The thrust of all debates over economic policy and government debt these days seems to be that this recovery ought to look like previous recoveries. We are insistent that unemployment fall faster, jobs be created more rapidly, consumption rise quickly, and economic growth pick up steam. All desirable outcomes, unquestionably. But we keep ignoring the factors that made the "Great Recession" of 2007-2009--and, accordingly, also the subsequent recovery--an outlier in terms of recent historical experience.
This is only natural, of course; our only comparative frames of references are other recessions since 1948 and, in terms of personal experience, the recessions of 2001, 1990-1, and the early 1980s. But this recessions was clearly of a different order, for a variety of reasons. For starters, the expansion that preceded it was one of the weakest--if not the weakest--since World War Two, as measured by job creation, per capita income, and the employment-to-population ratio.
Of the growth that did take place, we obviously know now that a significant portion of it was distorted by all things housing bubbled-related: construction, real estate, finance, etc. The plural of anecdote is not data, but I find Paul Kedrosky's parable of the highway ladder debris amusingly illustrative. Looking at Statistics of US Business data from 1998 to 2006 reveals that, of the net increase in the total number of firms of 442,000, fully one-quarter of that growth was in Construction (NAICS two-digit industry code). The only larger share went to the Professional, Scientific, and Technical Services (PSTS) sector, which includes businesses in R&D testing, ad agencies, computer design services, engineering services, law offices, accoutants, payroll services, and so on. Overall, a good sector in which to experience growth; yet, both the Construction and PSTS sectors are comparatively small job creators because average employment per firm is nine and ten, respectively, compared to the all-sector average of about twenty.
We keep wondering why job creation isn't automatically bouncing back to expansionary levels, and blaming sluggish job figures on fleeting factors like discretionary government policy. But because job creation in the prior expansion was low and because the driver of job creation--consumption--was built on sand (i.e., housing bubble), we shouldn't expect it to come roaring back. The employment-to-population ratio barely budged from 2002 to 2007, a historical first. The Federal Reserve of San Francisco, moreover, has calculated that personal consumption took a hit equivalent to about $175 per month per person as a result of the recession and is nowhere near returning to pre-recession levels. This is due, in part, to the completely unsustainable level of consumption the US enjoyed in the last decade. We shouldn't expect a return to that.
This points to the deeper factor underlying the slow recovery: this recession was marked by a financial crisis. And, as Reinhart and Rogoff have convincingly showed, post-financial crisis recoveries are very, very slow. Combine that with deep-seated challenges facing the American economy--geographic asymmetries, skills mismatches--and you can't help feeling that this is going to take a while.