Summary: Many economists and pseudo-experts forecast not just the long-anticipated “v” recovery, but an acceleration of the current good news into a boom. Before we pop the corks, let’s look at the recovery, what the recovery cost us, and how we’ve spent this expensively bought time.
What happened in 2011?
- 1.8 million new jobs (from the current employment survey)
- Increase in personal income of $576 billion
- Increase in annual GDP of $965 billion
- Cost of this recovery: $1,057 billion of new Federal debt
The recovery is real. Government spending sustains the economy while households pay down (or default) on their excess debt. The recovery is real, just like the recovery of a patient in a hospital’s intensive care ward. Wired and tubed, fluids flowing and machines humming, the patient feels fine.
- What happens when we disconnect the patient? Code Blue! Immediate medical attention needed!
- What happens if the US cuts spending to reduce the deficit? Code Blue! Instant recession.
Let’s look at the big picture
In 1929 – 1932 our leaders did everything wrong, since they had no reliable theory to guide them. In 2008-2009 we faced a similar situation but successfully applied costly lessons learned during the Great Depression. We passed that test. The second phase was more difficult, and we may have botched it.
(1) We borrowed and then squandered the money. We sustained consumption instead of using low rates and idle resources to rebuild our decaying infrastructure.
(2) The borrowed trillions bought time for reforms to our regulatory systems, especially on the banks, so that the problems that brought us down do not reoccur. We have squandered that opportunity. Now banks have recovered their political strength and remain above the law.
(3) The very success of the economic stabilization programs has had an unexpected result: without the pain of the depression we’ve not restructured our economy (China has the same problem). All the imbalances remain. So a recovery seems likely to again produce underinvestment by business, continued government deficits and trade deficits. Nor have we adequately reformed the health care system, the cost of which comprises the bulk of the government’s future liabilities.
What comes next?
The global economy has been decellerating since roughly last summer, but slowly. The current economic data looks too confused for any reliable forecast at this time. Almost anything might happen in 2012.
For more information about economic solutions
- A happy ending to the current economic recession, 12 February 2008 – The political actions which might end this downturn, and their long-term implications.
- A solution to our financial crisis, 25 September 2008
- Effective treatment for this crisis will come with “The Master Settlement of 2009″, 5 October 2008
- Everything you need to know about government stimulus programs (read this – it’s about your money), 30 January 2009
- Economists discuss the impact of the stimulus on our recession, 6 October 2009
- Explaining the government’s response to the financial crisis, 3 December 2009
- Government economic stimulus is financial heroin, 28 December 2009
- A lesson from the Weimar Republic about balancing the budget, 10 February 2010
- Why the U.S. cannot inflate its way out of debt, 16 March 2010
- We’re still blinded by our fetters of the mind and so unable to fix the economic crisis, 13 September 2010
It is pretty self-evident that Europe is (by design) heading into a recession of unknown severity. The severity will depend on what they do when they figure out that they can’t create prosperity by relentlessly cutting jobs and government services.
It is hard to say what this means for the global economy but, since they contribute 1/4 to 1/3 of Global GDP, it is not likely to be good. China’s sinking production numbers from this week seem to confirm my thinking.
What this means for the US specifically is beyond the time and resources I can give to this comment.
Europe is falling into a recession. Saying that it is “by design” is just a guess. There are no policy documents or speeches supporting such a statement. We have economic data, but can only guess at the motives of its leaders. We have no Professor Xavier to look into their minds.
And the downturn in Europe has been gentle and slow. One of the best real-time sources of global economic data is the Markit purchasing manager indexes. Here is an excerpt from the Eurozone report released March 22:
FM, we DO have speeches and policy papers on the European obsession with falling into recession.
As any Keynesian economist worth anything could point out to the Europeans, any time you make increasingly stringent budget cuts on an economy that is already having major problems you’ll get a recession. And yet every talking head in Europe has only two solutions when a country’s economy starts having problems: budget cuts and bigger budget cuts.
You can practice austerity or Keynesian economics in good times and it really doesn’t matter. You can even practice austerity or Keynesian economics in bad times. Switching from austerity to Keynesian economics in bad times is probably a good idea (as long as you remember to pay down the resulting debt when times turn good again).
But to switch from Keynesian economics to austerity in bad times is the most foolish thing I can imagine. Based on the Markit report you quote, the Europeans are getting off light. I wonder whether that will continue or a more normal set of results will show up in future reports.
(1) No, Europe is not “by design” falling into a recession. These two statements are not equivalent:
(2) “As any Keynesian economist worth anything could point out to the Europeans”
That one school of economists has a forecast of results from a specific policy DOES NOT mean that anyone implementing that policy intends that result. They may follow the advice of other economists. Or be following the advice of non-economists — such as political scientists or finanical experts (many of both groups have near-total ignorance of basic economics).
While I agree with old-school Keynesians that austerity policies within the EMU almost certainly will produce recession (or worse), this cannot be stated as fact. Economics is not like thermodynamics in the certainty of its predictions.