Robert Reich argues that what we’re seeing now in the economy isn’t a V-shaped recession or a U-shaped one but what he refers to as an X recession—something more akin to a system reset:
In a recession this deep, recovery doesn’t depend on investors. It depends on consumers who, after all, are 70 percent of the U.S. economy. And this time consumers got really whacked. Until consumers start spending again, you can forget any recovery, V or U shaped.
Problem is, consumers won’t start spending until they have money in their pockets and feel reasonably secure. But they don’t have the money, and it’s hard to see where it will come from. They can’t borrow. Their homes are worth a fraction of what they were before, so say goodbye to home equity loans and refinancings. One out of ten home owners is under water — owing more on their homes than their homes are worth. Unemployment continues to rise, and number of hours at work continues to drop. Those who can are saving. Those who can’t are hunkering down, as they must.
Eventually consumers will replace cars and appliances and other stuff that wears out, but a recovery can’t be built on replacements. Don’t expect businesses to invest much more without lots of consumers hankering after lots of new stuff. And don’t rely on exports. The global economy is contracting.
My prediction, then? Not a V, not a U. But an X.
Perhaps it’s time to revisit the idea I floated six months ago, that another way of considering an L-shaped recession is as a return to the status quo ante rather than as a decline. First, consider an L:
But note that if you expand the time horizon on what looks like an L when you’re sitting in the middle of it, you might see something like this:
As supportive evidence that’s what we’re seeing I’d offer the observation I read in the Wall Street Journal not long ago that the economy has shed practically all of the jobs created over the last 10 years. I’m betting that what we’re actually seeing after the collapse of the housing bubble is a return to what would have been without it.
That’s not particularly encouraging nor does it point the way forward but it certainly looks like what we’re seeing.
I’ll continue to offer with some sense of futility the same advice I’ve been giving since before the Bush tax cuts: we need a change in policy to something with a stronger orientation towards business. That means incentives for capital investment in the United States, improvement in the regulatory environment, confidence, and stability. I have no confidence whatever in the current crop of political leadership taking that direction.
I take everything Reich writes or says with a grain of salt. The guy is prone to wild exaggeration and hyberpole to get his name in the paper, IMO. If he told me grass was green I wouldn’t believe him till I check a sutably large random sample of lawns and still I’d hold out that there is a possibility that not all grass is green.
I think this is true of any recession, not just this one. It is a mistake to think this is peculiar to this recession…at least without showing it isn’t true in general for other recessions. What is different about this recession is the degree, not that it is unusual. I wouldn’t even argue that the real estate component is unusual by itself since according to Edward Leamer that is typically how recessions start…in the real estate sector. Perhaps the bubble nature of real estate, but that could be why the recession is so severe. The “L” shaped recession may very well be true with the inverted “V” in your second graph being the bubble, but WTF is an “X” recession sounds like more Reichean gibberish to me.
See, you left out this part,
Wages, wages, wages. He never looks at total compensation, never considers that people are taking more of their compensation in terms of higher untaxed benefits. And WTF about carbon in the atmosphere? Jesus Christ on a pogo stick. Its just silly. Yeah, okay global warming, but as a significant contributor to the current recession? Really? What about the death of Farrah Fawcett??!?!
“Problem is, consumers won’t start spending until they have money in their pockets and feel reasonably secure. But they don’t have the money, and it’s hard to see where it will come from.”
Well, the stimulas could have focussed more on tax cuts. I wonder where Reich stood on that.
“Don’t expect businesses to invest much more without lots of consumers hunkering after lots of new stuff.”
Don’t expect businesses to invest much more when they read that the government is going to raise taxes, and increase regulations as soon as we’ve recovered.
Is this the recovery?
That’s easy, he’d be against them. Reich is a technocrat, he believes in plans, programs, and policies when it comes to the economy. Distributed processes that have shown time again how resilient they are and how they can adapt quickly…those are bad.
That too, you look at an investments expected income in a net present terms and if you think there is a good chance of higher taxes on that investment it looks alot less attractive. And tax increases are coming, Obama lied during his campaign. He has already raised cigerette taxes and may start taxing things like health benefits or just tax income more heavily to get his health care reform through.