Of recent there has been fearful talk of an L, a long period of stagnation. The best-known example of this is Japan, which suffered what is known as the “lost decade,” following the collapse of its real estate and stock market bubbles, at the beginning of the ‘90’s. Even 20 years later the Nikkei 225 (the Japanese stock market) is only about 25% of what it was worth at its peak, just as the NASDAQ Composite is only just above 40 % of its 2000 peak.
Perhaps more pertinent in the current discussion is the possibility of a W, a double dip recession, and one does not have in mind the delicious use of that term from another era (a chocolate scoop on top of a vanilla one in a cone). A variety of economists have expressed fears of a double dip, including Martin Feldstein, a Reagan adviser, Martin Regalia of the US Chamber of Commerce and Dr. Doom, Nouriel Roubini, who sees more yellow weeds than green shoots in the current economic situation. Roubini, whose pessimistic forecasts of a few years ago, in 2005-06, were dismissed (and even made fun of) but when almost all came true, he has since been honored as a distinguished economist and forecaster.
Usually, double dippers refer to a recession followed by a short recovery, which peters out, followed by a second recession. A precedent, perhaps, is the short 1980 recession followed by the long and devastating 1981-2 recession. This made for a peculiar shaped W, in which the second downward slope of the W far exceeds the first downward slope. Letters are at best symbolic projections and not to be taken literally.
But a different version of the W is examined, and perhaps feared, by Christina Romer, chairwoman of President Obama’s Council of Economic Advisers and a scholar of the Great Depression. In 1937 we went into what is called a recession within a depression, with unemployment which had fallen, since 1933, from 25% to 14%, rising again to 19%. While perverse fiscal policies were involved—increased taxes on Social Security, for example—the main problem was tighter monetary policy, driven by fear of a potential inflation.
Contemporary anxieties about future inflation have ignited worries that policies will be created that will lead to a repeat of 1937, in spite of very detailed and thoughtful explanations by Fed chairman, Ben Bernanke, as to how inflation can be avoided, if and when it rears its ugly head. But the threat of inflation, and tighter money, may help doom what is desperately needed to reverse permanently the downslide and overcome what many if not most economists foresee—a painfully slow recovery that could last years.
The most visible sign of economic weakness, apart from the near-death experiences we may be seeing of the automobile industry, is the vast amount of unemployment, actually understated by the official rate, as I write, of 9.7%. Using a broader definition, one which includes workers who no longer look for a job because they think there is none to be found as well as huge numbers working part time, who would like to work full time, the unemployment figure is about 17 %.
The implication, as notable Nobelists like Joseph Stiglitz and Paul Krugman have argued, is that we desperately need a second stimulus, a booster shot, as it were. But, unfortunately, the politics makes this unlikely. Perhaps, in time, we can learn from the Alphabet Soup of the 1930’s—and re-create the WPA and CCC. In addition, simple humanitarian reasons (as well as fiscal considerations) beg for an increase in the period the unemployed get unemployment compensation, as well as an increase in the levels, and that we provide low interest loans to states earmarked to employ teachers, librarians, medical personnel, police and fire fighters.
If actions likes this are undertaken, maybe, we can read of a new recession letter, one which encapsulates the positive improvements these measure can create—a “J”—a letter describing a recovery that takes us to new heights and describes a genuine return to prosperity
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