One of the more popular buzzwords nowadays are “lost decade.” It’s actually another way of expressing the fear that today’s global financial problems will paralyze economies and stock markets for 10 years or more. Now, it’s a legitimate worry. But addressing the immediate dangers won’t be enough to avert a lost decade in the U.S. Equally important is a way to find a means to promote long-term economic growth that isn’t fueled by borrowing.
The term “lost decade” is best known in connection with the prolonged stagnation in Japan that occurred from Japan’s 1989 stock market crash and the bank bailouts that followed. More recently, it has become popular in the U.K. as a way of referring to forecasts of an unparalleled decline in living standards of the average citizen. The American version of a lost decade would not be the same, but it’s still a little scary.
Avoiding another recession is not enough.
On Friday, the White House framed the most recent jobs report as part of a plan for long-term job creation. And certainly, the decline in the unemployment rate to 8.6% seems heartening. But while there were an estimated 120,000 new jobs in November, over 300,000 people simply left the labor force and gave up or ran out of unemployment benefits. By that means of calculating unemployment, we could eliminate all unemployment if everyone just stopped looking for work and stayed home. For genuine improvement, new jobs have to be created at a much faster rate than they have been over the past couple of years. Slow growth is simply a kinder, gentler recession.
Financial recessions are more damaging than normal recessions.
Every unhappy family is unhappy in its own way, according to Tolstoy, but recessions can be broadly divided into two categories. The first is the normal business-cycle recession. Companies over-expand, build up too much inventory, hire too many people and generally get overextended. Then a period of correction comes in which companies cut back and lay off workers. That process takes around 18 months. But the defining factor is that the banking system remains undamaged. In a financial recession, by contrast, it is not only the industrial economy that gets overextended , so too do the banks. Additionally, correcting the excesses of the financial system takes much, much longer. The current recession has already been , and some leading economists say that full recoveries from financial recessions take six to 10 years.
An external shock could cause a double-dip recession.
Unpredictable events, such as a crash in China caused by the bubble in their own real estate prices or conflict in the Middle East triggered by an attack on Iran’s nuclear facilities, could trigger a second recession and start the clock for recovery all over again. Also, a collapse of the common euro currency or the breakup of the Eurozone could be equally disruptive. Even without such a dramatic event, attempts to straighten out Eurozone economies and shore up European banks could result in less lending and stagnation in the world economy.
So what happens now?
First, it’s extremely likely that something damaging to the U.S. economy will happen between now and the 2012 election. Secondly, the aftermath could easily be a period of prolonged stagnation. Even the clearest outlook on the economy tends to emphasize immediate problems, focus on the deficit or submerge the essential need for growth among a plethora of other considerations.
Albeit perfectly understandable, recessions – even bad ones – end eventually. Furthermore, they seldom harm the prospects of long-term investors. Average and poor Americans, as always, will bear the brunt of the unforgiving economic undulations.
Historically, periods of depressed stock prices have been followed by above-average returns, both because investors get to accumulate shares when prices are at bargain levels, and because economies that have gone through a period of correction usually get to play catch-up for a while once growth resumes.
What is essential, however, is that growth resumes. This is where our country’s leaders, if they really cared about anyone other than themselves, should be addressing the inadequacies of current attempts at mitigating public damage.
Short-term global financial threats may be the most obvious danger, but defending against them won’t prevent a lost decade. Even focusing on long-term budget problems – essential as that is – will not be enough to improve living standards for the majority of the American population. There is no real way to avoid a lost decade without restoring a normal level of long-term economic growth. That simply cannot be accomplished by austerity alone or by stimulus plans that rely on borrowed money.
The U.S. has an advantage over the Eurozone. The most troubled countries that use the euro currency may be shrinking their deficits faster than we are, but they already have crushing debts accumulated in past years. The countries are trying to survive under common financial policies, but employ their respective fiscal policies while doing so. This can never work long-term.
By contrast, U.S. debt is still manageable – especially once you consider that a big chunk of it is owed by one part of the government to another, (two wars and a Medicare increase funded with funds borrowed from the Social Security Trust Fund.
All of which, fortunately, means that we still have time to fix things. But it is essential that the current discussion be shifted to focus explicitly on the need for pro-growth policies. As we enter the election season, the first question every candidate should be asked is: “What is your plan to encourage healthy rates of economic growth at the same time that you are reducing the deficit?” To avoid a lost decade, it’s every bit as important to focus on reviving growth as on riding out the recession.
Survival strategies just aren’t good enough.