Time to Use the "D" Word: "Recession" Doesn't Begin to Describe Where The US Economy
Dr Mark Naison
For the last three months, as the American economy has gone into a free fall, economists and political leaders have parceled out the bad news in small, allegedly manageable proportions. Yesterday, the National Bureau of Economic Research finally confirmed what virtually every small business owner has known for some time- that the US economy is a recession, and that it has been in recession since the Fall of 2007!
But though everyone in political life now feels comfortable in using the word "recession," I have yet to see any economist or political leader say what all the economic indicators all suggest- that the US economy is headed into a Depression, with double digit unemployment figures that may persist for several years.
Despite the bank bailout initiated by the Bush Administration, and the stimulus package which the Obama administration will undoubtedly launch, the US economy faces a toxic mix unprecedented in post war US history- a brutal, and still escalating squeeze, on commercial and consumer credit, which, coupled with rising unemployment, is producing a dramatic shrinkage of consumer demand, the major engine of economic growth in the US and the world since World War II.
While economists will be debating the causes of the unprecedented collapse of the US banking system for some time, the consequences are only now beginning to be felt on the ground. The largest US Banks- Bank of America, Citicorp and JP Morgan Chase- and their smaller counterparts- are in such fragile condition that they becoming risk averse in their daily interactions with businesses and consumers. Not only are they making it much more difficult to lend money, they are sharply raising the interest rates on loans they do make, putting severe economic pressure on even long term customers. The restrictive, some would say extortionate conditions they are placing on lending, are having a powerfully depressing effect on economic activity
The following are the major ways the freezing of credit is forcing the economy into a depression
1. The denial of business loans, and the withdrawal of lines of credit, are crushing small and medium size businesses throughout the United States. Not only do businesses require credit to upgrade their facilities or launch new product lines, many of them require lines of credit to pay off suppliers or get through lean periods in the business cycle. Shutting off credit, or dramatically raising the cost of lending money, is driving many small and medium size businesses into bankruptcy, forcing them to shed jobs and add to the rapidly rising unemployment figures, further depressing consumer demand
2. Imposing much more rigid standards for home mortgages and car loans, while a necessary corrective to the loose lending practices of the last fifteen years, are making it much more difficult to purchase homes and cars, contributing to a huge glut of unsold homes, a devastating decline in new construction activity, and
a decline in new car sales so sharp that it has forced the three major US auto makers to the edge of bankruptcy. As construction companies shut down, car dealerships close, and auto manufacturers and parts companies fold, or engage in mass layoffs to stay afloat, hundreds of thousands, possibly millions of workers with relatively good incomes will lose their jobs
3. As banks impose limits on credit card debt and ratchet up interest rates on credit card holders, which they are in the process of doing, consumer spending will take a huge hit, putting a large number of businesses from restaurants to big box stores, in grave economic difficulty. How consumer demand will
survive such a dramatic contraction of personal credit in a time of rapidly rising unemployment no economist has satisfactorily explained. Where will the money come from to support stores that sell anything but food and clothing? The entire landscape of American commerce that was built around consumer spending- particularly the shopping mall- may now be in jeopardy.
4. As banks restrict access to student loans, or raise interest rates in those loans, a whole generation of students will be forced to postpone graduate and professional education, transfer to, or attend, less expensive schools, or be forced out of college altogether. This will lead to freezes in university hiring and devastating losses in cultural capital as talented students become unable to afford the training they need to become economic innovators.
The consequences I have just described, and the economic statistics that accompany them- unemployment rates of 11-15 percent, millions of unsold homes, new construction and new car sales at a fraction of previous rates- may be a bit abstract for most readers so let me put where we are heading
in concrete physical terms
1. You are going to see boarded up stores, boarded up car dealerships, and boarded up shopping malls in every section of the nation. Just like the boarded up factory was the symbol of the collapse of American manufacturing in the 1970s' and 1980's, the boarded up shopping mall is going to be the symbol of the credit crisis and collapse of consumer demand.
2. You are going to see large number of abandoned homes, and unoccupied high rise apartment buildings in
many sections of the country because those units cannot be sold or rented at market rates. How people forced out of homes and jobs will respond to huge stretches of abandoned, or unoccupied commercial and
residential space is anybody's guess. Perhaps there will be "squatter movements" or government programs to allow people to occupy abandoned space for nominal rents.
3. Large numbers of people who had thought they would have private living space will be living communally. As people lose jobs, or retirement income, they will be forced to move in with relatives or take in boarders to afford their current living space. Perhaps they will have to become boarders themselves. As for young people getting out of college, they will either have to move back with their parents or form communal apartments with friends and share housing costs and food.
This, my friends, is the world we will be living in during the next five years. And it is time for our political leaders to be honest about what we are up against.
Times this hard require emergency measures- as Paul Krugman has argued, what ever stimulus package is being planned should be doubled in size-- but they also require patience and sacrifice from all of us, and a willingness to lend a helping hand to our neighbors and fellow citizens who are in worse shape than we are.
No matter what we do, a Depression is probably coming. Whether it last three years or ten years depends on how intelligently we plan and how aggressively we act
December 2, 2008