Binyamin Applebaum writes

The bleaker view – which remains, to be sure, the view of a distinct minority — is that the years before the recession were abnormally good, and that while the recession was abnormally bad, reality lies halfway in between.

The present situation, in other words, is about as good as it gets.

A paper that will be presented Thursday afternoon at a conference organized by the Brookings Institution is the latest contribution to this literature.

The paper, entitled “Disentangling the Channels of the 2007-2009 Recession,” will be posted on the general conference Web site Thursday afternoon.

I think this confuses strong GDP growth with a good economy. If the number of workers is shrinking in principle you could have an economy that felt great with low GDP growth and on the other side if the workforce was soaring then even a 4- 5% GDP growth rate will feel bad, as was the case in the late 70s.

By my reading Stock and Watson argue that the only thing inexplicable about this recession is the fact that there are more workers than expected. Demographic factors had been pushing down the employment growth rate but now there is a surprisingly large workforce.

Here is one thing to note:

FRED Graph

The blue line is year over year job growth for those 55 and older. The red 24 – 54, what we would consider prime age.

Since, the dot-com bust net employment growth among those over 55 exceed that of those in their prime. This is not as a fraction of the population – this is total.

The only point where prime age workers even caught up was during the tail end of the construction boom.

During the Great Recession employment growth among those over 55 never went negative and is now growing at a record pace.

By contrast employment growth among those 24 – 55 was never positive (save for one month) until just recently.

One quick and dirty explanation would be that the Baby Boomers are not retiring as fast as expected and this had led both to extremely rapid growth in over 55 employment and to surprising labor market dynamics for younger workers who may have been expecting an easier  job market than materialized.

Indeed, I wouldn’t push it this far but one could argue that this explains both the size of the housing bust and the business investment boom.

The business capital-to-labor ratio turned out to be lower than everyone expected when the boomers didn’t retire. This put downward pressure on the marginal productivity of labor which manifested itself as a tight job market for young workers. This in turn meant lower household formation and lower housing demand.

On the other side, however, it meant an increase in demand for business capital to complement an unexpectedly large workforce.