The United States economy reached a significant milestone in May when the number of employed Americans returned to the peak recorded before the advent of the global financial crisis.
Considering that the recession in the US officially ended back in 2009, it has been a slow and tortuous recovery.
But May’s milestone was not an occasion to celebrate. What was more important than the number in work was the obverse – the number out of work.
Since the financial crisis began back in 2008, the US population has increased by 15 million. To restore the ratio of employed to the total eligible to its pre-crisis level would require another 6.9 million jobs to be created and filled.
Even then the national workforce would be inferior to the pre-crisis condition in that most of the new jobs would be in the low-paying service sectors. Their contribution to consumer demand would be significantly less had the composition of employment returned to its pre-crisis structure.
For investment to return to its pre-crisis trend line would require the US to successfully push its way into export markets. The problem there is that there are 20 or so other developed economies with the same challenging economic fundamentals as the US.
Most of the developed economies – Australia being one of the few exceptions – are exhibiting worrisome symptoms of “hysteresis".
Hysteresis refers to the dependence of the output of a system not only on current input, but also on its history of past inputs.
In the US labour example, the degree of participation in the workforce has fallen significantly since the advent of the global financial crisis. The GFC is not the only factor that has changed the attitude of so many Americans disengaging from the labour market, but it is the most obvious.
Other factors could include automation, globalisation or simply ageing. The depth and duration of the Great Recession (as it is referred to in the northern hemisphere) – along with deployment of austerity as a fiscal strategy and near zero official interest rates – have characterised the GFC as being qualitatively different from the mainly cyclical recessions of the post-World War II era.
However, modern research has widened the field of knowledge and experience of different economic crises beyond recent history.
Studies of deep depressions in earlier times have identified the highly persistent effects of hysteresis-influenced inputs on long-term output.
And as Lawrence Summers, an economist of academic distinction who has had practical policy experience at the highest level, remarked back in April: “The financial crisis has confirmed the doctrine of hysteresis more strongly than anyone might have supposed."
Now Professor Laurence Ball from Johns Hopkins University in Baltimore has published a paper on the long-term damage that the GFC has caused in 23 OECD countries.
He measured the effects by comparing the current estimates of potential outputs in each economy published by the IMF and OECD with the path that potential outputs were following in 2007, according to estimates at the time.
Ball found that the losses in potential output by 2015 based on current IMF and OECD forecasts ranged from almost nothing in Australia and Switzerland to more than 30 per cent in Greece, Hungary and Ireland. The total damage from the Great Recession is slightly larger than the loss if Germany’s entire economy disappeared.
The average loss, weighed by economy size, would be 8.4 per cent in 2015.
To put that figure for potential output loss caused by the deviation from the pre-2007 trend, it’s worth noting that Germany accounts for 8.2 per cent of the aggregate economy of the 23 economies in the study.
If you prefer thinking in dollar terms: for the entire sample, the weighted average of the loss in potential output amounted to 7.2 per cent in 2013, rising to 8.4 per cent in 2015.
Measured in 2015 US dollars, the 8.4 per cent loss for the 23 countries added up to $4.3 trillion.
Fiscal stimulus and exports
So how did Australia avoid this carnage?
According to Ball, Australia was almost unscathed because