But the Recession is Over...Right? Revisiting Tinkerbelle Economics

I have a pretty good track record on the economic crisis. In 2007, I pointed out that the "slowdown" that people were saying was absolutely not a recession, was, in fact, a recession. In 2008, I pointed out that most major economic downturns of the past century haven't been very brief - although technically the 1970s economic crisis consisted of two recessions, rather than one, you could just as easily observe that it consisted of a decade or so of high unemployment, economic stagnation, etc...etc... I argued that it was likely that the major economic crisis we were finally acknowledging was, in fact the beginning of a decade or more of economic instabilty. And guess what? It turns out that I was (sadly) right. From Reuters:

WASHINGTON, July 29 (Reuters) - The "Great Recession" was even greater than previously thought, and the U.S. economy has skated uncomfortably close to a new one this year.

New data on Friday showed the 2007-2009 U.S. recession was much more severe than prior measures had found, with economic output declining a cumulative of 5.1 percent instead of 4.1 percent.

The report also showed the current slowdown began earlier and has been deeper than previously thought, with growth in the first quarter advancing at only a 0.4 percent annual pace.

The data indicated the economy began slowing in the fourth quarter of last year before high gasoline prices and supply chain disruptions from Japan's earthquake had hit, suggesting the weakness is more fundamental and less temporary than economists had believed.

The annual revisions of U.S. GDP data from the Commerce Department showed economic growth contracted at an annual average rate of 0.3 percent between 2007 and 2010. Output over that stretch had previously been estimated to have been flat.

At the depth of the recession in the fourth quarter of 2008, output plummeted at an annual rate of 8.9 percent -- the steepest quarterly decline since 1958, and 2.1 percentage points more than previously reported.

Historically speaking, economic crises tend to be lasting, not short term, and while they may include (and even the Depression includes) stock market rallies, comparatively short periods of economic growth and a whole lot of cheerleading about how the worst is over. This is wholly normal.

The reason for this, of course, is that economics is a psychological game, rather than a rational one, and relies heavily on "Tinkerbelle Economics." Everyone remembers in JM Barrie's _Peter Pan_ that everytime someone says "I don't believe in fairies" one falls down dead. At the end of the story, the only thing that saves Tinkerbelle is the assurance that one does believe in fairies. Our markets operate on the same theory - as long as a preponderance of people believe they work, they sort of work. Kinda. If we are lucky.

The thing is, we're not that lucky. Just like saying "I do believe in fairies" doesn't make Tinkerbelle magically appear at the bottom of your garden, saying "I do believe the recession is over and we'll all go back to perpetual growth" doesn't make it happen. What it does do, however, is cause millions of people to make choices that are terrible in the face of real economic problems. Sure, get back into the housing market - I'm sure it doesn't have any more to drop! Sure, take out more debt - no problem, growth is just around the corner. Sure, go back to shopping - you'll definitely have your job by the time the credit card bills come due.

Right now the general data trend seems to suggest that when we look back at this from a few decades ahead, the last year and half will be a blip in an overall decline trend. And since there are other decline trends in resources and energy coinciding, along with rising costs for natural disasters caused by global warming, the other end of the downturn doesn't look cheerful, either.

It is, of course, nicer to believe in market fairies. Me, I don't believe - because while it is more pleasant to believe in TInkerbelle, real life works better if you look at what's actually there. Ultimately, we're going to have to change our way of life - and better sooner than later, willingly rather than forcibly. Me, I'm taking out the fairies!


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The housing market is unusual because it is one area where poor individual consumer decisions can rival the scale of governmental decisions. I think our national debt is at about $47k/person right now. Even if you take on some credit card debt after loosing your job, even if you make bad shopping decisions, it's hard to wrack up $47k overnight. A mortgage going south on you is another matter- $47k 'worth' of home could have easily vanished when the bubble popped.
So we will need to change our personal spending habits, sure. And I'm staying the heck away from the housing market (and probably will until I can put >20% down on anything). But I doubt consumer decisions can implode our economy as effectively as political intransigence toward raising revenues and cutting expenditures.

Sharon, I think we're in for a lot more than a decade of economic instability. In fact I don't believe "economic growth" is ever going to return. I've been reading chapters from Richard Heinberg's new book "The End of Growth" and he gives a very good explanation of why growth is over. The planet's resources are insufficient to support growth for 7 billion or more people.

By Helen Highwater (not verified) on 29 Jul 2011 #permalink

Still constantly amazed at how many people, economists even, think we can just go back to the old days of funding economic growth through borrowing.

By NoAstronomer (not verified) on 29 Jul 2011 #permalink