Regular readers and my students in class can probably detect a distinct pessimism in my comments on the U.S. economic prospects. They are right. I am pessimistic. Not necessarily because things have to be gloomy (they don’t – there are alternative policies), but because I just don’t see the politics allowing such policies. Instead, we are going back to the future. Or, rather our future is looking a lot like the recent past, only worse.
In the decade (really 2-3 decades) prior to the Great Recession beginning in 2007 and the Wall Street implosion of 2008, the U.S. was moving along toward an oligarchy. Increasing inequality of income and increasing political power and economic power for a narrow elite of truly over-the-top rich led by FIRE, the Financial-Insurance-Real Estate sector (Wall Street). Of course this trend was aided and abetted by too many in the economics profession who not only forgot the lessons of the past, but also reanimated economic dead ideas (see Zombie Economics). I thought (hoped) that with the crash of 2008 and the severity of the Great Recession, that change might arrive. Well, we didn’t get change and now there’s not much hope, either.
The New York Times has an article about why, despite being technically “over”, the Great Recession still stings. Here are a few excerpts that nail my concerns fairly well (red emphasis is mine, as are the comments in brackets and italic):
…an enormous oversupply of houses and office buildings and crippling debt. The decision last week by leading mortgage lenders to freeze foreclosures, and calls for a national moratorium, could cast a long shadow of uncertainty over banks and the housing market. [this could be worse than the Lehman/AIG failure] Put simply, the national economy has fallen so far that it could take years to climb back.
The math yields somber conclusions, with implications not just for this autumn’s elections but also — barring a policy surprise or economic upturn — for 2012 as well:
¶At the current rate of job creation, the nation would need nine more years to recapture the jobs lost during the recession. And that doesn’t even account for five million or six million jobs needed in that time to keep pace with an expanding population. [we are looking at a lost generation of potential workers] Even top Obama officials concede the unemployment rate could climb higher still.
¶Median house prices have dropped 20 percent since 2005. Given an inflation rate of about 2 percent — a common forecast — it would take 13 years for housing prices to climb back to their peak, [house prices are more likely to decline further first] according to Allen L. Sinai, chief global economist at the consulting firm Decision Economics.
¶Commercial vacancies are soaring, and it could take a decade to absorb the excess in many of the largest cities. The vacancy rate, as of the end of June, stands at 21.4 percent in Phoenix, 19.7 percent in Las Vegas, 18.3 in Dallas/Fort Worth and 17.3 percent in Atlanta, in each case higher than last year, according to the data firm CoStar Group.
Demand is inert. Consumer confidence has tumbled as many are afraid or unable to spend. Families are still paying off — or walking away from — debt. Mark Zandi, chief economist of Moody’s Analytics, estimates it will be the end of 2011 before the amount of income that households pay in interest recedes to levels seen before the run-up. Credit card delinquencies are rising.
“No wonder Americans are pessimistic and unhappy,” said Mr. Sinai. “The only way we are going to get in gear is to face up to the reality that we are entering a period of austerity.”
This dreary accounting should not suggest a nation without strengths. Unemployment rates have come down from their peaks in swaths of the United States, from Vermont to Minnesota to Wisconsin. Port traffic has increased, and employers have created an average of 68,111 jobs a month this year.
After plummeting in 2009, the stock market has spiraled up, buoying retirement accounts and perhaps the spirits of middle-class Americans. As a measure of economic health, though, that gain is overstated. Robert Reich, the former labor secretary, notes that the most profitable companies in the domestic stock indexes generate about 40 percent of their revenue from abroad.
Few doubt the American economy remains capable of electrifying growth, but few expect that any time soon. “We still have a lot of strengths, from a culture of entrepreneurship and venture capitalism, to flexible labor markets and attracting immigrants,” said Barry Eichengreen, an economist at the University of California, Berkeley. “But we’re going to be living with the overhang of our financial and debt problems for a long, long time to come.”
New shocks could push the nation into another recession or deflation. “We are in a situation where our vulnerability to any new problem is great,” said Carmen M. Reinhart, a professor of economics at the University of Maryland.
It’s that “vulnerability to any new problem” that bothers me most. We have a growing foreclosure fraud crisis that could become a big bank failure problem. We have a Eurozone so committed to austerity and protecting German banks that it is willing to sacrifice GDP and millions of jobs in the process. The banks, despite their record profits of the last 15 months aren’t really all that healthy. We just allowed them to extend and pretend that many of the loans on their books are good, when they most likely won’t be.
I don’t need to watch the annual October crop of fright movies to get scared. I just read the economic news. What I see happening is that we are re-building the debt-based, banks-are-king system we had before the crash, but only bigger. Instead of recovery, we have return.