Tuesday, July 21, 2009

Is the recession over?

That appears to be what Brad DeLong thinks, although he predicts a sluggish recovery with no real job growth. But Paul Krugman points out that consumer spending is going nowhere at all. It's still sitting at 5% under last year's average -- which itself was brought down significantly by the disasterous 4th quarter of 2008 -- and he agrees with Harvard's Martin Feldstein who says what we're seeing is an inventory bounce as excess inventories are depleted and manufacturing starts back up again. Both Krugman and Feldstein attribute positive value to the stimulus package (and when those two agree on something -- which they don't do all the time, they tend to be rather rivals -- it's worth listening to them), which Krugman asserts has prevented the economy from falling into a new Great Depression. And finally, Nouriel Roubini seems to largely agree with Feldstein, Krugman, and DeLong. In short, even though we may be moving into "recovery", it's going to seem an awful lot like recession for a lot of people for a long time.

From a standpoint of economic outlook, I tend more towards Paul Krugman's view than Brad DeLong's. Yes, we're getting a manufacturing bounce as inventories are depleted and companies like GM and Chrysler re-start their long-idled factories. And the stimulus package plus the Fed's monetarist interventions appear to have averted a new Great Depression, perhaps because deficit spending saved the economy from utter collapse. But Krugman holds economic activity is not going to return to previous levels -- and drop unemployment significantly -- at any point in the near term future. The current stimulus package clearly isn't enough to make up for the decline in consumer spending, and runs out of steam at some point next year anyhow. Yet President Obama, scared of being accused of being a "socialist" (bwahahaha! As if the Rethugs weren't going to call him one anyhow), has decidedly ruled out another stimulus package, thus condemning over 30 million formerly-employed Americans to utter impoverishment and homelessness within the next year.

So what's going on here? Clearly demand is low, and is not rising. Furthermore, it's not going to rise, because of the US's poor social safety net. Unemployed people aren't spending because they're trying to survive on unemployment checks and odd jobs, employed people aren't spending because of the horrendous state of what qualifies as "unemployment insurance" today. If people had some assurance that if they became unemployed, their home and car payments would be taken care of, they would not be so reluctant to spend. But unemployment insurance in most states is a joke. For example, unemployment benefits were capped at something like $500 per month in Arizona last time I lived there, which would not have even paid the rent on my apartment.

As a result of the failure of the U.S. unemployment insurance system, if people see a possible period of unemployment coming up because of an economic downturn, they quit spending and instead start saving so that they won’t lose their home and car during that period of unemployment. That puts us into paradox of thrift territory, where individual thrift makes unemployment that much more likely. At this point, even if car and mortgage loans were available on the loose terms available pre-2008, I doubt we would see a serious uptick in demand — people are too worried about their own jobs to spend money on major purchases right now.

What this points out is that a social safety net is not only good for the working Americans who would fall into it during a recession or even a depression. It is also good for business as a whole, since it moderates the economic cycle by keeping consumers spending even if the economy appears to be in a downward cycle, by adding a measure of insurance that would otherwise be achieved by increasing their savings rates (and thus plunging us into paradox of thrift territory). No sane economist should oppose a reasonable social safety net — it is an excellent way to keep demand high even during recessionary periods, and thus an excellent way to prevent a recession from turning into a depression — but, sad to say, sane economists get little face time in today’s government and press :(.

But we don't have such a safety net, and we have a President so terrorized by the thought that Republicans might call him "socialist" that he won't propose one, just as he refuses to propose job creation credits, a jobs program, or any other mechanism for dealing with the misery that this jobless "recovery" is going to bring to far too many Americans (but not to our ruling class of course, who got a TRILLION dollars in freshly-printed Fed bills during the course of this disaster). I guess the end conclusion is that we're fucked, we're fucked up every orifice, and we're going to stay fucked unless every one of these ruling class motherfuckers who don't give a shit about America and Americans (except for millionaire-Americans like themselves) is hanging from the end of a rope strung over the nearest hefty oak tree, at which point we're *still* fucked because rule of gun inevitably leads to rule of thug and we just get fucked a different way. The end game I see is Somalia writ large. I hope I'm not alive to see it... but I fear I shall. Alas.

-- Badtux the Apocalyptic Penguin


  1. So you don't think that the majority of the country will just muddle along at or just below the starvation point for the next generation or so , untill something like a "big" war comes along to 'save' us again ? I kinda see it as a never ending depression in my lifetime . The Monied Class will never give up the strangle hold on the available wealth , and the working class is powerless without some sort of radical change , unlikely in this TVized generation .

  2. I don't see another big war coming along. Nobody in the world today has the desire nor ability to launch such a big war. And I don't see things getting to the point of desperation where Americans would actually revolt and do something drastic, besides, where is the ideological framework to do so? Communism has been discredited, and social democracy such as is practiced in Europe is more a pragmatic set of best practices rather than a belief set that can grab and hold the minds of the masses.

    If you want a vision of the future, imagine a boot stamping on a human face - forever. (With apologies to George Orwell). And we are the people who are going to be under the boot. Forever.

    - Badtux the Apocalyptic Penguin

  3. "— people are too worried about their own jobs to spend money on major purchases right now"

    Own a small retail store in the sporting goods industry, and it's not just the major purchases that are not being made. Most people are cutting off all non-essential purchases. It's not getting better here in retail land and I don't expect it to for at least 6-12 months. I expect to loose my biz over this. Oh well could be worse, I could have a job with benefits and loose that, get unemployment and have that run out, then I'd really be screwed. Oh wait.....

  4. I wish you were right here, but their plans are far more extensive than they have let on: witness the huge buildup all over the world of American military bases.

    And the boot on the face is among the first ones - thus our man Obama's necessary calming presence throughout.


    I don't see another big war coming along. Nobody in the world today has the desire nor ability to launch such a big war.

  5. The U.S. can't even win two small wars, we've gone downhill so much. I mean, we're a nation that can't even make our own *underwear* anymore -- if the Chinese cut us off, we'd all be going commando!

    Yes, the U.S. military establishment is overseas everywhere. It is also seriously overstretched and will bankrupt the country if we don't pull it back. As for potential competitors such as Russia and China, they are doing the minimum they need to make sure we don't attack them, and not one bit more -- they have bigger fish to fry. They're not even funding insurgencies against our proxies anymore, they just don't care about military adventures anymore.

    I repeat: I see no major war in our future, not for at least 20 years anyhow which is how long it'll take China and Russia to finish modernizing and start a serious military buildup (right now they are equipped with antique Cold War era gear that is good enough to dissuade anybody from attacking them, but not much more).

  6. Afterthought :
    I and others use the term "war" loosley . Remember there is already a "war" on drugs , a war on hunger , in effect a war on peace , etc. The "new" war could be anything that the Military/Industrial complex deems worth the effort , ahem : Profit .
    Traditionally some form of expansion had been the way to end a recession/depression , and get the unwashed masses back to something that consumes their time and energy while bringing more profit to the corperation . I firmly believe that after an approiate time the military/ Industrial complex will come up with something for the remainder of the people . And of course the unwashed masses will then be so gratefull that they will not again seek monetary equality for maybe another hunderd years .
    a down and out w3ski

  7. If you think Krugman is pessimistic, then for god's sake don't read James Kunstler. In his view, this "recession" is nothing less than the early stages of a total collapse of the American "way of life" on every conceivable. I've had to ration my reading of his blog, because every time I check out a post, I have to stifle the urge to start filling my basement with canned food and shothun shells.

  8. In fact, I'm so upset I can't spell this morning... :)

    BTW, the word verification I just had to type in was "scaryobi." No idea what it means, but it sure sounds menacing.

  9. BT,

    I love you, but you are just tooooooo logical for this crowd.

    It's true that they can't manage even one war - let alone two or more - but don't think that will stop them from trying.

    And they will find other targets (in addition to the War on Drugs, Terr'ists, Dental Insurance, etc.).

    Your economic analysis is great. Thanks. Nouriel Roubini is saying 7 years at least, and then, it may only be a blip as we head back down . . . hard.

    Krugman holds economic activity is not going to return to previous levels -- and drop unemployment significantly -- at any point in the near term future.

    And I quote from Jim Kunstler's essays all the time because if snyone makes sense these strange days he does. And he says "hunker down" for the big one.

    P.S. My word verification is "hadom." Make of that what you will.


  10. In the last few weeks, extended unemployment benefits have started to run out for people who lost their jobs a year ago, and now will have no income at all.

    Also read somewhere yesterday that U6 (real unemployment) is about 16.5%. Avg Work week hours are down to something in the low 30's. Commercial real estate is just beginning to collapse. International trade is drying up.

    Bottom is still a long way down.

    There is a current productivity blip, because 1) the still employed are doing more with less, and 2) the inventory bounce. They are not sustainable.

    The pendulum swings both ways. There will be good times again.

    We just don't know when.

    One way to gauge when a recession/depression is over is when GDP gets back to the long term trend line. (ln GDP over long periods is remarkably linear.) For the GD, this was around 1941. It could have been sooner, but FDR made the horrible mistake of balancing the budget in 1937.

    Don't know Kunstler. Will have to check him out.

    JzB the pessimistic trombonist

  11. Here are some looks at GDP growth. Draw your own conclusions.

    1900 to 1960

    1950 on. 30 Yrs of suckiness.

    Ln GDP 1920 -1960. Best fit line through 1900 - 2000 data

    Ln GDP Grt Dprsn Yrs.

    JzB the graphical trombonist

  12. The events we are witnessing in the Main Street economy have been off the expected charts of almost all of our professional economists. Their education and training causes them to believe in reversion to the mean. Hence, they expect the economy will stop going down and level off because that was has happened every time in the post World War II era.

    My contention is we have returned to a global debt-induced deflationary depression akin to the one in 1930's. Therefore the economy will not be returning to the "expected mean."

    None of the global economic data that has been released to date has led me alter my expectations. For example, GDP in Britain in the second quarter fell a much worse than expected -.8% from the first quarter. What many of the economists are missing is people cannot spend money if they cannot get their hands on it.

  13. What is so frustrating is that we *know* what needs to be done. We need a tax code that rewards insourcing rather than outsourcing to bring jobs back to America, we need job creation credits, we need fiscal stimulus, we need an improved safety net so employed people don't shut down spending when unemployment starts going up, we need a devaluation of the dollar via monetizing the deficit in order to encourage jobs to come to America rather than go overseas, we need the zombie banks to be taken over and recapitalized from top to bottom with however much capital is needed to get them lending again, and so on and so forth. Yet our political system is doing virtually none of that, and seems incapable of doing none of that. The GOP is being obstructionists, and the Democrats are too scared of being called "socialist" if they do what needs doing (as if the GOP wasn't going to call them "socialists" anyhow, LOL!).

    I feel much like Soviet economists must have felt as the Gorbachev years were issued in -- that the system is collapsing, and the leadership is so blinded by ideological blinkers that doing the pragmatic things needed to avoid collapse is as inconceivable to them as life on Jupiter. I don't know what the end game is going to be, but if it doesn't involve a massive collapse in living standards and millions dead from hunger, lack of healthcare, or freezing to death in the winter as happened when the Soviet Union collapsed, I will be very surprised...

    -- Badtux the Apocalyptic Penguin


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