Today I want to talk about frying pans. No, I haven’t joined the staff of Wirecutter. I’m talking instead about a suddenly popular new type of economic chart, called “frying pan charts” by Alex Williams of Employ America. Here’s an example, depicting the percentage of Americans in their prime working years actually employed:
As you can see, up to 2020 this chart kind of looks like a skillet — a flat section, the handle, in the years before the 2008 financial crisis, then a long dip, the pan itself, before it finally got more or less back to its precrisis level. There was another plunge with the Covid recession, but it was brief, and we’re now all the way back to pre-Covid employment levels.
Here’s another chart, showing the ratio of real gross domestic product to the Congressional Budget Office estimate of “potential” G.D.P. — what the economy should be able to produce at full employment. It’s not quite as pretty, but looks similar:
You can draw comparable charts for many other economic variables, some of them just showing levels like the two figures above, others showing deviations from the pre-2008 trend. Their consistent shapes all tell the same story: The U.S. economy remained significantly depressed for many years — indeed, a decade or so, after the financial crisis — and this lost decade could have been avoided with the right policies.
How do we know that it could have been avoided? Because of what happened the past few years, when the U.S. economy, boosted by major federal spending programs, came roaring back from the Covid slump, regaining all the lost ground in just over three years. If America had done as well after the financial crisis, we would have been back on trend by mid-2011.
So why didn’t that happen? President Barack Obama did pass what media reports insistently called a massive fiscal stimulus, but it was far too small, given the size of the financial shock. That’s not 20/20 hindsight; I was tearing my hair out over the plan’s inadequacy in real time. It was also obvious to me, although apparently not to Obama officials, that they had only one shot at getting it right — that if the plan failed to produce a vigorous recovery, Republicans would say, “See, stimulus doesn’t work,” and nothing more would be done.
In fact, by 2010, with unemployment still close to 10 percent, the Very Serious People of Washington lost interest in job creation in favor of obsessing about the national debt. As a result, we turned to years of fiscal austerity that held the economy back.
Along the way there were many arguments offered about why a return to precrisis levels of employment wasn’t possible. American workers just didn’t have the right skills. Or they didn’t want to work, maybe because the improving quality of video games was keeping them at home. (I am not making this up.)
Strange to say, however, all those skill-lacking, game-obsessed American adults did eventually get productively employed when there was finally enough economic demand for their services. And after the Covid recession, when the U.S. government actually did provide adequate fiscal stimulus, the return to full employment happened quickly, belying fears that the pandemic would leave long-term economic scars.
OK, but before I simply declare that inadequate government stimulus led to a lost decade for the U.S. economy, I need to address one objection from economic theory. For decades, most economists have accepted some version of Milton Friedman’s natural rate hypothesis, which argues that trying to push unemployment below some minimal level will lead to ever-accelerating inflation. Conversely, if the economy persistently has excessive unemployment, the hypothesis says that we should see ever-falling inflation, perhaps eventually leading to deflation.
That didn’t happen in the 2010s. Inflation was consistently below the Fed’s target of two percent, but it wasn’t ever-declining and never got close to deflation:
Does this mean that the economy wasn’t depressed, after all? No. At this point, it seems clear that the relationship between unemployment and inflation is very weak unless the economy is running very hot, in which case it becomes more or less vertical. Stealing a presentation idea from a recent San Francisco Fed paper, here’s one measure of labor market tightness versus one measure of underlying inflation since 2001:
Above, I’ve measured labor market tightness by the ratio of unemployment to job vacancies (labeled “U/V”); I’ve measured inflation by the annualized rate of change of consumer prices excluding food, energy, shelter and used cars over the previous six months (the so-called supercore measure). I’ve also divided up the data between prepandemic observations — that is, before February 2020 — and observations after January 2021, omitting the crazy period in between.
I won’t go to the wall defending any of these choices individually, but as far as I know, any reasonable selection of variables will show roughly the same picture: almost no relationship between labor market slack and inflation in normal times, and a more or less vertical relationship when labor markets are very tight. And that’s the key insight we need to reconcile the assertion that America suffered from a lost decade with the observation that we never experienced deflation.
So how much did this lost decade cost? I’ve argued that we could and should have returned to full employment by the middle of 2011. If we sum up the gap between actual and potential G.D.P. between then and the end of 2019, it comes to $3.5 trillion in 2012 dollars, or $4.5 trillion in today’s prices. That’s an immense waste of human and economic potential — but it happened quietly, so that hardly anyone noticed.
After Covid, we avoided a repeat of that silent tragedy. Whatever else you may say about recent economic policy, that’s one big thing we really got right this time.
Quick Hits
Many, many frying pans.
People don’t want to work anymore, and they never did.
Seriously, this is a good economy.
Hungary, inflation capital of Europe.
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