Deep Scars From a Brutal Recession

In a 2009 interview, Bill Bonner of Agora Financial described the difference between a recession and a depression. "In a recession, you have growth, and then the economy runs too hot, and then it has got to cool down for a while," he said. "And when it's cooling down, people get laid off. And then when it warms up again, they get hired back at the same jobs and things go on. But that's not what's happening now. People are not getting laid off. They're getting fired. And they're fired permanently because the jobs are not just cooling off; those jobs are disappearing." 

You'd be hard-pressed to come up with a clearer description of our current job market. There are currently 14 million unemployed people in the country; roughly half have been out of work for six months or longer. One-third have been out of work for more than a year. Not since the Great Depression have we seen figures even close to those levels. During the unemployment spike of the early 1980s, the average bout of unemployment lasted half as long as it does today -- 20 weeks versus 40 weeks.

By most standard measures, the past three years has been a severe recession. By Bonner's definition, it's been a depression.

Here's what's really tough to swallow: "For individuals, the likelihood of finding a job declines as the length of unemployment increases," as a Pew Economic Policy Group study notes. Even when the long-term unemployed do find a new job, it's likely to pay far less than the previous one, and the odds of lapsing back into unemployment stay high. It's a depression scar. And depression scars don't just last months. They can last years, decades, even lifetimes.

This is especially true for young workers, who make up a disproportionate number of the current unemployed. There's a momentum to job success that tends to reward those who begin their careers when the economy is good, while holding back those who start when the economy is stalling -- not just in their first job, but for the bulk of their careers. "Graduates' first jobs have an inordinate impact on their career path," wrote former White House economic advisor Austan Goolsbee.

In a study of men graduating from college between 1979 and 1989, Yale economist Lisa Kahn found that those beginning their careers during recessions earned considerably less than those graduating in relative boom times. That much might be expected. But what's astounding is how long the gap lasted. Seventeen years after graduation, Kahn found that those who began their careers in tough economic times still made less than those who started when the economy was strong, even adjusting for age differences. The gap wasn't trivial, either. For every 1 percentage point increase in the unemployment rate during the year someone graduates, wages over the following 17 years drop by 4.4% per year. Those who started their careers when the economy offered abundant opportunity built contacts, gained experience, and developed resumes that gave them momentum throughout their entire career. Those who stepped into economic havoc were never able to fully shake it off.

Older workers are hardly immune. Testifying before Congress last year, Till von Wachter of Columbia University explained: "The average mature worker losing a stable job at a good employer will see earnings reductions of 20% lasting over 15-20 years," when laid off during a recession.

And then there's the stress. Being laid off during a recession can reduce life expectancy by as much as 1.5 years, von Wachter found. Japanese workers who started their careers during the bubble collapse of the 1990s now make up 60% of all clinical depression and stress cases, according to the Japan Productivity Center.

Overall, the economy will recover, of course. The question is when, not if. But it's increasingly likely that the recession will leave a wider gulf among social groups than already exists. Years from now, two groups will exist: those who made it through the recession with their career intact and those who didn't. The latter group will be made up of two sets: those who were unlucky enough to enter the job market during the downturn, and those who, for whatever reason, were laid off.

Some people -- many people -- will buck the trend, of course. If you're graduating into today's economy with a degree in computer engineering, the future may have never been brighter. For those with an entrepreneurial flame, a down economy provides some of the most fertile soil to start a business. If you're one of them, great! Go get 'em! But here's reality: A large chunk of workers laid off over the past few years won't measure the recovery in weeks or months. They'll measure it in years or decades -- if at all.

Two important points come out of that. First, rising inequality tends to lead to resentment. I recently spoke with a professor from American University in Cairo. What pushed Egyptians to stand up in the Arab Spring earlier this year? Many factors, not least of which was dramatic income inequality, she told me.

"You can't keep people tame for long when one group automatically does so much better than another," she elaborated, inevitably comparing it to the current Occupy Wall Street protests. Income inequality is the single most underappreciated factor in the Arab Spring, she said. The comparison isn't meant to put Occupy Wall Street on the same level as the Arab Spring; it's just to point out that economic problems lead to social problems.

Rising income inequality has been brewing in this country for decades, but in the past, the less-well-off could cover it up through debt accumulation -- if you couldn't get a raise, you could at least take out another home equity loan. It's not like that anymore. The less-well-off are growing tangibly, materially, distant from a lifestyle that used to be within reach. Whether that's a healthy reversion -- I think it is, to a degree -- isn't the point. They're angry, they feel cheated, and they're going to stomp their feet until things change.

Second, the single most important factor affecting the budget deficit is the unemployment rate. Are the government's current unemployment projections factoring in how long the scars of this recession could last? I don't think they are. People aren't paying enough attention to that. The only thing worse than forecasts of huge budget deficits are forecasts of huge budget deficits built on overly optimistic assumptions.

"This is a big thing. This is a half-century change we're looking at," Bill Bonner said. "And this is not going to happen fast. It's going to happen very slowly." Think he's wrong? Share your thoughts below. 

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.

Fool contributor Morgan Housel doesn't own any of the shares mentioned in this article. Follow him on Twitter @TMFHousel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (12) | Recommend This Article (25)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 11, 2011, at 4:37 PM, astuber9 wrote:

    Good point (and frightening) about unemployment projections. Didn't Paul Ryan's plan estimate something ridiculous like 2.5% unemployment by 2014? We have not even begun to scratch the surface of the austerity measures that will be needed in the coming years. And less gov. spending will only exacerbate the low or no growth projections for years to come. How will we ever get off this vicious cycle?

  • Report this Comment On October 11, 2011, at 9:26 PM, TigerPack1 wrote:

    When do we get serious about creating jobs, and quit spending all our energy, money and resources saving the largest banks?

    We could have cut a check for $50,000 to each of the 100 million households in America or about $17,000 to each man, woman and child, instead of blowing $5 TRILLION on giveaways to the U.S. banking system, large foreign banks and corporations, and politically linked U.S. corporations.

    That money would have ended up on bank balance sheets the same week (as deposits), and provided the strong banks the capital to buy out the weak ones worth saving...if common sense and honest leaders had existed the last 3 years.

    The weak ones could have failed, and nobody would have cared or been negatively affected. Instead of letting Americans decide who the winners and losers should be, and how to allocate emergency spending and capital, we instead allowed some IDIOTS in Congress and running the FED to help out their buddies. The rest of U.S. have been left to fend for ourselves, while we feel the effects of PONZI generated inflation for food and energy, and zippo for income raises.

    Crony capitalism and special interest decision making at its best (or worst)! What has America become, besides deeply in debt, and headed toward communist style control of the economy by the government... YEAH?

    STOP THE MADNESS!

  • Report this Comment On October 12, 2011, at 9:23 AM, Tygered wrote:

    FYI, the teaheads just killed Obama's American Jobs bill. I guess those on unemployment will just continue to stay there.

  • Report this Comment On October 12, 2011, at 3:46 PM, rone51 wrote:

    How to you stop a recession and put Americans back to work?

    Buy American goods and services.

    Please start something and share this with everyone you know.

    It starts with you.

  • Report this Comment On October 12, 2011, at 4:03 PM, wolfman225 wrote:

    <<FYI, the teaheads just killed Obama's American Jobs bill. I guess those on unemployment will just continue to stay there.>>

    Idiot. Dems control the Senate. The Republicans had nothing to do with it. They didn't fillibuster. Reid couldn't hold his caucus together. Even some Dems don't like this "Jobs" bill.

    Funny, I don't recall such angst when Reid and the Senate refused to bring proposals passed by the House up for debate, much less a vote.

  • Report this Comment On October 12, 2011, at 4:16 PM, badnicolez wrote:

    Could the long-lasting difference in income between those who started careers during down times vs. good times have to do with being more risk-averse and staying at a company longer due to being thankful they have a job, versus making career moves that would potentially positively affect earning potential (both in skills acquired and dollars) over the long-term?

  • Report this Comment On October 12, 2011, at 4:25 PM, wolfman225 wrote:

    ^ Great point.

  • Report this Comment On October 12, 2011, at 4:26 PM, AvianFlu wrote:

    Hey Tygered:

    The teaheads, as you call them, actually have the solutions that will cure the economic ills of the country. That is, provided the communists running the show haven't completely poisoned the well.

  • Report this Comment On October 12, 2011, at 5:14 PM, DJDynamicNC wrote:

    "Idiot. Dems control the Senate. The Republicans had nothing to do with it. They didn't fillibuster. Reid couldn't hold his caucus together. Even some Dems don't like this "Jobs" bill." - Wolfman225

    Actually, that's false. The Republicans specifically did fillibuster - that's why the vote failed even though it garnered a majority of votes. That's what a fillibuster is, a refusal to cloture out debate without 60 votes. Passing a bill requires a simple majority - which this bill received, despite getting precisely zero Republican votes.

    Interpret that how you will, but I recommend getting your facts straight before making claims. If you would like additional information in the future, you can find vote results and other political information using sites like www.google.com or www.bing.com

    Hope that helps!

  • Report this Comment On October 12, 2011, at 5:38 PM, wolfman225 wrote:

    DJ--

    I stand corrected. The report I heard was that the vote was 50-48 against.

    Apparently, the reporter mis-spoke.

  • Report this Comment On October 13, 2011, at 5:55 PM, DJDynamicNC wrote:

    Fair enough, sir.

  • Report this Comment On December 11, 2011, at 1:58 AM, Nextex wrote:

    "The argument that the two parties should represent opposed ideals and policies, one, perhaps, of the Right and the other of the Left, is a foolish idea acceptable only to doctrinaire and academic thinkers." (Dr. Carroll Quigley - Tragedy and Hope)

    It's neither a Democrat or Republican issue. The fact of the matter is corruption is one of the reasons our economy is fractured. For example, in the 1980s, we had the Savings and Loan Scandal. Congress did try to bail the Savings and Loan outfits out of it, and the Savings and Loans ended up failing - hence, we no longer have Member FSLIC entities. Between 2001-2009, we saw companies cook their books i.e. (Enron, Arthur Anderson, MCI Worldcom, etc). To add further economic strain, the sub-prime mortgage crisis came about. I worked in the home building industry 9.5 years. Lots of people bought houses with those stupid Adjustable Rate Mortgages. I call them stupid because some people had no right to buy houses, number one. Number two, the home builders, real estate agents, mortgage companies, banks, etc should have told those buyers NO! No, as in you don't qualify. No, please come back to us at a later time when a fixed rate mortgage will be more beneficial to your needs.

    Besides the corporate scandals and sub-prime debauch, we had the Madoff Scandal that would have made Charles Ponzi both envious and jealous. And to ultimately cause further damages, we had the banker bailouts as well as corporate bailouts.

    To add further trauma to the market, student loan debt is higher than consumer credit card debt. I'm guilty of borrowing money to go to school, and I have the desire to pay that debt. However, I've yet to score work, and I have a sick feeling of what's to come for people in my position.

    Also, what has happened to lots of people's retirement? I lost all of mine, the company I worked for froze our ESOP and used the money to bail themselves out. However, check out the latest on MF Global and those people. The CEO does not know what happened, and is pleading the 5th.

    The problem with our nation has more to do with the economy. Where exactly did things go wrong? What did I do wrong? What did we all do wrong?

    The government forgot the United States Constitution, and as a result we are all suffering. I bet lots of people up in DC don't know how to spell Constitution! Corporate America has the politicians in their back pockets. Goldman Sachs and the United States Government are in bed together, and if no one believes me look at the Treasury Department as well as the SEC. Fox News, CNN, CBS, NBC, and other media outlets don't tell us the truth. Instead they argue the information over the airwaves like attorneys arguing their cases without judges and juries.

    We the people spent more than we made (myself included). I tried keeping up with Jones and FAILED. Did I really need to do some of the things I did to impress a woman who ended up rejecting me? Did I really need that product that now just sits idle? Why did I fall for the schemes and scams of marketing?

    It was a mistake that Congress bailed out the "too big to fails." What we are seeing is a sick co-dependent relationship. It reminds me of the disease of Alcoholism. Seems like the vicious cycle of "rescuer - persecutor - victim."

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1567986, ~/Articles/ArticleHandler.aspx, 10/20/2014 8:05:21 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement