-- Posted by Neil H. Buchanan
Let me begin with a sincere (but resigned), "I hope I'm wrong." Economic forecasting is a dangerous business, especially for someone who is a natural pessimist. To adapt an old joke, I have successfully predicted nine out of the last two recessions. Even so, all of the pieces now seem to be in place for what we have feared all along: a policy-induced relapse into a second bout of recession, without ever having emerged from the Great Recession. In this post, I will explain why this sorry outcome now seems inevitable, what could be done to stop it, and what should be done after we fail to stop it.
Although there has been some encouraging news about the economy over the last few months (e.g., auto companies skipping their summer shutdowns), there is no question that the situation is still quite bad. The unemployment rate still hovers just below 10%, with the real rate of involuntary idleness well above that. Even so, given that unemployment is a lagging indicator (and taking account of oddities like the measured unemployment rate rising briefly in the face of optimistic economic news, with suddenly-encouraged workers flooding back into the job market), it might have been possible to argue that the economy will continue to recover and ultimately bring jobs back with it.
Maybe. Even the CBO's forecasts, however, predict that unemployment will stay above 8% through the end of 2012. Eight percent! Even in the 1980's, before we experienced years of unemployment in the 4-5% range, Reagan's apologists would only dare suggest that 6-6.5% was the "natural" rate of unemployment. This is, in other words, already a situation in which we have been told to expect years of above-normal joblessness, leading to economic and human damage not seen since the 1930's. Moreover, much of the rest of the economy seems already to be moving in the wrong direction. Earlier this week, for example, we learned that the economically-essential housing sector has never been weaker, with the lowest rate of new home sales on record.
In the face of that (at best) mixed picture, what is happening to economic policy? The Fed has announced that it is standing pat on monetary policy. Chairman Bernanke has admitted that he thinks that the economy is weakening and should be given some serious monetary stimulus. but he and his colleagues are afraid to "spook the markets." (Paul Krugman's columns over the past few months have included some especially trenchant observations regarding the bizarre logic of catering to hypothetical financial market jitters.) Fiscal policy is a disaster. Last year's much-too-timid stimulus will soon run out, with "centrist" Democrats (and, of course, all Republicans) refusing to do anything serious now.
Yesterday, all of the Senate's Republicans (plus Ben Nelson of Nebraska) blocked a bill extending unemployment benefits to 1.2 million long-term unemployed citizens, along with aid to states and cities that is necessary to forestall laying off hundreds of thousands of teachers, police officers, and other essential government workers. Even if (as is likely) some kind of compromise is reached on the extension of unemployment benefits, the amounts have already been reduced. Moreover, with the Fall elections a bit more than four months away, the opposition party has clearly decided that it is better politically to oppose all spending proposals going forward.
As insane as all of that is, the politicians in other countries seem to be even crazier. The new government in the UK has announced across-the-board 25% cuts in government spending. The German government takes pride in refusing to respond to recession with stimulative policies, in a sort of Protestant-ethic-meets-masochism celebration of self-imposed damage. Being part of the euro zone has forced many countries to adopt drastic measures to cut spending and raise taxes, even in the face of unemployment rates reaching into the 20% range.
In short, there is no prospect of help from consumers (who are scared of losing their jobs, or who have lost them already and will soon have reduced or nonexistent income support), business investment (because no sensible business would spend money to expand in this economy), government spending ("cut the deficit!"), or exports (notwithstanding China's mild moves toward adjusting its currency).
What could we be doing? President Obama surprised me recently by trying to convince other world leaders to stop enacting self-destructive policies, but his timidity and tardiness on the issue is now coming back to haunt him (and the rest of us). Really, there is no mystery about what we could or should be doing. Reverse course on fiscal and monetary policy. Make job creation the central goal of economic policy. Educate the public about the important of increasing deficits during bad economic times. Save states and cities from fiscal implosion.
We will not, of course, do any of that -- at least, not until things turn very ugly once again (and maybe not even then). If the ensuing crash does not lead to, in the sinister words of a current U.S. Senate candidate, "second amendment-type solutions" -- in which case we will have much bigger things to worry about than spooking financial markets -- then we will have to dig out of an even bigger hole. That will require even more deficit spending, of course.
I wish I could end on a joke. I cannot. Again, I really hope that I am wrong.