This Recession Is Different

[FCP Bob 1,312]

There's no question that this recession is proving to be different than other ones during my lifetime for the US and other places. Employment especially isn't coming back like it has in the past.These two articles might help explain why. The first link is from a Nobel winning Economist and is a little dry and the second is from The Economist Magazine and discusses the first article in an easier to understand way.Basically the reality is that things are different this time and people had better factor that into their expectations and policy makers in their actions.http://www.project-syndicate.org/commentary/spence25/English

Adapt or DieMichael SpenceBut, while that might play well politically, the sensible conclusion is that this is not just a cyclical recovery, but rather the beginning of a delayed process of structural adaptation to a rapidly shifting global economy, to emerging economies’ growth and shifting comparative advantage, and to powerful technological forces. While these changes are difficult to think about with any degree of precision, that doesn’t make them unimportant.Of course, no one would deny that there are cyclical elements in the downturn of 2008. But they were accompanied by structural imbalances that had been building over at least 15 years, and that are at the heart of the US economy’s inability to bounce back in a normal cyclical way.Skeptics might well question why, if these alleged structural imbalances are now impeding GDP and employment growth, they did not appear before the crisis. The answer is that they did, but not in growth and employment figures. Other signals were missed, ignored, or deemed unimportant.A short list of these signals would include excess consumption (now gone) and deficient savings, based on an asset bubble and high debt; a persistent and growing current-account deficit (signaling that domestic consumption and investment exceeded income and output); and negligible net employment growth (over two decades) in the economy’s tradable sector. With domestic aggregate demand in short supply, the only functioning growth engine, external trade in goods and services, is not an employment engine.Missing all of these signals produced the pre-crisis illusion of sustainable growth and employment, and helps explain why the crisis, rather than its causes, is viewed as the culprit. The crisis, however, merely exposed the underlying imbalances and unwound some of them.

http://www.economist.com/blogs/democracyin...icathesclerotic

Economic recovery America the sclerotic Jul 15th 2011, 13:05 by W.W. | IOWA CITY THIS column by Michael Spence, a Nobel-laureate professor of economics at NYU, struck me as an exceptionally sober way of saying, "Good god! We're screwed!"Mr Spence emphasises the critical importance of institutional adaptability for emerging economies, most definitely including the adaptability of government. The development of an economy's private sector inevitably brings structural change in its wake. To facilitate and not stall growth, government's vital supporting policies and institutions must adapt to these shifts in the structure of the economy. "The policy framework that has proven to serve the major emerging economies best," Mr Spence reports, "is one that focuses not only on macro and monetary stability, but also on adaptation..."Mr Spence observes that the governments of large, advanced economies have not made adaptation a priority. In particular, structural shifts in the global economy have been overlooked or ignored by American policymakers, leaving them more or less oblivious to role of these developments in our lingering economic malaise......I would suggest that many of these signals were ignored, or explained away, because if they turned out to be symptoms of a real disease it wasn't very clear what could be done about it. I think Mr Spence is right: pretty nearly everyone who matters has been underestimating the importance of the way structural transformation in the global economy has created structural dislocation in America's domestic economy. However, he leaves us with maddeningly general advice. According to Mr Spence "we require a shift to a policy framework that accurately reflects the non-cyclical nature of the longer-term structural adaptations that will be required to restore growth and employment." Well, yes. But I wouldn't mind hearing more about which structural adaptations "will be required". In a recent post, Kindred Winecoff nicely articulates how the problem of structural adaptation relates to domestic distributive politics:“At the same time the US worked to make the global economy more open and competitive, it did not enact policies that made itself more open and competitive. For a long time, our dominant global position meant that we could collect rents from the rest of the world, which we then distributed according to political demand. But those rents are now being competed away while the political demands have not. It's a fixable problem, I think, but not until we recognize what the problem is. Right now it doesn't appear that either major political party does."....."Everything you have built your life around is about to change" is not so easy to hear when you're fat, complacent, monumentally entitled, and proud of it. Americans will for some time continue to resist the fact that we are poorer than we had thought. But it will soon sink in that American distributive politics is now less about who gets how much of the national bounty, and more about who loses how much—about who suffers how much from which broken promises.

[hblask 1]

I don't have time to read the whole article right now, but the summary you provided here sound remarkably similar to the premise of the book I discussed in the Random News thread (The Declaration of Independents). Basically, govt is a lagging indicator that blocks progress. The statement:

In particular, structural shifts in the global economy have been overlooked or ignored by American policymakers, leaving them more or less oblivious to role of these developments in our lingering economic malaise.

is what much of the book about, and it compares adaptation in the private sector to adaptation in the public sector, in shocking detail. GM failed to adapt, the govt propped it up, and it continues to crank out crap nobody wants. Ford saw what was coming, adapted (and specifically avoided govt intervention), and is relevant and interesting. The list goes up and down the economy.It's no coincidence that at after 10 years of the fastest expansion of govt in history, at a time when govt is taking up more of our resources than ever, that our ability to adapt to changes is particularly weak. (Hmmm, what was the previous record for fastest expansion? Oh yeah, the 1930s...)I'll read the whole article later when I have more time.....

[hblask 1]

OK, I read the articles, and basically have the same answer: the private sector generally adapts quickly when necessary and allowed to adapt, government takes decades. The response to the economic downturn was as outdated as it was ridiculous: borrow money and pass it out to the politically connected. When your only tool is a hammer, everything looks like a nail. Government doesn't understand that having an inefficient car company making boring overpriced cars is bad for the economy. Government doesn't understand that propping up the housing bubble they created prevents recovery. Government doesn't understand that propping up poorly managed banks and then entrenching their existence into law is bad for the economy.But the time is up. We're out of money and information flows too quickly for congress to pretend that their impotent flailing is working anymore. The change is going to happen, if not now, soon. Reality will win. My kids will not have to live under the Bush-Obama Doctrine of central planning and wise bureaucrats.

[FCP Bob 1,312]

The point I'm hoping to make isn't to reinforce anybodies predisposed ideology. I think no matter what article I post Henry will say that it supports lowering taxes and slashing government spending even if those might be part of the solution, well the cutting spending part of it anyway. Taxes need to be reformed but to pay the bills government revenues can't be lessened.My main point is that there is no easy way out and that there is going to be prolonged pain because of a change in US competitiveness plus the fact that the US was a bubble economy for a long period of time and Americans lived beyond their collective means and now those bills are coming due.This is a really long well balanced article that I think Henry will support for the most part but also says that the Tea Party slash and burn types are idiots and that the changes have to be gradual or else the shock will be a disaster.http://www.businessinsider.com/john-mauldi...-to-come-2011-7

Somehow we must then find about $1.2 trillion in cuts or taxes to get the deficit down to below the growth rate of nominal GDP. And another few hundred billion if we actually want to balance the budget. And that, gentle reader, is no small hill to climb. Let’s say we cut spending and/or raise taxes by $200 billion a year for 6 years. That is more than 1% of GDP each and every year! Go back to the first chart. That means that potential GDP growth will be reduced by over 1% a year! Every year. We would need to rely upon private GDP growth, which Rob’s chart shows has been flat for almost 15 years! The growth of the last 11 years has been a government-financed illusion. There are no good choices. The time for good choices was years ago. I was and still am a fan of the Bush tax cuts. They were not the problem; a few years after the cuts, tax revenues were up considerably. The problem was a profligate Republican Congress which allowed spending to rise even more. And you can’t just blame it on the wars. That contributed, but it was not even close to the lion’s share. If we had held the line on spending, we would have paid off the entire debt and been in good shape when the crisis hit in 2008. The following graph is from today’s Wall Street Journal editorial page. They use it to show how much Democrats allowed the budget in terms of GDP to rise and spin out of control. I would point out that in the 8 previous years, under Bush/Hastert/Delay et al., there was also a rise in the growth of government, as the chart shows. While it was not as large, it was clearly there. The drop in the previous period was the Bill Clinton/Newt Gingrich years. How many people are nostalgic for that pairing? Say what you will about them, their collaboration was a good era for growth in the private sector – the last we have had.And that is the crux of the problem. Either we willingly cut the deficit by a far more significant amount than anyone is discussing, or we hit the wall at some point and become Greece. $4 trillion? No, let’s talk about 10 or 12. And that, John, is the problem. We have painted ourselves into the corner of no good choices. We are left with difficult and disastrous choices. We have condemned ourselves to a slow-growth, Muddle Through Economy for another 5-6 years, at best, as we are forced to right-size government. If we raise taxes to partially solve the problem, we have to recognize that higher taxes will result in slower private growth. That’s just the rules. There are no easy buttons to push. So, we must cut spending and the deficit, and yes, it is going to slow the economy for a period of time. The economic literature suggests that a spending cut will have 4-5 quarters of effect and then be neutral going forward. But we are going to have to make those cuts year after year after year. I know the Tea Party types want to do it all at once, but that would guarantee a decade-long depression. You just really don’t want to go there. It MUST be a slower, controlled “glide-path” approach. I wrote about this back in 2009, along with all the other options. Nothing has changed: http://www.johnmauldin.com/frontlinethough...tion-mwo110609/.Read more: http://www.businessinsider.com/john-mauldi...7#ixzz1SNnZrnL3

[Balloon guy 158]

The problem with a long term approach is that right in the middle of action you change the entire team and hope they agree with your plan.Of course they will not.Our size will also prevent a focused change. It's part of the reason I've never been a fan of universal health care. We are not a little bit bigger than the countries that do it, we are 10 times bigger.The larger the behemoth, the harder to steer.That's why we need to break up into 3 countries: Liberalland made up of the entire east coast, Texas, and New California which is from Texas west. All democrats will be allowed to move for one year to the east coast, after that they must shut the heck up and get a job.The rest of the patriotic and honest Americans will have to choose between Texas and New California.In 10 years we will invade Liberalland and conquer it in about a week since they will have sold all their weapons to pay for Starbucks in the local schools. We will then put Arnold in charge as punishment for their stupidity and turn their entire country into a reality TV show for us to laugh at.

[FCP Bob 1,312]

The problem with a long term approach is that right in the middle of action you change the entire team and hope they agree with your plan.Of course they will not.

You're at the top of a cliff and need to get to the bottom. The reason you need to get to the bottom is that a tribe of savages are chasing you and they're armed with spears. Their Heathen Gods have told them that if they go down the cliff that they'll end up in Hell and burn for eternity so there's no risk of them chasing after you.You can slowly climb down using vines and out crops of rocks along the cliff but if you do this there's a risk of the savages hitting you with their thrown spears. Or you can jump off the cliff and you'll be safe from the savages but there's about an 80% chance that you'll die from the fall and even if you live you'll be badly crippled.

[Balloon guy 158]

You're at the top of a cliff and need to get to the bottom. The reason you need to get to the bottom is that a tribe of savages are chasing you and they're armed with spears. Their Heathen Gods have told them that if they go down the cliff that they'll end up in Hell and burn for eternity so there's no risk of them chasing after you.You can slowly climb down using vines and out crops of rocks along the cliff but if you do this there's a risk of the savages hitting you with their thrown spears. Or you can jump off the cliff and you'll be safe from the savages but there's about an 80% chance that you'll die from the fall and even if you live you'll be badly crippled.

Can I phone a friend?Cause I will phone Snake Plissken!

[brvheart 1,752]

They only have spears. Just shoot them with your full-auto AR.

[Balloon guy 158]

They only have spears. Just shoot them with your full-auto AR.

You mean superior fire power is still relevant in this day and age?Hmmm

[hblask 1]

http://www.businessinsider.com/john-mauldi...-to-come-2011-7

First, a ntipick. From the article:

In the US, the real question we must ask ourselves as a nation is, “How much health care do we want and how do we want to pay for it?

My response: you got a mouse in your pocket? Because *you* may have a different answer than *me*, and I think we should both have the right to our own answer.[/nitpick]But I disagree with the premise of the article: that reducing wasteful deficit spending has short term negative effects. It just doesn't, anymore than increasing wasteful deficit spending helped the economy over the last several years.If the government hires people to dig holes and fill them back in, firing them is never, ever bad for the economy, even if there are really a lot of people digging holes and filling them back in. To believe that you'd have to believe that East Germany was worse off once the wall fell -- they weren't. Their economy started firing instantly, and they've never really looked back.

[SilentSnow 1]

Uh oh. Looks like the insanity is spreading. Now even the Wall Street Journal agrees with me that this recession is fundamentally different than the ones we've had before. http://online.wsj.com/article/SB1000142405...0582615858.html

[akoff 0]

Uh oh. Looks like the insanity is spreading. Now even the Wall Street Journal agrees with me that this recession is fundamentally different than the ones we've had before. http://online.wsj.com/article/SB1000142405...0582615858.html

i have seen and deal with this everyday, i only scanned it but it seems prety correct. why hire? i can get subs all over that don't require commitments, they are not regulated, i don't have to provide them health care and for all the talk of people that need jobs i see damn few applications that are impressive. That being said i still expanded my work force in 2010 by 20 percent.business is risk reward - the margins are very thin right now - the banks make you sign for blood to get anything and the government is unstable at best...not a real good climate for employment.

[hblask 1]

Stating that the economic conditions at any given time are different than they were in the past is not really a shocking or controversial statement.The article does discuss an interesting trend, the disposable worker. But they missed the other side of that: the disposable job. We have reached a level of wealth in this country that being employed full time is making less and less sense. If you can live comfortably and hang out with friends and get lots of time off with a part-time or seasonal job, why sign on for a 40 year stint at SoulSucking Inc and miss all those years of your life? Poor societies don't have the luxury of taking time off. Now, we get the world at our fingertips for a fraction of the labor it used to take just to put food on the table. I could foresee a time when six months on six months off is as common as people working year round. Or at least people going to 30 hour weeks. The interesting question is what that does to the labor statistics the government keeps. Do the old measures become obsolete? How do we measure "net percentage of how much we want to be employed"?

[FCP Bob 1,312]

Interesting New Republic article that Henry won't agree with that compares what's happening today with what happened in the 30's and the Great Depression and there are a lot of similarities.Doom! Our economic nightmare is just beginning.Edit: If it asks you to sign up before reading the article try this link from Twitter since they seem to allow you to read the article from a Twitter link.http://www.tnr.com/article/economy/magazin...4b8VHAw.twitter

[strategy 4]

krugman's takehttp://krugman.blogs.nytimes.com/2011/09/2...owl1_r1_control

[hblask 1]

Interesting New Republic article that Henry won't agree with that compares what's happening today with what happened in the 30's and the Great Depression and there are a lot of similarities.Doom! Our economic nightmare is just beginning.Edit: If it asks you to sign up before reading the article try this link from Twitter since they seem to allow you to read the article from a Twitter link.http://www.tnr.com/article/economy/magazin...4b8VHAw.twitter

The article ignores key differences. The 30s downturn was sparked by the Fed's decision to shrink the money supply by something like 30% after a decade of loose monetary policy. This time, the loose monetary policy just continues. Another key difference is that Roosevelt did massive harm by increasing tariffs, basically cutting us off from the world. Obama has done a lot wrong, but at least he's not killing trade with other countries.The main problem with the article is that it just assumes Keynesianism will work the next time, this time for sure. It's never enough, is it?