The Living Room Times

Are we experiencing a repeat of the 2008 financial crisis? The New York Times explores the question. It’s a good overview; I encourage you to read the whole thing. I am inclined to side with the pessimists, but I hope I’m wrong.

More broadly, I fear we’ll look back at 2010 as a “dead cat bounce” rather than a genuine (if weak) recovery between recessions, and likewise we’ll view 2011 through whenever not as a “double dip,” but as part two of an ongoing Great Recession/Depression that started in 2007 and has not yet truly ended, and won’t for a while. The structural flaws in the U.S. and global economies that were thrown into sharp relief in 2008 and 2009, then masked by frantic government efforts to prevent a depression, have not actually been solved, even if analysts and investors spent much of 2010 and early 2011 ignoring them and trying to forget about them. The housing market is still in deep doo-doo; global trade imbalances are still massive; we still don’t have a plan for replacing excessive, debt-fueled consumer spending as the “engine of the economy”; and we’ve simply shifted a lot of debt from companies to governments, so instead of too-big-to-fail banks threatening the stability of the economy, we have too-big-to-fail countries doing so, with no one left to backstop them or bail them out (and no political will for additional bailouts of any kind anyway).

Frankly, I never really understood the optimism of 2010 — it always seemed like the argument for pessimism was detailed and nuanced and well-thought-out, while the argument for optimism was basically “meh, we’ll muddle through, somehow or other.” But I partially supressed my doubts because I recognize my own lack of knowledge in this area, and have little choice but to trust the experts. Yet those experts made a lot of valid-seeming points back in 2008-09 about the depth of the problems broadly underlying the crash, and I’ve never really understood the logic of expecting a lasting recovery, even a weak one, before we make more progress toward solving those problems. To make a college football analogy (P.S. THREE WEEKS TILL KICKOFF!!! WHEE!!!), the “recovery” of 2010 felt like a situation where a team is widely and reasonably expected to struggle, because it lacks a proven QB or a solid defense, but then it pulls a somewhat flukey upset in its first game, and suddenly it’s deemed a national title contender… even though it still lacks a proven QB or a solid defense. The pessimists still have the better of the argument, and will probably be proven right in the end.

All the hand-wringing about corporations hoarding cash, holding onto their record profits instead of investing or hiring, misses the possibility that these companies are just more clear-eyed than the rest of us, and recognize what I increasingly suspect is true: that we’re in for a very rough decade, and building up a rainy-day fund (or a rainy-decade fund) before the s**t hits the fan — again — might not be such a bad idea. Again, I hope I’m wrong.

As if recent events haven’t created enough cause for #PANIC already, I’ve recently seen a couple of charts of economic data that really put things into (scary) perspective.

One is the “real” monthly employment picture since 2009, subtracting out the 150,000 jobs that must be added per month just to keep up with population growth:

Yikes.

The other requires a bit more explanation. Nate Silver explains:

The rate of growth [in the U.S. economy] has in fact been quite steady over the long run: since 1877, the annual rate of G.D.P. growth has averaged about 3.5 percent after inflation. … I’ve plotted how far ahead or below of the long-term trend that the economy is at any given time. …

Here, you can really see the effects of the Great Depression. In early 1933, G.D.P. was about 40 percent below what it “should” have been based on long-term growth rates. But the economy recovered at a rapid clip over the course of the next decade. In fact, G.D.P. temporarily overshot, exceeding the long-term trend during World War II as America employed all the industry and labor that it could get its hands on to help with the war effort.

By this measure, most post-World War II recessions are barely detectable. They look more like reversions to the mean after years of above-average growth.

The Great Recession, however, is highly visible. G.D.P. had already been a couple of percentage points below the long-term trend before it began, as the recovery from the 2001-2 recession was not particularly robust. But things got much worse in a hurry.

Looked at this way, in fact, not only is the worst not yet over — the situation is still deteriorating. Every quarter that the economy grows at a rate below 3.5 percent, it loses ground relative to the long-term trend. Although the economy grew at a 3.8 annual percent rate from fall 2009 through summer 2010, over the past year growth has averaged just 1.6 percent, putting us farther behind.

Right now, gross domestic product is about $13.3 trillion dollars, adjusted for inflation — when it “should” be $15.7 trillion based on the long-term trend. That puts us more than 15 percent below what we might think of as full output, by far the worst number since the Great Depression.

If the economy were to enter another recession and shrink by 1 percent over the course of the next year, we would wind up 19 percent behind the long-term trend. But even if it were to grow at 2 percent, we would still be 17 percent behind.

What we need, instead, is above-average growth — in fact, quite a lot of it. Even if the economy were to begin growing at a 5 percent annual rate, it would take until 2018 for it to catch up to the long-term trend.

Anyone think that’s gonna happen?

Realistically, we’re looking at that ugly red dip extending well into the 2020s. At some point, doesn’t such an extended period of economic difficulty start to approach a functional definition of “depression”? Or at least a “lost decade” or two?