America, and the world, could be looking at the worst recession since the '70s and early '80s. (Coincidentally, the last recession began simultaneously with the end of an 8 year presidency. The one before that was pretty close, too.) I remember that era. Only the unions and the remnants of employer-worker loyalty saved my neighbors from prolonged unemployment and foreclosure. St. Louis firms tried hard to keep their doors open. We know it wasn't so good in other industrial cities: Detroit, Pittsburgh, Cleveland, Milwaukee, southern Pennsylvania.
There was a string of recessions throughout the '70s with only mild recoveries between. When the economy was not contracting, interest rates and inflation roared frighteningly in our faces. We could smell the foul breath of rancid practices from the government. Social spending, regulation, and hideously high taxes were choking the American economy.
Reagan fixed some of that, but it took time. Stagflation--the combination of flat growth and high inflation--had to be killed like malignant cells. The patient got sick in the process. It wasn't pretty.
Conditions are right for another long, deep recession--the kind no one under 30 remembers. Double-digit unemployment, double-digit interst rates, and salary cuts galore.
Now, I've been noodling this post for a couple of weeks, but a Wall Street Journal article pushed me to finally write it. Here's my concern:
- Oil prices seem to have settled in at $90+ a barrell. Look back to the Arab Oil Embargo and the launch of OPEC. It was oil that first wracked our economy in the '70s, and we needed a decade to get that monster under control.
- Banks are not lending. Even though the banks had a lot to do with the forclosure fiasco, they seem not to undertand that holding their cash will only make matters worse. It seems the big banks want to see a recession--perhaps to help share the misery that they feel right now.
- A Democrat Congress discourages business investment. The only two sustained economic rallies since the Vietnam war occurred in response to Republican legislation. The GOP controlled the Senate and White House from 1981 to 1987. That ushered in Reagonomics. The GOP held both houses of Congress from 1995 to 2007. That brought about the next real rally. From 1991 to 1994, the economy was on its knees.
- The leading candidates in both parties seem eager to expand social spending in health care, education, and the other cash wasters Washington so adores.
- The Bush tax cuts are set to expire in 2010, and a Democrat Congress will not renew them, especially in a recession.
Here are some choice quotes from WSJ.com:
Housing is in the midst of its worst downturn since at least the 1970s. That has led to a meltdown in the mortgage market; with financial firms struggling to make sense of their losses, they are making it harder for even credit-worthy borrowers to get loans. The combination of heavy debt loads, still-high energy and food prices and a weakening job market has households tightening their belts. Consumer spending, long a bulwark of the economy, is faltering.
On the severity of the current housing market conditions:
University of Maryland economist Carmen Reinhart and Harvard University economist Kenneth Rogoff agree. They say the current crisis appears on track to be at least as bad as the five most catastrophic financial crises to hit industrialized countries since World War II.
Robert Gordon, University of Illinois economist, on the effects of oil prices:
"While energy is not as important a part of the consumer budget as it was in the '70s -- nor is food -- nevertheless, the squeeze will push out consumption in everything else," Mr. Gordon says. "Across the board, I think we're going to have significant ongoing pressure in inflation-adjusted retail sales."
Our best hope is to stave off the recession until after the election. If the GOP can capture one house of Congress, we have a chance of maintaining some policy sanity in Washington. If the Democrats hold sway, expect the next four years to look a whole lot like the Carter Administration.