When Will The Recovery Begin? Never.
July 9, 2009, 5:02PM
The so-called "green shoots" of recovery are turning brown in the scorching summer sun. In fact, the whole debate about when and how a recovery will begin is wrongly framed. On one side are the V-shapers who look back at prior recessions and conclude that the faster an economy drops, the faster it gets back on track. And because this economy fell off a cliff late last fall, they expect it to roar to life early next year. Hence the V shape.
Unfortunately, V-shapers are looking back at the wrong recessions. Focus on those that started with the bursting of a giant speculative bubble and you see slow recoveries. The reason is asset values at bottom are so low that investor confidence returns only gradually.
That's where the more sober U-shapers come in. They predict a more gradual recovery, as investors slowly tiptoe back into the market.
Personally, I don't buy into either camp. 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.
No recovery, ever? Never, ever? An interestingly pessimistic view from the left side of the ailse. What makes it ever more interesting is that not even 4 months ago, Robert Reich predicted a smooth recovery:
My Recovery PredictionI guess even 'economic soothsayers' can stop patting themselves on the back long enough to change their predictions.
There's a reason it's called the "business cycle."
Robert B. Reich | March 25, 2009
I've got something of a reputation as an economic soothsayer. Last March I predicted the economy would slide off a cliff in six months. Six months later, it did. How did I know? I'll get to that later. Now, I'm predicting the economy will start to recover in the second quarter of next year.
First, look at the economic fundamentals -- such as historic ratios of home values to rents and incomes and of stock prices to corporate earnings. At the rate houses and stocks are now dropping, they'll be terrific bargains by the middle of next year. Meanwhile, given how fast business inventories are now dropping, firms will probably start rebuilding by then. Business investments in plants and equipment are now nearing a standstill, so by the third quarter of next year companies will need to replace lots of aging equipment. On the consumer side, the sharp falloff in spending on durables means lots of cars and appliances will begin wearing out by the middle of next year.
However I think the best part is Reich's inference in both articles that the economy won't turn around until "consumers" start spending money again. That seems a far cry from the current Democratic mantra that only President Obama's Good-Time, Happy, Nanny State Government® can spend us out of the recession.
To me, it sounds like Reich is making a great case for tax cuts, especially of the payroll variety. No better way in my mind of getting people to start spending more than to immediately put more money in each and every paycheck.
I doubt we will ever hear that out of the mouth of Robert Reich though. It might get him blacklisted from the tony parties in Washington, Manhattan, and Cambridge on the Charles.....