As has always happened in past recessions, there are now a chorus of doomsters predicting severe economic and social disruption. They go well beyond the valid observation that this recession will be deep and the recovery is likely to be slow and painful [see below]. Interestingly enough, the doomsters do not agree on exactly where the greatest wreckage will be, or what will cause it. In other words, they not only disagree with those who take a more moderate position, they also disagree with each other. Indeed, their scenarios are often mutually exclusive.
Often they claim, or are given credibility, based on the fact that they predicted the recession, or the financial or housing calamity of the US. That alone is unpersuasive. Economic disasters are being predicted all the time! And so when distress does on occasion occur, this is not an automatic reason to think they are “right”. But everyone does need to consider their arguments. [Of course, others did predict recession, but do not foresee disaster.]
Some of the doomsters can be easily dismissed. They are simply and obviously using this occasion of economic damage and uncertainty to advance whatever political or philosophical remedy they have long advocated. This looks to them to be a good time to take advantage of social disadvantage and the spectre of disaster to drive their agenda forward. So government intervention is about to drive the economy into a long great darkness. Or the failure of capitalism demands a massive degree of intervention. Or the ecology of the planet is about to be irreversibly destroyed. Or central bankers are running amok and gold must be returned to its rightful place. The list goes on. However, it is instructive to note that their actual arguments have not changed; it is rather that today’s distress proves the case. That the recession could “prove” both the need for more and less government intervention speaks to the limited analytic content of many of these arguments.
Others can be disregarded because they are choosing to play games with the language. Dire warnings do attract attention, after all; of course, such a consderation would never sully these weighty and scholarly arguments. The word Depression is now being mangled out of all proportion. While it is true that there is no established definition, some authors have taken to saying that if you define a Deptession as . . . . [fill in the blanks], this already is one. So if I define prosperity as a decline of output, then prosperity, we have. Or there is the approach that says everything is so bad, we need a new word since recession is inadequate.
Let us be clear about the actual Depression of the 1930s. I have been privileged to know some of those who lived through this period. To compare their distress to today’s challenges, even as they worsen, is historically inept and fundamentally disrespectful of those who have preceded us. First, in the Depression, output fell at least 25 percent. And employment was down about 30 percent. [The statistics then are less reliable than today.] We are now down merely several percentage points. And there was no social safety net. Government was relatively inactive, telling individuals to cope on their own. The threat of world war hung in the air. There is no similarity to today, even as the recession drags on.
Of course, there is the small problem, usually glossed over by the doomsters, that they often confuse what is, with what they expect. For example, they should be saying this recession will be more severe than others. They cannot actually say it is, since by any objective standard at this time, that it not the case. It is a sharp downturn to be sure, but it has not yet passed the boundaries of past recessions. So make a prediction, or be descriptive, but be clear at the least.
Then there are the cyclists. Disaster is about to engulf us because we are at the “down” part of a historically immutable cycle that cannot be deflected. This is the triggering year of the 161-year Doofus cycle, named after Gustave Doofus, a 13th century hermit. Moreover, it coincides with the postwar 17.5 year techno-babble cycle that is presently peaking at the stage of mass irrationality. Indeed! These cycles, and others, fail the plausibility test solely on the basis of the fact that the structure of the economy and of society is changing so rapidly. The proportion of employment by occupation and industry continues to change sharply. [Most of the jobs in the US over the past decade arise from two industries – healthcare and education.] Educational and social norms shift massively. The growth of women in the paid labour force is a radical change, as is the fact the employment losses are presently a largely male problem. Cycles cannot be taken seriously since we live in a world of accelerating and radical change. Imagine that.
However, some of the doomsday warning are worth thinking about. Food riots and military interventions, or even wars, it is argued will, or may, accompany this recession. First, the poor and vulnerable are always hurt most in any economic contraction in any part of the world. But this time, we have a global recession that follows a widening of economic activity in much of the developing world. In the past, distress in the developed world did not have especially great consequence for the poorer countires because they were often not part of the world’s commerce. But more of them are now, more of them are affected by declining trade volumes, for example. They have joined commercial systems that require capital expenditures and costly inputs like fertilizer. A disruption in global trade can clearly have severe and damaging effects in some parts of the developing world. Food shortages are not an implausible possibility. Yes, it will be affected by how long the global recession is; but the danger is real. The developed world in relative terms is less vulnerable.
There is also a realistic danger that inflation in the future could be serious problem. While the Federal Reserve can be expected to resist it strongly, it might become persistent requiring strong counter-measures. But if this does occur, it means the real economy will be growing, even if not as quickly as we might want. [The famed stagflation of the 1970s, now much commented on, did have high inflation with reasonable growth. The economy of the 1970s was not a disaster.] Here history is our guide. In the 1970s, we and the financial markets coped with inflation over 10 percent, the world did not end, and standard textbook policy brought it back under control. Yes, the process was painful and yes, the standard of living rose.
Another argument involves the fear that the financial system might yet meltdown, with a massive failure of confidence in the system and a collapse of lending. Yes, there are other types of loans going sour, including commercial and credit card debt. But that is precisely why the world’s central bankers are taking such aggressive action. While economic confidence is truly fragile, and if it fails systemically, can take long to repair, the central bankers can simply re-build bank balance sheets to whatever degree necessary. The system is guarding confidence with every available tool. They should be adequate. [But what about inflation caused by the central bankers? See above paragraph, or we will get stuck in a closed loop.]
It has also been noted that US consumer spending may never recover to its former heights. But that produces a needed adjustment and slow growth, not doom.
Some dangers lurk in the wings. All are being addressed. The real challenge is not a catastrophic and dramatic meltdown. Rather, it will be a long term period of adjustment to a challenging new environment. This is a subject for a further post.