If the Economy Is So Bad, Why Isn’t It Worse?
Given the high price of oil, the collapse of the dollar, and the credit crunch, one might have expected America to be mired in a deep recession. But it's not.
The media have already declared the U.S. economy to be in recession, even if the official statistics don’t say so yet. The economy is certainly not as healthy as it was a few years ago, and may yet get much worse. But so much has gone so wrong, so quickly, that it’s not interesting to squabble over whether this is a “recession” or a “slowdown.” I wonder: why aren’t things worse?
By most measures, the U.S. economy ought to be in trouble. The goods consumers need most, food and energy, are rising rapidly in price, at the same time record declines in the values of the dollar and real estate have reduced the value of Americans’ incomes and their largest assets. Declining wealth and the rising cost of necessities should be diverting spending from other consumption goods, while at the same time more durable purchases, like homes and large motor vehicles, are enduring a historic supply glut. The chicanery in the market for housing-related financial instruments has weakened the faith of financial firms in the market, and credit for new investments is suddenly scarce.
These are the ingredients for a big recession, maybe even a depression. We have never experienced gas prices or housing declines like this before. Yet the actual effect on the economy has been pretty small. The revised GDP estimate released May 29 showed a small increase over a year ago, even after accounting for inflation. It could be that the worst of the economic downturn is yet to come, but if so the stock market doesn’t think so. The S&P 500 has declined 6.3% year-to-date, not as well as could be hoped but not bad at all by historical standards. The unemployment rate in April rose to 5.0%, higher than the 4.5% rate of April 2007, but well below the 6.3% rate hit in mid-2003 or the double-digit rates in many other countries.
Gas prices might be in uncharted territory, but the stability of the economy is consistent with a pattern of stability that began sometime in the 1980s: economic volatility declined a lot, quickly, in almost all rich countries at the same time. The business cycle, that nauseous vortex of gold rushes and great depressions, seemed to have all but disappeared. I, and others born like me after 1980, have never known what a severe economic downturn looks like. Economists call it the “Great Moderation,” a cheeky oxymoron that sounds like a humbler Big Bang.
Many intelligent people have proposed explanations for why the economy might have become steadier. In a 2004 speech, Ben Bernanke classified all the hypotheses that had been proposed as falling into three camps. Some economists believed the moderation could be attributed to technological advances; some to improved public policy, particularly monetary policy; and some to simple good luck.
We have certainly been lucky — the Cold War did not end, as expected, in a nuclear holocaust, for example. And monetary policy is definitely much better. The Federal Reserve and other major central banks are more politically independent than ever before, and more willing to think creatively about the best ways to stabilize prices. (Full disclosure: I worked for three years as a research assistant at the Federal Reserve Bank of Boston.)
But the progress of technology is hard to overstate. Take the price of gas, for example. American gasoline consumption has risen steadily over the years, but the economy has grown even faster, and our vehicles and lifestyles — sprawl notwithstanding — have become more economical with fuel. Our real GDP per gallon of gasoline consumed is double what it was in 1958. Even though the price of gas is much higher than it was in the 1970s, we are better protected against an energy shock.
The biggest technological change in the time of the Great Moderation, however, was the widespread adoption of the personal computer by business, in particular finance. This was one of the topics I worked on with my former boss, economist J. Christina Wang, who studies the banking system. Her unpublished research suggests that the adoption of information technology permitted banks to manage risks in ways never before possible, protecting them against systemic disruptions and smoothing the growth of economic production.
Of course, the same technology played a big role in the housing market collapse. Exotic mortgages were issued, resold, and manipulated based on models of repayment risk that turned out to be woefully inadequate. Given bad assumptions and bad data, statistics can’t help; they can only make you a more esoteric type of wrong. But perhaps the same number-crunching that created our economic mess is keeping it from becoming much worse.
The truth is that economic growth is notoriously difficult to predict. Economic reporting tends to focus on the bad side of every story, even when there may be a good side as well. It wasn’t long ago that the media was decrying the lack of affordable housing in major urban areas; now the problem is not rising home values, but falling. The weak dollar has made oil expensive and consumers poorer, but in Europe they worry that the strong euro will make their products uncompetitive and their jobs at risk. People, including journalists, tend to focus on risks to our well-being much more than opportunities. The era of the Great Moderation may be coming to an end soon. But according to the numbers, it hasn’t happened just yet.
Nic Duquette is a writer living in Ohio.
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29 Comments
1. WhoStruckJohn:When you outsource your consumer goods, you outsource your manufacturing recession. Take a look at changes in port activity and trade balances exclusive of oil. We might not technically be in recession yet (of course, that may change when the final revisions to the numbers are done months after the fact) but there is a very real shift in consumption patterns.
Jun 3, 2008 - 1:18 am 2. David Thomson:“People, including journalists, tend to focus on risks to our well-being much more than opportunities.”
No, it’s the journalists who are negatively influencing the general public. They are doing this for one simple reason: the MSM journalist want to help Democrats win elections! Their story lines would change overnight if a Democrat resided in the White House. The “elite” journalists, for all practical purposes, are partners of the Democrats.
Jun 3, 2008 - 2:29 am 3. TomGrey:While David is 2/3 correct on elite journalists being overwhelming supporters of the Dems, and almost actively anti-capitalism, there is also the issue of Fear sells.
Good news doesn’t sell newspapers, and the business of news is a BUSINESS, first.
If the Fed gets this soft landing right, continued slow growth in the US and continued weak dollar will mean continued increases in exports — where is the Trade deficit graph?
I’d guess that THAT deficit is going down fast, “good news”, and so there’s lots of new work in export industries.
Plus of course the windfall profits for farmers — where’s the graph on farm profit over the years?
Good news just doesn’t sell as well.
Jun 3, 2008 - 4:01 am 4. david foster:Is your “real GDP / gasoline consumption” chart really about gasoline, or about oil? The “barrels” legend on the Y axis makes me think it is the latter.
One major factor reducing *oil* consumption per GDP $ was the conversion of oil-burning power plants to nat gas or coal in the wake of the first big oil price shock.
Jun 3, 2008 - 7:24 am 5. Andrew Ian Dodge:Journos are declaring it a recession in the US (wrongly) as opposed to the UK where business leaders are declaring a recession.
Jun 3, 2008 - 7:34 am 6. Sk:If the Economy Is So Bad, Why Isn’t It Worse?
Because its not so bad.
Jun 3, 2008 - 7:45 am 7. Thomas:Read this important article why economic growth is exponential and accelerating through human history, and how recessions are harder to come by.
Jun 3, 2008 - 7:55 am 8. JohnMc:Though the article is ‘ok’ on its face the fundamentals provided by the author are flawed. One example –”We have never experienced gas prices or housing declines like this before.” One need only hark back to the oil shock of the 70’s. Gas went from a .25-.30c range to $1.10 in most parts of the country in a matter of months. Not only that you had to queue to get gas and some stations were rationing 5gal per customer. As far as housing plunging one only need look at the LA/TX/OK housing market of the mid 80’s. People would give their houses away if you would take over payments. ‘Jingle mail’ was running on FedEx things were so bad.
Absent from this discussion is any consideration of the changes in logistics. No longer do companies hold large inventories. Its all JIT. At best there is a month’s worth of product in the supply chain. This permits companies to cut production orders in a flash to prevent inventory overhang.
Finally we have this — “Christina Wang, who studies the banking system. Her unpublished research suggests that the adoption of information technology permitted banks to manage risks in ways never before possible, protecting them against systemic disruptions and smoothing the growth of economic production.”
My Sainted Mother! It is that adoption of IT that led to the securatization debacle we are in now. In the name of bundles the mega banks threw away their first defense against losses — ‘Know Thy Borrower’. Not only that but considering the fact that the banks were only going to hold paper for a matter of months the risk to them was perceived to be minimal. Or so it seemed till they started adding the assets to their own portfolios. Sigh…
Nic, you have the basis for a good article but it is obvious to me that you are a GenXer. Your piece misses some very well known postwar events.
Jun 3, 2008 - 8:18 am 9. SnarkyBytes » Is The Economy Bad?:[...] Via Instapundit, Nic Duquette asks If the Economy Is So Bad, Why Isn’t It Worse?. [...]
Jun 3, 2008 - 8:45 am 10. Daily Pundit » How Come?:[...] Pajamas Media » If the Economy Is So Bad, Why Isn’t It Worse? Given the high price of oil, the collapse of the dollar, and the credit crunch, one might have expected America to be mired in a deep recession. But it’s not. … Many intelligent people have proposed explanations for why the economy might have become steadier. In a 2004 speech, Ben Bernanke classified all the hypotheses that had been proposed as falling into three camps. Some economists believed the moderation could be attributed to technological advances; some to improved public policy, particularly monetary policy; and some to simple good luck. [...]
Jun 3, 2008 - 8:52 am 11. Concerned Citizen:Nic, if you are reading these comments, an interesting investigation would be to see how much of the economy has moved into the volunteer and .org segment of the economy, becoming in essence “dead money” that supports activity with zero economic return and of dubious real value to humanity. You’ve got the economic background to dig this up.
To your thesis, this is endowed, constant money, essentially sitting in the bank, paying out rain or shine, which might contribute to the “steadiness” of the economy. The economic gains and increasing returns brought on by technology and free trade are being “taxed” by large amounts of capital being taken out of useful productivity.
I’d be curious to know just how big it is.
Jun 3, 2008 - 9:17 am 12. Spartee:“Nic, you have the basis for a good article but it is obvious to me that you are a GenXer. Your piece misses some very well known postwar events.”
List ‘em and keep the “young whippersnapper” tropes in your keyboard.
I saw a graph showing inflation adjusted gas prices since the 50s. And yes, housing prices do go up and down in selected markets on a regular basis, but what in the post-war history looks like the market we see now?
Finally, the short essay necessarily has some limitations on words. Don’t demand too much from such briefs.
Jun 3, 2008 - 9:20 am 13. The Platform » Blog Archive » U.S. economy - recession or just a slowdown?:[...] this is not the only view. Nic Duquette argues that the economy is actually not as bad as many experts have been claiming. Duquette points [...]
Jun 3, 2008 - 10:07 am 14. Ed:Yup, economic ups and downs are definitely moderated by technological improvement. The day the London to Sydney telegraph cable was connected the message time from one end of the empire to the other dropped from six months to six hours, and this increase continues today. The effectiveness of Adam Smith’s invisible hand has never been greater, and will only speed up.
Jun 3, 2008 - 10:08 am 15. Dani:Concerned Citizen- that’s a really good point about money taken out of the economy by nonprofits. Along those lines, if 15% of the GDP is now tied up in healthcare- the costs of which are almost entirely in personnel and technology- and funded mostly by nonprofit and tax-supported entities- resulting in a doubly insulated section of the economy that is much bigger than it was during the last major recession.
For better or for worse, it’s steady as she goes for the health care behemoth. While bad consumer debt is rising (and is very important since most hospitals run on the margin) it will take a very long and deep recession to have an impact there.
Jun 3, 2008 - 10:59 am 16. lawrence Franko:The world economy, especially the “new economies” of the BRIC’s (Brazil, Russia, India, China), Eastern Europe, and — believe it or not, the Middle East, Latin America, and parts of Africa –are doing VERY, VERY well. American companies, especially in medical and information technology, and institutions (universities educating all those top-dollar paying folks from foreign parts) who export to those new economies are also doing very, very well. That’s why, for example, Massachusetts had GDP growth at over 3% per annum in the first quarter of this year. If the exporting/world competitive part of the economy are going gangbusters, and the domestic housing and financial part of the economy are in the doldrums, on average we are just fine.
Jun 3, 2008 - 6:19 pm 17. samule dhalgren:bobaloo, I know there is policy and ideology at right wing sites by people such as Ed Morrisey. That is the problem.
The policies and ideology they espouse have brought are planet to the brink of destruction, if not already past it.
Their policies and ideology have needlessly killed hundreds and hundreds of thousands of people in Iraq.
Their policies and ideology have devastated our economy.
Their policies and ideology have created astonishing economic disparity.
Their policies and ideology have threatened the basic civil liberties of gay Americans.
Their policies and ideology have threatened women’s right to decide what to do with their own bodies.
Their policies and ideology have had a catastrophic effect on our international reputation and credibility.
Their policies and ideology have made the world a far more dangerous place.
Their policies and ideology have fueled the fires of racism and xenophobia.
Ed Morrisey and Debbie Schussel are friends, and if you google it, you will find countless articles where Ed Morrissey cites her and other extremist wackos like Michelle Malkin for his own twisted arguments.
I’m sorry, but I don’t find right-wing sites like Pajamas Media, Rush Limbaugh, or HotAir to be benign or informative; I find their twisted ideology to be a very serious threat to both the planet and humanity.
Jun 3, 2008 - 9:45 pm 18. dispatches from TJICistan » Blog Archive » forget about exporting your pollution - now you can export your recession !:I read this at the asheville times editrial page and it makes me wonder how anybody could be so stupid!!!
[...] post arguing that the very very minor economic downturn given the large number of shocks is a result of [...]
Jun 4, 2008 - 6:52 am 19. Ratatosk:Wow, what a very badly written assessment. Did you actually take any classes on economics, or did you see pretty pictures and think you could translate without any context?
This is a very tricky economic situation and gladhanding isn’t gonna help. Recessions are always difficult to pin down in their infancy, and no one can tell for sure what the end result will be. However, your conclusions are simply ill-informed. PJ Media once had relevant, well researched articles… now they seem willing to post half-assed nonsense just like the rest of the MSM.
Bleh. I’m done.
Jun 4, 2008 - 7:20 am 20. marchand chronicles:samule, thanks for the drive-by spamming.
Ratatosk, thanks for the drive-by flaming. Next time you disagree, manage to read the article first. This is the second sentence: “The economy is certainly not as healthy as it was a few years ago, AND MAY YET GET MUCH WORSE.” (Emphasis added, which I wouldn’t ordinarily point out, except some people seem not to get the obvious.)
Duquette’s entire point was that while the future may still be uncertain, the state of the economy RIGHT NOW is unbelievably sound considering the triple-shot of rising energy prices, rising food prices, and falling real estate prices.
Jun 4, 2008 - 9:26 am 21. Smokey:samule dhalgren, could you tell us what planet you’re reporting from? Because it certainly isn’t Earth.
And for those still arguing whether we’re in a recession, see here.
Note the shaded areas. They are recessions, as determined by the National Bureau of Economic Research of the Federal Reserve Board. A recession is specifically defined as two consecutive quarters of negative GDP growth. As a matter of fact [as opposed to liberal, know-nothing opinion], the U.S. is not in a recession — much as people with a political agenda want it to be so.
Furthermore, in the most recent quarter the U.S. economy has begun to accelerate, not contract. That is the truth of the matter, and those arguing recession are doing so with a politically mendacious agenda in mind.
Jun 4, 2008 - 12:46 pm 22. Don Polson:Analysis of news coverage of economy is incomplete w/out factoring in measurably more negative stories when Rep’s are president vs. Dem’s. Also, similar economic conditions under Clinton were reported consistently worse than under Bush. Example: “recession” as a topic showed up much more infrequently in 2000 when economic contraction actually occurred, compared to, oh, say, most of the last year as growth has gone from great to slow–but still growth.
Don Polson
Jun 5, 2008 - 4:16 pm 23. Don Polson:Change the sentence to “Also, similar economic conditions under Clinton were reported consistently more positively than under Bush.” Point is, the natural tendancy to report “bad news” gets more energetic when the President is a Republican.
Don
Jun 5, 2008 - 4:20 pm 24. Don Polson:Sentence should read: “Also, similar economic conditions under Clinton were reported consistently better than under Bush.” Yes, bad news sells but MSN is more energetic about reporting bad news when the President is a Republican than a Democrat.
Don
Jun 5, 2008 - 4:25 pm 25. sierra:Point: Why has the Fed stopped reporting M3????
Maybe too much cash “sloshing” around in the system that contributed to the crisis we are facing now?
I live in California; 77 years old; have gone thru many “downturns” (and upticks) in our economy and have never seen the “numbers” like now…..
We are a “consumer” society firstly, exporters second. The consumer is now faced with almost an insurmountable litany of problems from the rocketing price of gas (oil) to their primary support system, ie., home equity, being swiftly eroded.
We “own” a debt that we know that we can never repay……to “ourselves.” Still, it is un-repayable….
The Fed is printing money 24/7 and has been since the late ‘80′ crash….
We will eventually face the inevitable rock and hard place of plunging dollar world wide (which is occurring as we write) and the inevitability of raising interest rates to protect same.
We are now “bailing out” FINANCIAL institutions which goes against all common sense.
Our “banks” are no longer “local” so they no longer have any personal responsibilities towards their local communities. Thank heavens for credit unions and other smaller local thrifts…..
We are a nation adrift of history; ignorant of history; and refuse to understand what “globalization” means, except when defined by the MSM.
We have an administration (no less responsibility lays on the “opposition”) that is irresponsible in the least and criminal in the conduct of our foreign policies.
We have a selfish, narcissistic public that refuses to understand that we live in a global world; our “needs” or “lifestyles” are not meant to rule the world!
It will be interesting to see how the public and the our government/corporate power elites handle this latest mess.
As an atheist, God help us all!
Jun 7, 2008 - 7:51 am 26. Bennett:The Federal Reserve is the most un-American organization ever created, they are the ones who truly have the power over us; just a small group of secretive private bankers. The Federal Reserve System must be abolished. They have no constitutional authority to exist in the first place. By devaluing our currency they put America on the fast track towards depression, and through a system of creating debt they have turned all of us into slaves. The Fed meets in secret and has no oversight; as we talk about the need for more regulation in the financial sector to prevent fraudulent loans to be issued, the oversight should start at the top with the Federal Reserve disclosing all of their otherwise private details to the public. The Federal Reserve is a private corporate banking cartel made up of wealthy international bankers. The Federal Reserve is as “federal” as Federal Express. Because they are a private entity, they are the ones to benefit when money is borrowed from them every time they issue dollars America, which they print out of thin air on worthless paper. It costs just as much for the Fed to print a $100 bill as it does to print a $1 bill. It is advantageous for the Fed if the nation is put into a situation where it is forced to borrow as much money as possible. In this regard, war is by far the best situation for a nation to be in, and I am sure the private bankers of the Fed could not be happier that our deficit is in the trillions because of the wars we are engaged in. Who benefits from war? The Federal Reserve does, as it loans our own money to us at interest. This interest is paid in the form of the Income Tax, which is illegal as the income tax is a un-apportioned tax that cannot be levied upon people for their labor. Yet all of the money we make four months out of the year goes to pay the Income Tax. By so doing, the Federal Reserve has enslaved the American people, while they plunge us deeper and deeper into debt by making sure wars are sustained for as long as possible, and the currency becomes more and more worthless, and our homes are foreclosed upon to make us homeless upon the land our fathers conquered, just as Thomas Jefferson predicted would happen if we would ever allow private banking institutions to control the issue of our currency. The Federal Reserve is a sick and disgusting entity that must be abolished for good.
Jun 9, 2008 - 6:48 am 27. Jim:Now, now, now, Bennett. There’s more to the US money system than you say. True, our money system involves a lot of financial tricks rather than sound principles. But there are more factors involved. Still, our national debt consists of loans made mostly by international financiers who expect full return of their loan to us. Federal spending being so wildly out of control, and being backed by enormous amounts of debt is a very large factor in the dollar dropping so much recently. The US govt debt is increasing at a rate of more than $1 trillion per year now. The national debt increased 50% in the past 4 years. There is no sign of this letting up. Conservatives like to pat Bush on the back for his wonderful idea of tax cuts (and let’s ignore that they are not accompanied by corresponding spending cuts). Do we really think that this continual heavy borrowing can just continue on year after year without some big problems happening? Are we all (including conservatives) going to stay in our dreamland of heavy federal spending that has no backing? Wake up people. I believe USA is headed for major financial collapse – Federal Reserve or no Federal Reserve.
Jun 13, 2008 - 10:45 am 28. jose:You are so right sierra that’s my opinion
Mar 7, 2009 - 6:40 pm 29. Jesze915:Im still lost?
May 13, 2009 - 1:34 pm