2010. It has slowly been dropping since—still lingering well above the post-9/11 economic recession that was so unacceptable at the time, six years into this mythical “recovery.”

The reason we need to combine this unemployment report with the number leaving the labor market is that the unemployment percentage is becoming less and less accurate. That number only counts those currently qualifying for unemployment compensation, plus a certain number added in based on phonecall polling. If someone no longer gets unemployment, they are not counted. We know the percentage of the population gainfully employed is going down—now 62.8%, the lowest it has been since the 1970s malaise. Maybe you remember that time, when President Carter gave a speech telling us to expect this to be the new normal.

Fortunately, Carter was wrong; that was not the new normal. That was the normal result of government interference policies. After a couple of years of Reagan removing impediments, growth and prosperity ensued, as expected.

Recessions are parabolic; when economic indicators fall, they naturally rise back up. However, there’s a trampoline effect; if government “helps,” it takes the energy out of the recover, so it doesn’t bounce back up, but dribbles along at pretty nearly a flat line, sometimes referred to as an L-shaped recovery.

This employment-population ratio illustrates
the L-shaped "recovery," from here

What is the solution—every time? Get government to stop interfering. Allow the hard-working, enterprising, creative population that is our greatest resource to do its thing, unhindered.

We know those in the current administration are not interested in an actual recovery; those power mongers benefit from a larger populace that feels helpless and turns to government for “help.” They will lie about and spin the numbers just enough to persuade those not paying attention to believe they are doing what they can under difficult circumstances—so they can keep getting elected. They hide the fact that this is the worst "recovery" since the Great Depression--which also lingered because of government interference.

We need to break through that haze and let people know—it doesn’t have to be this way. We can have freedom, prosperity, and civilization. We know how. We need to get those who are thwarting us out of power, and find followers of our founders to replace them.

Poster Household

A couple of days ago Greg Mankiw’s economics blog posted a chart showing the ratio of the population that is employed, from 2004 through the first quarter of 2012. You can see the plunge from early 2008 through the end of 2009. A normal recovery from a recession would, by definition, return to approximately the pre-plunge level (see my posts Parabolas and The Trampoline Effect). Clearly that has not happened.

EMRATIO chart found here

This is a better picture of the recession and unemployment rate than the doctored numbers the administration has been feeding to the sycophantic media. This picture is what we’re experiencing.

I know we can’t extrapolate accurately from one anecdote, but the Spherical Model household has been a good candidate for the poster family for the Obama economy (taking into account that the plunge began before Obama took over). My sense is that we’re not alone in our experiences (even though our numbers may be higher than most).

For part of 2011 we had nine people living in our household: eight adults and one toddler. Of the adults, three were employed: one well employed, one working two jobs but still seriously underemployed, and one part-time summer job. That left five unemployed job hunters—none of whom could get unemployment payments, nor appeared on government charts. That happens when you go from full-time student or full-time mom, or part-time worker who quit to move—all common situations.

But the government measures unemployment by how many are getting unemployment checks. If eligibility runs out, or they give up trying, or take time to try to develop an entrepreneurial business, these unemployed people stop being counted.

If they take a temporary low-paying job, because there are many good things that come from being a paid worker rather than an unemployed job seeker, they disappear from the statistics, but they don’t exactly exemplify recovery. We’re the poster household for this situation as well.

We went down to eight people (seven adults) at the end of summer when my daughter, Social Sphere, returned to college, where she had lined up another part-time job. By then three more family members started working part time at low pay, leaving only two technically unemployed (but not counted), but actually still six looking for better employment.

People who don’t expect government to solve their problems eventually improve their situation in just about any circumstances. My son Political Sphere will start law school in the fall, so, while the income situation will continue to be a problem not measured in the government statistics, we expect much better prospects for his family in about three years. And Mrs. Political Sphere, while underemployed, has been able to find some work recently, and the job should transfer after their move.

Economic Sphere entered the US Army and is halfway through bootcamp. He has a six-year commitment, or possibly a career, after which he has top secret clearance, another language, computer experience, and other experiences that should keep him employable.

So the household begins to empty out. Eventually we can call it recovery, although that will take years. Would we want four more years of this? No. I’d really prefer opportunities and prosperity for us and all our children. And I think I could also get used to quiet and a clean house—interrupted by frequent visits. Family continues to be the basic unit of society, and when family functions well, it is much better at leading to the positive ends we seek than government could ever be.