22 September 2010

Is There A Name For This Kind Of Economy?

Naming The Beast

The official recession lasted from December 2007 (in the wake of the financial crash) to June 2009 and is based predominantly on gross domestic product growth or decline. An eighteen months span makes the "Great Recession" deserving of its name, as it is the longest recession since the Great Depression.

But, this means that we have been in a "recovery" for the past fourteen months, despite the fact that this period of modest GDP growth has continued to involve high unemployment levels, rising poverty rates, and a mix of job destruction and job creation at a rate slower than population growth rates. The fact that the recession could be so far gone is a stunning. It doesn't feel like we are out of the woods yet. Still, a "double dip" recession in which GDP starts to decline again, seems increasingly unlikely.

Calling this a "recovery," even a "jobless recovery" or "slow recovery" is entirely too cheery. We may not be back to pre-recession employment levels relative to the population size, or unemployment rates for another two or three years, and poverty could very well increase before it subsides. Unemployment, in turn, appears to be one of the factors that is driving extraordinary low housing starts. While the economy is recovering, it is no where near where it started and isn't getting there particularly fast.

We have snappy names for many economic situations. There are bull and bear markets. There is stagflation, when inflation is high (inflation is near zero now) and there is a recession or near zero GDP growth, usually with high unemployment. There are booms and busts (generally synonyms for recessions and recoveries). But, this situation seems to be novel, and hence without a name that evocatively captures the mood.

A Life Cycle With Many Forms

Part of the problem with trying to figure out what to call it is that this animal keeps changing its spots. It is like a frog or butterfly that looks dramatically different at different parts of its life cycle to the point where it is hard to remember that all of its manifestations really are part of the same continuous occurrence.

We started with a regional housing bubble collapse. This led to the demise of the subprime and Alt-A mortgage backed security industries, which in connection with the force of derviatives, caused a Wall Street centered financial crisis that went global. The financial crisis screwed up the credit markets generally, and this along with the fallout from foreclosures and the demise of the construction industry in a glutted market led to a generalized, plain vanilla predominantly cyclic recession.

Now we a teetering on the edge of deflation without actually going there, have low interest rates, continued high levels of consumer debt defaults and charge offs, excessively cautious lending standards, low real estate values in former bubble markets (although not necessary quite to a bottom in some markets), a still depressed construction sector, high unemployment with a large long term unemployed component, high poverty rates, recovering share prices and corporate profits, strained federal, state and local government budgets, and a global economy waiting for the next shoe to drop in a European sovereign debt crisis (and possibly a Japanese one as well). We've been through one of the largest spat of car recalls in recent memory, as well as a major egg recall.

College graduates in 2008, 2009 and 2010 have all faced some of the most dismal job prospects in recent history, and if evidence like the studies relied upon in Malcolm Gladwell's book "Outliers" are correct, a bad start in a career often means an entire lifetime of depressed economic prosperity from the pinnacle of the economic pyramid to its bottom. Prospects for the class of 2011 don't look so great either.

We are so overwraught with the economy that the suicide of a Brocos wide receiver doesn't even make it beyond the sports pages and doesn't manage to penetrate water cooler conversation.

A Problem Without An Easy Solution

We have turned to the government for help, and it has tried to do something.

It has bailed out the automobile industry, money center banks, money market funds, select major financial institutions. The Fed has kept interest rates near zero and purchased trillions of dollars of mortgage backed securities to prevent the mortgage industry generally from collapsing. The dollar has been allowed to weaken against most foreign currencies. Congress passed cars for clunkers and huge housing purchase credits. The estate tax is repealed for 2010. The federal government has provided bailout funds to state and local governments, extended unemployment insurance, subsidized COBRA premiums, passed a major financial regulation overhaul, passed a major health care reform, put money in transportation projects, sustained unnecessary defense spending, passed targeted tax cuts, sent checks to every taxpayer and to every Medicare Part D recipient. The President has ramped up our involvement in a regional war in Afghanistan, created four hundred thousand temporary census jobs, pressured China to strengthen its currency, and negotiated new international standards for bank capital at Basil III. The federal government has shored up FDIC liquidity to maintain confidence in bank deposits and put Fannie Mae and Freddie Mac into receiverships accompanied by guarantees of previously not guaranteed debts of the publicly charged corporations.

What do we have to show for the effort? Unemployment is still hovering near 10% and will probably get worse before it gets better. Financial institutions aren't dropping like flies, but continue to have strict lending standards. Housing purchases remain extremely low despite low housing prices and record low mortgage interest rates. Health insurance costs keep climbing. Republican leaders are starting to compare China's communist economic policies superior to our own. Temporary boosts to the economy from cars for clunkers, housing purchase credits, census jobs, Medicare Part D checks, per person tax credit checks, and similar measures have indeed proved to be temporary.

A bailed out General Motors seems to be on the record to recovery and much of the funds spend bailing it out may be recovered in an IPO of the reorganized company's stock later this year. But, Chrysler hasn't clearly turned the corner, and it still looks like the taxpayers will not get their money back from our bailout of AIG when its stock is offered to the public. It isn't easy to see light at the end of the tunnel in Afghanistan which just held another deeply flawed election, this time for the national parliament.

It feels like we are pushing down for all we're worth on the economy's accellerator, but our wheels are just spinning. Where ever the growth is happening in the economy, it doesn't seem to be trickling down to a large share of the public.

An Economy Examined But Not Understood

The Internet makes the experience more surreal. One thinks of an economic crisis as characterized by an information deficit. But, blogs, the mass media, and increasingly widely available academic and government scholarship have kept us to the minute with careful analytical examinations of what is going on. True enthusiasts have instant access to the verbatim text of proposed and recently adopted legislation. Book length treatments of key moments on the unfolding of the financial crisis have sprun up like so many green shoots. Technical jargon once know only people who read Wall Street trade journals has entered the popular lexicon. Distinguished macroeconomists have squeezed out experts on shark attacks, saving your marriage and serial killers on mass media interview shows. No country in the midst of a financial panic has ever been so well informed.

So What Do We Call It?

So what do we call this stage of economic malaise accompanying by modestly growing GDP, this stuck feeling, the sense that the economic is continuing to get worse for some even while it starts to turn around for others?

Suggestions are welcome. It escapes my poetic sense.

Side Note

An only tangentially related point is the Blockbuster video, which gobbled up or forced out of business most of its competitors in the video rental business is on the verge of bankruptcy. A bankruptcy would likely wipe out much of its $900 million in debt, close a few hundred of its store front locations, and probably force it to move to something closer to the downloading oriented Netflix business model.

The Bankruptcy Reform Act of 2005 made Chapter 11 bankruptcies for retail companies much harder to accomplish by allowing landlords to force decisions on the disposition of leased stores before the bankrupt company can find subtenants to take advantage of favorable old leases. But, in Blockbuster's case, the problem may be just the opposite one. Blockbuster may have long term leases are far more than the going market rate which has collapsed due to the real estate price bubble.

Movies are the classic example in microeconomics courses of consumption that continues uninterrupted even in bad economic times, and Blockbuster rentals are a classic way to move to a lower cost substitute to a higher priced good like going to a movie theater in person, so its is more than a little surprising that it is struggling so badly despite near monopoly power in the store front video rental market. But, technological change overshadows comparatively minor tidal forces like business cycles, even when they are wild and crazy ones.

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