Recession and Eye on the Pie and Opinion

MARCUS: The recession will leave a residue

October 10, 2009

 Sorethroat waits for me in his usual spot outside the Statehouse. As ever, he has a cigarette in his hand and a worried look on his face.

“Is it over yet?” he rasps.

“What’s ‘it?’” I reply, stalling for time. I know what he means.

“The recession,” he says. “Has it ended or are we going to have this gloom around the Statehouse when the Legislature returns?”

“Wouldn’t it be refreshing,” I ask, “if we focused on a different way of looking at the recession? What if we talked in real terms about how much we lost in work days or goods and services?”

“I don’t know what you’re talking about,” Sorethroat gasps as he takes a fresh cigarette.

“It’s very simple,” I say. “Imagine you have a job that pays $100 a day. That’s about $25,000 a year.”

“It’s no job I want,” he says.

“Imagine!” I insist. “Now your boss comes in on Monday and announces you’re taking a 10-percent cut in wages. You’ll get $90 today. Tuesday, the boss does the same thing. You’re getting 10 percent less than you got Monday. So now your pay is $81 a day.”

“Yeah,” he says. “Monday, I get $10 less than I made before the pay cut and Tuesday I get $9 less than I got on Monday because 10 percent of $90 is $9.”

“OK,” I say. “You go home and tell Mona your pay is $81 now. She says that’s 19 percent below what it was last week and it’s an outrage.”

“That isn’t all Mona will say,” Sorethroat nods knowingly.

“Right, but we need to think about what you’re not getting. The boss’s pay cuts denied you $29 of the $200 of goods and services you expected to have.

“Sure,” he says, his face darkening. “I was shorted 10 bucks on Monday and $19 on Tuesday, so I’m down $29 for the week.”

“Exactly,” I say. “You’re short 14.5 percent of your anticipated income. Where you would have made $200 in two days, you got only $171. But take heart. Wednesday, the boss comes in and says he is reversing course and will increase your pay 10 percent for two days just as he cut it previously for two days.”

“I’m no fool,” Sorethroat says. “I know 10 percent on the up side is not equal to 10 percent on the down side because the base is smaller.”

“Precisely,” I tell him. “After two days of 10-percent increases, your daily pay is $98, still 2 percent shy of that starting pay rate. Yet your total lost wages now equal nearly $42, or 10.5 percent of what you would have made without these shenanigans.”

“So where are you going with this?” he asks.

“We need to think about recessions in terms of what we have lost in output.

Normally, it takes about half a year after the recession’s low point to get back to the previous peak. However, it takes even more time to restore the unrealized goods and services. Some of that output can be deferred with little damage to society (toasters), but others may be irreplaceable (health care and education).

“In this example, the boss will have to go another two days with 10-percent increases, getting the daily rate up to $118.60, before the total lost wages are wiped out. So, too, it will take our country several quarters after the recovery, well into the expansion, before we can wipe away the losses of this downturn.

“Now are the legislators considering all the public goods and services not provided because of this recession?”

“No,” he says, with weariness from years of working for the state, “they’re focused on re-election in 2010.”•

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Marcus taught economics for more than 30 years at Indiana University and is the former director of IU’s Business Research Center. His column appears weekly. He can be reached at mmarcus@ibj.com.

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