We now all know the limitations of Standard and Poor, what they missed and what they didn’t, why to blame Republicans, why to blame Obama, and that Austerity is the new watchword in the US, while rioting has taken everyone’s imagination in the UK (wow, aren’t we timely?) Most of us are worried that the US will slip back into a recession. You shouldn’t be.
The reason you shouldn’t be worried is that the good news is that the US was never *really* out of a recession. Sure, in economist terms, we technically had some quarters of growth and a nice extended stock market rally, but in the net, what really changed for most people? Unemployment declined only marginally and stayed above 9% during the entire period – 5 years ago 9% would have been a crisis, not a rallying point. Functionally, close to 20% of the US population is unemployed or under-employed. The housing market, into which much of our “wealth” was poured early in the century has never recovered. Energy and food prices have undermined household security, and more people are food insecure in the US than at any time since the Great Depression. Consumer spending, which is used to drive recovery has been stagnant.
Economists have been looking for a short term recession cycle – looking so hard that they found it, but we’re not in a recession like some recent ones – we’re in a deeper crisis. Consider Ken Rogoff’s analysis:
Recessions, he argues, imply a very particular economic phenomena: a business-cycle recession, in which the drop is quick, and the recovery is usually similarly swift. That is not what we’re in. That is not what financial crises are. And mistaking one for the other has, in his opinion, cost us a fortune.
Financial crises are not about the business cycle falling out of whack. They’re about debt. Lots of it. And that’s why they’re so resistant to efforts to speed a recovery. Whereas you normally get out of a recession by lowering interest rates and persuading consumers to spend, the period after a financial crisis is marked by consumers trying to dig out from under a mountain of borrowed money. You can accelerate that process, but it’s hard to do. But first you must correctly diagnose the problem.
Rogoff has suggested we call this period the “Great Contraction” in order to distinguish it from more normal recessions. You may or may not like the name, but consider this: When we talk about double-dip recessions, that implies, as the National Bureau of Economic Research has said, that the recession ended in summer 2009, and we’ve been recovering ever since. The Great Contraction, conversely, suggests we have been, and remain, mired in an ongoing financial crisis. Which better describes the economy you see?
As I’ve been arguing since 2007, this is a long-term phenomenon, one that we can’t get out of. There have been brief periods of growth and impressive stock market rallies in other extended financial crises – in the 1970s we technically came “out” of a recession – although job growth didn’t really start before the next recession began. But who remembers the mid-1970s as a period of growth? The Great Depression had some of the biggest stock market rallies in history – but who thinks of that as a period of great market rallies? Japan’s lost decades included periods of recovery – but ultimately people describe the last 20 years of Japan as part of the larger picture of decline – and Americans lack many of the things that made the lost decades milder, like good savings rates.
Profound, rather than shallow financial crises average a decade or more in length in modern times. This is a hard truth, but a truth nonetheless – but one that most people in leadership roles, or invested in markets cannot afford to believe. Markets depend on tinkerbelle thinking, on confidence and belief – even if wholly misplaced. Thus we cannot afford to see what’s in front of our eyes – better call it an unexpected double dip, rather than a logical part of a larger tragedy.
Think, however, about what you personally might have done differently if, in 2008, you’d realized you were in for 10 years of potential unemployment, economic insecurity, decline, instability. How would that change your life? That’s a question to ask ourselves – and ask ourselves now. Most of our deepest assumptions rest on a growth that seems increasingly unlikely – what we are facing isn’t just austerity (although that’s a start) but a rethinking of our priorities – we need to recognize the long haul for what it is and begin to prepare.