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Recession Redux

Why I'm not cheering the economic recovery


On Thursday, the Standard and Poor’s stock market index hit a record high, surpassing the previous record set in October 2007. Last month, the unemployment rate fell to 7.7 percent, the lowest since December 2008. Only the most determined pessimist would find grounds for worry in the current economy.

Sadly, I am one. I don’t believe we are doomed, but I doubt the current recovery is leading toward the buoyant growth and widespread prosperity that we enjoyed after the country’s last great crash and downturn. We may even be smoothing the way toward another financial crash in a decade or so.

I base my thinking on long-term trends in economic history rather than on what happened last month or year or even the last fifty years. I think the financial crash of 2007 and 2008 and the Great Recession that followed was dissimilar from any recession that occurred after World War II. Instead, it was a recurrence of the kind of crash and downturn that we experienced from 1929 to 1939—the years of the Great Depression. We did certain things as a country during and after the Great Depression that laid the basis for the “golden years” of American capitalism that followed. We could be acting in a similar manner now, but we are not. And that’s why I think this recovery is at best partial and fleeting.

There was a set of circumstances that led up to and precipitated the crash of October 1929 and Great Depression and that have played a strikingly similar role in the decades leading up to the crash and Great Recession:

A Technological Revolution: In the 1920s, the United States enjoyed rapid increases in productivity brought about by the widespread introduction of electricity and the internal combustion energy. In the 1990s, the United States enjoyed a similar boom from the introduction of digital technology and the Internet. These booms created euphoria and unrealistic expectations; they led to overproduction; and they also created the potential for technological unemployment—unemployment that rose as the economy’s power to increase production of goods and services expanded. That led in both cases to “jobless recoveries” that government had to counteract.

A Widening Gap in Income and Between Wages and Profits: In both the 1920s and the period from the early 1990s through 2007, the wealth and income of the top 10 and 1 percent grew wildly at the expense of everyone else. In both periods, the growth in productivity outran the growth in median wages. In both periods, the share of the gross national income going to profits rather than wages grew. In so far as the wealthy are less likely to consume all or most of their income, that led to the potential for production outrunning demand and for unspent income and wealth accumulating at the top and filling speculative bubbles.

Rising Debt and Speculation: In both periods, the threat to consumer demand created by these income and wealth disparities was met by growing consumer debt. In both periods, the growing concentration of wealth among the very rich found expression in growing speculative investments—in housing and stock bubbles. When demand finally began to slip, and the euphoria created by the technology booms abated, a financial panic set in, which led to a larger crisis and to a broad economic downturn.

How, then, did the United States finally pull out of the Great Depression? During the 1930s, the recovery sputtered, largely because the Roosevelt administration lost confidence in 1937 in its own solutions. The economy fully recovered during World War II. After the war, it preserved the reforms that the administration had adopted during the 1930s. These measures were essential to the strength of the ensuing recovery and to the “golden years.” Again, there were three of them:

Rising Wages and Consumer Demand:  New Deal reforms in labor law and the establishment of a minimum wage boosted wages. Social security, unemployment insurance and other social programs established a floor under consumer demand. During the postwar decades, median wages kept pace with productivity, and labor’s share of national income grew.

Regulation of Speculation: New Deal banking and securities legislation discouraged the kind of speculation that had led to the stock market crash in 1929. The Dow Jones average did not reach the heights it achieved in 1929 until the mid-1950s, but by then the actual growth of American industry sustained higher stock prices. There were no financial crises until the 1970s. New Deal regulation of the power industry also encouraged cheap and universal access to electricity.

Government Investment:  Consumer demand and business growth were reinforced by growing government spending on social welfare, education, health care, infrastructure, and economic growth. In 1929, government spending accounted for 11.27 percent of gross domestic product; by 1954, during the Republican Eisenhower administration, it accounted for 29.27 percent—a huge increase. Government spending took, in effect, the surpluses created by a private economy fuelled by new technology and recycled them into new investments and consumer demand.  

Now if you look at what’s happening today, we don’t seem to be countering those forces that led to the crash and downturn. Instead, we find ourselves recreating some of the conditions that led to the crash and not doing enough to turn things around.

Falling Wages and Rising Profits:  During the golden years, wages often accounted for almost 60 percent of national income. They are now at an abysmal 43.5 percent. Productivity has continued to rise faster than median wages. In January, incomes fell by the largest amount in twenty years. Consumer spending increased because the savings rate declined. That’s exactly the pattern that occurred in the years prior to the crash and Great Recession.

After a brief hiatus at the beginning of the Great Recession—when the crash eliminated wealth at the top—the top of the income scale has resumed expanding at the expense of everyone else. Corporate earnings increased 20.1 percent a year since 2008, but as much as $1.5 trillion of these profits remain uninvested. In other words, we have a growing accumulation of wealth at the top that is at the expense of consumer demand and that could potentially create new speculative bubbles.

Failure of Regulation: The Obama administration and Democrats in Congress tried to pass financial reform regulation, but the Dodd-Frank bill that passed in 2010 failed to separate commercial from investment banking, as the New Deal reforms had done. The bill imposed new regulatory structures, but how these work, and whether they work at all, has been subject to intense lobbying battles. There have already been signs of instability. Last year, JP Morgan Chase, which was reputed to be the country’s safest bank, suffered billions in losses from a trading scandal. The current increase in stock prices is nothing to crow about; it could be a harbinger of new bubbles.

Government Investment: When the Obama administration took office, it got an $800 billion stimulus package through Congress that helped the country recover from the Great Recession. The package included important programs for spurring future economic growth in broadband use, renewable energy, and biotechnology, as well as needed spending on infrastructure. But when the Republicans won control of the House in November 2010, they forced the administration to agree to draconian cuts in spending that have slowed the recovery and threatened future growth. Government’s share of GDP has fallen by 10.2 percent from 2009 to 2013.

Washington, of course, is in the grip of an economic philosophy promoted not only by Tea Party Republicans, but also by corporate lobbies like Fix the Debt and blinkered editorial page writers. This philosophy sees the expansion of the public sector as occurring at the expense of the private sector; but the experience of the New Deal and World War II suggests otherwise. In an economy driven by a high-powered private sector, the growth of the public sector can reinforce the strength of the private sector by smoothing out the business cycle and making investments in future growth that private industry would not undertake on its own. Government regulation can also help by preventing financial crises and discouraging stifling monopolies. But to many, these lessons seem to have been lost. Washington needs to wake up, but it’s not happening, and that’s why there are reasons to worry about our economic future.