Why This is No Traditional Recession
The leaders of the Republican Party (and plenty of their followers) continue on their strange path of denying the most basic economic logic in the midst of economic crisis and opposing whatever the President says or does. Happily, the Obama administration knows economics, and they seem to generally know themselves. Yet, they may still overestimate the extent of their powers, especially their ability to turn around the economy anytime soon without serious, new initiatives.
For a meltdown that follows none of the regular rules or patterns of garden-variety recessions, the stimulus we’re providing for consumers and the subsidies for housing and banking may well be insufficient to drive a respectable recovery in 2010 and even 2011. Yet, the President’s budget forecasts — and depends upon — economic growth of 3.2 percent next year and 4.0 percent in 2011. This is a picture of a traditional, “V-shaped†recovery, like 1983-1984. It’s what happens when a deep recession suppresses the normal buying impulses of households and businesses until the early signs of recovery, when all of the suppressed demand comes back with a vengeance. The result is a strong bounce back, just of the sort assumed in the budget.
But this is anything but a traditional recession, and there’s little reason to expect a traditional-shaped recovery. The stimulus will help, as will another round likely to come this summer. They may well be enough to stop our decline, but alone they won’t sustain enough growth in demand to push the economy much out of the cellar. Here’s the crux of the problem facing the President’s economic team — and ultimately all of us: People are pulling back sharply on their spending not only because they’re afraid they might lose their jobs, or already have. In addition, they’re suffering the greatest wealth losses in their lifetimes, especially in the value of the homes that constitute most families’ biggest asset. That means that a real recovery may require a much more aggressive housing program to stem the decline in housing values as well move foreclosure rates back towards normal. If that’s beyond the administration’s reach, this recession could go on until the housing cycle unwinds on its own, or as long as another 18 to 24 months.
Besides consumers (and government), the only sources of demand in the economy are business investment and exports. We can forget about a revival of U.S. exports driving growth, at least for more than another year. That’s because much of the rest of the world is in worse shape than we are. Most of them are much more dependent on their own exports recovering than we are, so their recovery may depend on Americans buying their exports. On top of that, most countries still aren’t providing any large scale stimulus — we, along with China and Spain, are the exceptions. So, a revival of our exports will likely come only after our own consumer demand recovers, to help fuel demand in other countries for our exports. That, too, would put recovery as much as two years distant.
That leaves business investment to fuel a recovery in time to help support the President’s plans in education, health care, climate, and most other things. But what businesses are prepared to invest when consumers here and abroad are buying so much less of whatever those businesses produce? That’s particularly so when it’s as hard as it is today for most companies to borrow funds to invest. This brings us back to something else we already know: A real recovery will also require a much more aggressive banking strategy from the administration and Congress, to force the bad debts and bad banks out of the way so that normal lending can start again. Because so many of those bad debts involve housing, a revival of business investment will likely have to follow the stabilizing of housing values. Here, again, there’s little reason to expect this will happen in time to help fund the administration’s budget proposals.
We all have to begin to think about what the policy and political landscape will be, if we don’t put in place more effective housing and banking programs than we now have, so we’re still mired in serious recession a good year from now. One change seems certain: Much of the political energy now fueling initiatives in health care, energy and climate would seep away. After another year of hard times with no relief in sight, the other thing that will matter to most voters and politicians will be the economic crisis that President Obama was elected to end.
The President knows full well — or should — that containing health care and energy costs, especially those borne by businesses, will be critical to breaking the mold of the last expansion, when most people’s wages and incomes stagnated, or worse, even as productivity, growth and profits rose handsomely. The saddest implication of our present predicament is that another 18 to 24 months of serious recession could leave untouched the deep, underlying economic problem that the President and his Party were really elected to solve.