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Add to FavoritesA bad joke once defined a recession as you not having a job, while a depression is me not having one. There is, unfortunately, a great deal of truth in this rather flip quip.
As the American economy is currently structured - largely capitalist supported with socialist welfare systems amounting to two-thirds of the Federal budget - a recessionary tendency is built in to the very structure of our economic institutions. Even where some economic indicators are not currently in decline, mounting government and personal debt, the trade imbalance, and the home mortgage disaster have put the economy in a very dangerous position. A few more crises, whether economic, political, or terrorist, and the situation is ripe for a full-blown depression, if not a full-scale economic meltdown.
This predicament is firmly established on the wage system, the means whereby, in both capitalism and socialism, the ordinary worker gains the bulk of his or her income. Wages are the price of labor. As the objective value of labor falls with advancing technology or as cheaper labor becomes available in other countries, adequate income levels for ordinary people (and thus effective demand) can only be maintained by raising wages with no corresponding increase in productivity, personal borrowing, charity, or State redistribution through confiscatory taxation.
Unfortunate ly, borrowing (whether by individuals or the State) to make up for inadequate effective demand as well as redistribution is like trying to get out of a hole by digging it deeper. Going into debt to purchase assets that pay for themselves out of the income they generate is beneficial, even necessary to keep an economy viable, but going into debt to purchase consumption goods and services or for government spending, or taking from the less-poor to give to the more-poor only makes a bad situation worse.
The bizarre construction we call modern economic policy is governed by the assumptions put into place by John Maynard Keynes. In the Keynesian framework, there is necessarily a tradeoff between inflation and employment. If you want low inflation, you put up with high unemployment. If you want low unemployment, you put up with high inflation. When, as now, these assumptions are no longer valid, the economy as a whole goes into a tailspin, with high unemployment and high inflation competing to see which can break the back of ordinary citizens faster.
Ultimately, the question is not whether the United States economy is in a recession. Under Lord Keynes' assumptions, the economy is always in a precarious position, whether suffering through the throes of a plunge, the trials of a recovery, or teetering on the brink of another downward spiral. The question is what is to do be done about it?
The American economy needs to change from its current wage system and mentality that the purpose of production is to create jobs for people who need income. A basic economic dictum is that the purpose of production is not job creation, but consumption. The only way to ensure that there is sufficient effective demand in the economy to clear all goods and services at market prices is to connect workers to production directly as owners, rather than only indirectly as suppliers of labor. By this means there will be a restoration of "Say's Law of Markets," rejected by Keynes, but which states that supply generates its own demand, and demand its own supply, or (in other words), production equals income . . . but only (as Louis Kelso pointed out in the 1950s) if everyone has the effective opportunity to participate in the economic process as a worker, an owner, and a consumer.
With workers sharing in ownership income as well as wage income, prices would stabilize, and - since everyone needs to consume in order to survive - everyone would have enough income through both wages and ownership without government redistribution or mandated minimum wages. There will always be extreme cases, of course, but with a properly-structured economy these would return to being an anomaly in what would be transformed into a full-employment, no inflation economy.
One possible program to achieve a stable economy through full employment and zero inflation is called "capital homesteading for every citizen," from the book with the same title. Zeroing in on critically-needed tax reforms, reorientation of the central bank away from financing government deficits and toward financing the acquisition of capital by currently non-owning workers, and reaching an equilibrium in supply and demand, capital homesteading is well worth investigating. At the very least, it has to be better than swinging back and forth from recession to fear of recession in a never-ending and frustrating dance.
Learn more about this author, Michael Greaney.
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No
America, the "Vanilla Sky" economy.
Whether or not we are in a recession depends on who you talk to. If you are a consumer reeling from the loss of value in your home, no longer able to lower payments by refinancing your mortgage, or someone in residential real estate, construction or the mortgage industry, the answer is certainly YES. On the other hand, if you are in a more traditional industry such as pharmaceutical, transportation, food, energy, or a large technology firm, things are probably OK.
While experts continue debating, the economy is still chugging along. The unemployment rate is at 5.5%, up from a low of 4.5% a year ago, but far from the 8% to 10% levels seen in the early 90's. But while the economy grew at a healthy 2% last year, profits have been declining, with earnings for S&P500 companies down in both third and fourth quarters of 2007. This is why I call it the "Vanilla Sky" economy, like the creepy 2001 movie where after a car crash Tom Cruise cannot figure out whether he is alive or living a dream or where reality lies. Business is growing but not profitably, and evidence of a slowdown is all around us. We are hanging on to our jobs but not getting raises because employers are making less money. We pay our bills but feel poor. The real estate downturn and market turmoil have caused our networths to decline. The banking crisis is making it near impossible to refinance our houses, get more cash and lower payments. Gone are the days of cashing lucrative stock options, day trading to pay off bills, or getting cash out of the house to finance our life style.
So are we in a recession? And why is it so difficult to figure out?
The answer is we just went through a bubble. America has a history of bubbles: the energy crisis in the late 80's, the dot.com busts in early 2000's, and now real estate. All have the same root cause, too much money thrown at a sector for too long.
In the late 80's government tax shelters caused enormous inflows into energy. You could put money into an oil and gas trust and immediately get a full return on your taxes, without the promise of the venture ever making a single profit, the equivalent of free money. It ended when the government changed the tax laws, causing a glut and an energy recession that lasted well into the 90's. In the mid to late 90's it was the VC's chasing the Internet gold rush, virtually throwing money at any high tech start-up with a pulse. The industry eventually went bust in 2001 and didn't fully recover until four years later. And this century witnessed the financial services industry in a heating frenzy to throw money at any consumer dead or alive, using growing home appreciation as collateral, in the belief they would never go down in value.
These trends start with decent business value propositions but eventually morph into the equivalent of a pyramid scheme as they gain too much momentum. And like pyramid schemes, they work for a while but end up badly, especially if you are holding the cards at the end. We always recover, but it takes several years. This bubble will be no different.
So again, are we or are we not in a recession and why can't the experts agree on one or the other? The answer lies in the way our economy works. Just like a car it is made of many parts, some functioning, some not. This economy feels like a car that has everything working well, except the gear box that is frozen in third gear. It is moving but cannot accelerate, and at the same time it is not coming to a screeching halt. The gear box is of course the banking system, which has been virtually frozen for six months, since the sub-prime crisis hit full course. The fed keeps greasing the gear box, in this case lowering interest rates and adding money into the financial system, hoping it will eventually crank it out and work smoothly again. But the bankers, just now emerging from huge mud piles after taking very large write-offs's, are still a bit gun shy about jumping right back in.
Smart money is betting we are not in a recession, but that it will take some time for the financial system to clean itself and work smoothly again. A good barometer is Warren Buffet. He recently took sizeable positions into basic American industry, such as railroads, manufacturing and consumer staples. But he is still staying clear of the financial sector, thinking there will be better opportunities ahead. If he thought we were heading into a recession, he would hold on to his cash and wait for a better time.
My predictions for 2008:
1. Economy recovers slowly in the second half of the year.
2. Banking system returns to normal by summer, as lending is simply too large a source of income for banks to ignore.
3. Fed reduces rates to 2.5%, mortgages decline below 5%.
4. Dollar peaks at 1.50 Euros and gradually goes down to 1.25 by year end.
5. Oil ends 2008 in the $60's. While demand for oil doubled in the past five years, the price quintupled. The slowdown in the economy will help synchronize supply and demand to a more rational level.
6. Residential housing continues to depreciate; reaches bottom some time during 2009, flat lines for a few years, and starts appreciating significantly in 2013.
7. Stock market recovers from mid year lows with the S&P500 reaching the 1600's by end of year.
8. Google reaches $900.
9. Large cap stocks outperform.
10. Consumer staples, property and casualty insurance, energy and utilities, pharmaceutical and healthcare, selected growth large cap technology, and Japan outperform the market.
11. Financial services, home builders, small caps, and China underperform.
Learn more about this author, Rene Pharisien.
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