By the time the Bureau of Labor Statistics was done revising December and January, last Friday’s February unemployment report marked the loss of an additional 800,000 jobs, bringing the total for the past four months to 2.6 million. As the chart from Time’s Curious Capitalist blog indicates (we are, appropriately, the brown line streaking down the page), this downturn is rapidly parting company with every other recession of the post-WWII era. To say there’s no end in sight is a considerable understatement. At this point there’s no sign that the rate of collapse is even moderating.
Add to this the growing despair of some of our best economic observers that the Obama administration will get the government response right (see the latest from Joseph Stiglitz and Paul Krugman [I] [II]), and the entire economy starts to resemble a vast field of dominoes stretching in rows and loops for as far as the eye can see. I’ve always remembered a line from the first national news feature I ever read about AIDS back in 1982 or so, before it was even called AIDS. Most diseases become less mysterious and frightening as you begin to study them, one researcher said, but this one only gets scarier the more you learn about it. That’s more or less how it feels now reading the financial pages and economy blogs every day.
So occasionally I try to think instead about bottoming out and reaching the other side. When it begins–a year from now? two? five?–what is “recovery” from circumstances like these going to look like? To hear the professional cheerleaders going on about it, you would think that it’s just a matter of finding the right spell to cast on the banks, at which point lending will resume and normalcy will be restored.
If you believe that, Citigroup has some mortgage securities it would like to sell you. Whatever the cyclical forces in play here, there is a huge structural component as well, and that is debt. When most commentators talk about debt, they are talking about the U.S.’s national debt, which is growing exponentially thanks to Bush’s tax cuts and profligate war-making and Obama’s frantic efforts to prop up the banks. This will be a big issue in years to come. But private debt is even more out of control, especially in the household and financial sectors.
As for the financial equation, the lesson of the Swedish and Japanese crashes is that economies don’t regain their vibrancy until the bad debt is written down. You can frontload the pain and speed the eventual recovery, as Sweden did. Or you can spend years and vast sums of money plugging holes without ever really seeing a recovery, as Japan did. That in sum is the case for nationalizing the biggest banks. But no one on Wall Street is inclined to do that, and too few in Washington are inclined to make them. (With respect to the argument that the American system is too big and complex to fix by nationalization, Martin Wolf writes, “The four biggest US commercial banks–JPMorgan Chase, Citigroup, Bank of America and Wells Fargo–possess 64 per cent of the assets of US commercial banks. If creditors of these businesses cannot suffer significant losses, this is not much of a market economy.”)
Of course no one is talking about major steps to relieve the crippling indebtedness of American households beyond a few pennies in mortgage aid here and there. We’ll just have to grow our way out of it, a problem made much worse by the steady decline of real wages over the past generation-plus. Aside from a brief, tech bubble-induced growth in middle incomes in the late ’90s, American workers have seen their living standards slide even as their productivity has grown impressively.
And the job market that attends U.S. recovery, when it comes, is likely to be further degraded in structural terms. This from a Saturday story in the New York Times:
In key industries–manufacturing, financial services and retail–layoffs have accelerated so quickly in recent months as to suggest that many companies are abandoning whole areas of business.
“These jobs aren’t coming back,” said John E. Silvia, chief economist at Wachovia in Charlotte, N.C. “A lot of production either isn’t going to happen at all, or it’s going to happen somewhere other than the United States. There are going to be fewer stores, fewer factories, fewer financial services operations. Firms are making strategic decisions that they don’t want to be in their businesses.”
We could certainly make do with fewer financial services operations, but think for a moment about manufacturing. Before the current downturn started, it had shrunk to about 12 percent of U.S. GDP. And 1.2 million of the jobs lost last year were in manufacturing. It’s very old-school to lament the decline of manufacturing–just look at the afterthought that the fate of GM has become amid the furor over the banks–but as people like Kevin Phillips keep pointing out, manufacturing is the real wellspring of wealth creation. It’s ironic to see economists clucking about how we’ll need to become more successful exporters in future. What are we going to export? Our principal export for years has been financial products–which is to say, debt creation vehicles–and the world has had enough of our financial innovations to last it a good long while.
So perhaps we are different from Japan after all: Even in the depths of their stagnation, they still produced things the rest of the world wanted. We’ve been producing consumers and whopping trade deficits, and now our consumers are broke. We’ve already seen signs that debt has seriously gummed up U.S. recovery from the last couple of recessions, as Doug Henwood pointed out in my first MinnPost interview with him. But when it comes to the way debt can shackle an economy, chances are we ain’t seen nothing yet.