The economy has apparently retrenched, slowing to below expectations and more optimistic forecasts. Unemployment has risen above 9 percent again. Economists and pundits point to previous recessions and state that this should not be happening. Previous recoveries in all the recessions in the past 50 years were faster and more robust with job gains exceeding those lost in the downturn. What’s going on?
The short answer is that we have deeply different causal factors and effects in this recession than in any other. Past recessions had more narrow repercussions. The 2000 recession, for example, was directly related to the tech boom and madness over Internet and technology stocks. When the boom ended, the effects were not widespread or deep into the general population. Recovery was quick.
The severe recession of 1981-82 was brought on by Federal Reserve monetary contraction policy aimed at breaking the back of inflationary expectations — consumer prices were rising at a 14 percent per annum clip. This was the result of the previous Federal Reserve expansionist policy aimed at stimulating the economy (sound familiar) and offsetting the effects of the quadrupling of oil prices by Arab oil producers. Since the boom and bust were policy determined, the natural tendency of the economy to recover prevailed when left alone.
Our current situation is different on a number of levels. The first is causal. The recent recession was a result of the housing boom bust which affected the millions of Americans (62 percent of the population) who owned homes. Virtually every one of them took an economic hit with diminished home equity. The housing bust also devastated the building industry which accounts for some 17 percent of the economy.
The second significant difference is government interference in the natural ability of the economy to recover. The housing market has suffered a surfeit of official programs and policies aimed at boosting demand and preventing foreclosure. While seemingly compassionate, these unsuccessful programs stalled the drop in home prices necessary for a recovery to begin.
Finally, the present government is so anti-business in its culture and policies and thus so focused on controlling the economy, that producers and entrepreneurs are uncertain about their future. Jobs are not created by pessimists.
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