Retrenchment, Not Recovery

Economists and politicians are debating whether we are in a recession or a depression, and how many months or years it will take to recover from the downturn. As I have argued on this blog and in my book, what is now happening to the economy is not typical or normal. I would call it a "retrenchment" rather than a recession. In that sense, it is a permanent correction, and will result in a substantial and long-term contraction of GDP, the standard of living and the stock market. It will take many years to return to where we were. The problem is that the U.S. government and consumer have both been living on borrowed money for a generation, so that most of the gains of that period are illusory. We were never really that wealthy, and now we have to start paying for that extravagance.

A similar argument is made in an interesting article entitled "Will There Be A Recovery?" by Paul Craig Roberts, a former Assistant Secretary of the Treasury in the Reagan administration. He also sees the current situation as different from past recessions. Recovery in the past could be stimulated by cuts in interest rates, allowing consumers to spend more against rising real wages. This would lead the economy to rebound.

Now it is different though. For one thing, for most workers, real wages have remained stagnant for almost twenty years. Consumers have maxed out their credit and can no longer borrow so freely. And interest rates are already at rock bottom levels.

"And there’s another problem," says Roberts. "Much of what American consumers purchase today is made offshore. Stimulating consumer demand in America puts factories back to work, but those factories are located elsewhere in the world." The U.S. consumed more than it produced, by borrowing from abroad. But this source of funds is also drying up now.

These are all themes that I raised in The End of the American Century. While I do not totally agree with all of Roberts' arguments, his overall point is a good one. There will not be a recovery, like recoveries in the past. The task for the U.S., and the Obama administration, is to figure out how to navigate this difficult transition, and to convince U.S. citizens that we can live a good life without all the excesses of the past.

Take a look at Roberts' essay, and offer your thoughts in the Comments section here.