Economic Incompetence

http://www.nytimes.com/2011/08/05/business/economy/double-dip-recession-may-be-returning.html?emc=eta1

http://www.nytimes.com/2011/08/05/opinion/the-wrong-worries.html?emc=eta1

http://www.nytimes.com/2011/08/08/business/a-second-recession-could-be-much-worse-than-the-first.html?emc=eta1

***************

"The difficulty lies not so much in developing new ideas as in escaping from the old ones." (John Maynard Keynes)

***************

I think I've developed a new term "Economic Incompetence." Hence, the title of this post. The term refers to the combined total of actions taken by the powers that be (government regulators, congress, etc.) since the economic downturn (recession) was declared "retroactively" as having started in December of 2007. The retroactive aspect of it involves the center of all economic thought declaring (I forget the name of the non-partisan agency that declares such things) two quarters into the Great Recession that we were in a recession because economists define recessions as two consecutive quarters of negative economic growth (GDP growth in minus numbers). This, of course, cannot be measured until it's happened - then it is fact. Imagine if you were running a business and you waited for official retroactive confirmation of a recession - what would you do with all those cars you produced that nobody's going to buy?

Somewhere along the line, those same "gurus" declared a "recovery" in June of 2009. Many of us who follow "jobs" didn't see the recovery as declarable: jobs are, and always have been, a lagging indicator. And jobs were reflected in unemployment statistics that were in the 9% plus (standard measurements) to 17% plus (BLS U6 unemployment rate which includes those who have given up) area. Perhaps the gurus saw all time record corporate profits as a positive sign. Unfortunately, those profits were not being turned into capital spending (except in areas that would improve productivity - like enhanced software that would delay or eliminate the need to hire people back) here in the U.S.

Paul Krugman's post last week, just after the Dow dropped 500 points (attached), pointed out that, considering one crucial measure, the ratio of employment to population, we were nowhere:

June 2007 - 63% of adults were employed

June 2009 - 59.4% of adults were employed

June 2011 - 58.2% of adults were employed

Krugman's perspective on this is that we're facing a "terrible reality:" not only are vast numbers of Americans unemployed or underemployed, but for the first time since the Great Depression, many American workers are facing the prospect of very-long-term - maybe permanent - unemployment.

As Floyd Norris pointed out on the same day (attached), if this is the beginning of a new double dip, it will have two things in common with the dual recessions of 1980 and 1981-82: in each case the first recession was caused in large part by a sudden withdrawal of credit from the economy. And, in each case, the second recession began at a time when the usual government policies to fight economic weakness were deemed unavailable. Then, the need to fight inflation ruled out an easier monetary policy. Now, the perceived need to reduce government spending rules out a more accommodating fiscal policy.

Catherine Rampell, of the NY Times "ECONOMIX" blog, has chimed in today (attached) with Krugman and Norris, to point out that in the four years since the recession began, the civilian working age population has grown by about 3%. Given a healthy economy, she estimates that jobs would have grown by about the same amount - instead, the number of jobs has shrunk. Today the economy has 5% fewer jobs - or 6.8 million - than it had before the last recession began: the unemployment rate was 5% then, compared with 9.1% today.

Fareed Zakaria has a somewhat simpler (and easier for me to remember) way of putting this: The U.S. GDP is no larger than it was in December of 2007 but there are 10 million less jobs.

As Rampell puts it, with construction nearly nonexistent and home prices down 24% since December 2007, the country does not have a buffer of housing to fall back on. She goes on to point out that economists refer to the difference between where the economy is and where it could be if it met its economic potential as the "output gap." Menzie Chinn (an economics professor at the University of Wisconsin) has estimated that the economy was about 7% smaller than its potential at the beginning of this year.

Given all of the above, it's difficult to envision a way out of what was described last week as an economy growing at "stall speed" (I think that was 1.8%). I'm not an economist but I have experienced the economy for a long time from the business side of things and I see a kind of collective incompetence which i referred to above as "Economic Incompetence" which has grown out of what I learned in grade school was the virtue of America's foundation: a pluralistic society where everyone was represented in government. The problem we have now (and, I hate to write about politics) is that we have "too many cooks" represented in government, all with their own ideas and all of them looking to gain something politically from outcomes. So, "compromise," which we're all taught is the civilized thing to do, doesn't work out well for the collective population (what better example is there than the "debt ceiling" debate?).

Here's an idea: throw some tax incentives at all those corporations sitting out there on all that "cash" to spend capital money here in the U.S. on infrastructure or infrastructure-related projects that are much needed. I think it was Mark Zandi (who is quoted by both Republicans and Democrats as knowing what he's talking about), chief economist for Moody's Analytics, who said in testimony before congress that infrastructure spending has the highest multiple for job creation.

My hope is that we will come out of this economic malaise soon but it doesn't look like it.