The Coming Recession

Seven observers debate the (sorry) state of the economy.

From the June 2008 issue

(Page 3 of 4)

Much of the White House’s faulty economic policy can be traced to its wars in Afghanistan and Iraq, especially the latter because it has been larger, costlier, and more diverting. I use the word diverting deliberately to emphasize that the government’s military adventures in southwest Asia have served to draw the public’s attention away from economic measures that otherwise would have attracted more notice and hence more resistance.

One reason war is always associated with especially rapid growth in the size, scope, and power of the state is that it focuses people’s attention on what is seen as the most urgent matter, so they simply don’t notice what the government is doing in other areas. Another reason is that during wartime many people increase their broad support for the government and are less inclined to challenge its actions even when those actions have little or nothing to do with the war.

Hardly anyone was surprised that real military spending (measured in accordance with the government’s own narrow definition) increased by almost 60 percent between 2000 and 2007, compared to real GDP growth of 18 percent during that time. Note, however, that the government’s real nondefense outlays increased concurrently by more than 24 percent—an increase one-third greater than that of GDP. When people let down their guard in “supporting the troops,” they permit the government to make greater headway in its ceaseless quest to enlarge spending in a wide range of areas, many of them strictly civilian in nature.

The administration has partially concealed the burden of its spending binge by resorting to deficit finance. Federal debt held by the public increased by 49 percent between the end of fiscal 2000 and the end of fiscal 2007—a 24 percent increase after adjusting for inflation. To facilitate this surge in public borrowing, the Federal Reserve engineered a 40 percent increase in the monetary base, easing credit conditions in the commercial banking sector. The real estate bubble (now bursting) and the substantial depreciation of the dollar’s international exchange value are but two of the consequences of these reckless, war-spawned fiscal and monetary policies.

In view of the plunging stock market, my guess is that the current recession—in which many of the easy-credit-induced malinvestments of the past seven years are being liquidated by means of write-offs, loan defaults, bankruptcies, and other asset forfeitures—has much further to run. If you like the present worsening economic situation, write the president and your congressional representatives a letter and thank them for their war and their related economic spoliation.

Robert Higgs, a senior fellow in political economy at the Independent Institute, is author of Crisis and Leviathan: Critical Episodes in the Growth of American Government (Oxford University Press) and many other books.

Stagflation or Depression?
Robert E. Wright
The current U.S. economic outlook is as bleak as it was in 1974 or even 1930. Will the economy wither? Or will it just wilt a little before blossoming in a bath of Fed-supplied liquidity? Nobody knows for sure, but I fear the former. Here’s why:

• Our educational system does a poor job of teaching people how to think independently. It always has, but until recently that wasn’t a big problem. Today’s globalized economy, however, demands ever larger numbers of engineers, doctors, scientists, and sundry creative types. We probably won’t create enough independent thinkers until we have school choice at the primary, secondary, and tertiary levels.

• Thankfully, entrepreneurs abound. They’ve pulled us out of the economic fire in the past and could do so again. But they are more hamstrung than ever with high, uncertain, and often capricious taxes and regulations that do not appear to be going away anytime soon.

• Something stinks in our financial system. Six different mortgage securitization schemes blew up between the Civil War and World War II for exactly the same reason that subprime mortgages tanked last year: very poorly designed incentives for mortgage originators. Why don’t financiers and their regulators pay more attention to America’s rich financial heritage? Their modeling is more sophisticated than ever, but their economic reasoning is not.

• The national debt is so high ($9.4 trillion, or almost $31,000 per person) that the government must largely rely on monetary stimulus rather than more salubrious fiscal measures, such as permanently cutting taxes. Too much easing by the Fed could lead to 1970s-like inflation and further financial havoc.

• Urged on in part by the example set by their profligate leaders, Americans wallow in a huge pile of private debt as well. A high level of individual leverage has become a permanent fixture of the nation’s landscape. Americans owe so much that to keep growing, financial institutions have to push the margin of safety by making loans on ever thinner collateral and ever weaker covenants. If the economy slows significantly, many more poor-quality loans will hit the proverbial fan. The ensuing mess will stink and take a long time to clean up.

Even if the Federal Reserve manages to save the economy this time, these problems may continue to fester, breeding the next economic catastrophe. Perhaps, though, even greater levels of incompetence in other countries will break our fall.

Robert E. Wright is the author of One Nation Under Debt: Hamilton, Jefferson and the History of What We Owe (McGraw-Hill) and a curator for the Museum of American Finance. He teaches business, economic, and financial history at New York University’s Stern School of Business.

The Only Thing to Fear Is Fear-Driven Government ‘Control’
Donald J. Boudreaux
New York Times columnist Gail Collins was underwhelmed by the president’s folksy course-things-ain’t-great-now-but-we-Americans-with-our-rebate-checks-and-incessant-complaining-about-congressional-earmarks-are-gonna-be-just-fine address to the Economic Club of New York on March 14. She complained that “in times of crisis you would like to at least believe your leader has the capacity to pretend he’s in control.”

This is the attitude that scares me. I worry not a whit that the subprime crisis or falling share prices will cause long-term economic woe. As unnerving as the current downturn might be today, people in competitive markets always find ways of regaining their economic footing tomorrow. Investors recalibrate their expectations and entrepreneurs redirect their energies to take better advantage of the changing economic landscape. Workers’ pay and consumers’ standard of living, after blipping briefly downward, resume their upward trend.

“Nonsense!” a chorus yells. “What about the Great Depression? Or the 1970s?” The experiences of these decades are indeed relevant. They are, however, precisely why the clamor for putting someone “in control” of this crisis is so frightening.

Comments

Grand Poobah|5.5.08 @ 12:23PM|#

You forgot the requisite reference to those dastardly newsletters. How can you mention Ron Paul without dragging out the mythical LRC KKK hood?

Cosmotariat|5.5.08 @ 12:34PM|#

Grand Poobah | May 5, 2008, 12:23pm | #

Did you not see him talk about the Fed? Scary stuff...what a loon...you know when somebody mentions banks they mean "the jooos."

frankstallone|5.5.08 @ 12:59PM|#

Well, according to forbes I live in the country's most recession proof city (OKC). But good luck to the rest of you.

|5.5.08 @ 1:21PM|#

Urged on in part by the example set by their profligate leaders, Americans wallow in a huge pile of private debt as well.

I never quite understood statements like this. Does anyone really base their personal financial decisions on how much debt the federal government has? "Well, Honey, I was going to put this extra $2000 we have in a Roth IRA, but I just looked at the latest federal budget and said 'Screw it! Let the good times roll...'"

The Democratic Republican|5.5.08 @ 1:36PM|#

Hey frank! I don't live too far from you. Ya, it's good living in Oklahoma right about now!

Naga Sadow|5.5.08 @ 1:43PM|#

NAL,

I do. Also, some use it to judge loan timing. A set 160,000 dollar loan looks better if you anticipate inflationary pressures kicking your wages up due to "high cost of living increases".

Brandon|5.5.08 @ 1:53PM|#

Poobah said, "How can you mention Ron Paul without dragging out the mythical LRC KKK hood?"

This article wasn't compiled by David Weigel.

David Weigel|5.5.08 @ 2:10PM|#

This article wasn't compiled by David Weigel.

But I talked to him for the article, JUST BECAUSE I HATE HIM SO MUCH.

|5.5.08 @ 2:10PM|#

I never quite understood statements like this. Does anyone really base their personal financial decisions on how much debt the federal government has? "Well, Honey, I was going to put this extra $2000 we have in a Roth IRA, but I just looked at the latest federal budget and said 'Screw it! Let the good times roll...'"

Probably not literally. But in a broader sense, we now live in a society where debt is no longer a four-letter word, so to speak. Our ancestors were terrified of indebtedness, and rightfully so. But so many Americans today live in a dream world of thinking that they can always buy everything today and pay tomorrow. And the federal government's profligate nature sets a very bad example, to say the least. It's not enough to say that we get the government we deserve. We ARE the government, so it will always reflect us as we really are.

BTW, kudos to the Reason folks for this roundtable. A welcome relief from all of the Obama/Clinton crap that has dominated H&R lately.

PC|5.5.08 @ 2:22PM|#

David Weigel | May 5, 2008, 2:10pm | #

I don't think you hate him. You probably love him the same way Obama loves his racist evil grandmother.

Invisible Finger|5.5.08 @ 2:30PM|#

Does anyone really base their personal financial decisions on how much debt the federal government has?

No, but it IS based on the government's attitude toward debt versus savings. If the government goes deeper into debt, and the government is much smarter than me, then debt must not be a bad thing. So gimme that 120% LTV mortgage, please.

Plus, capital gains and savings are taxed up the ass, so it's not like the government rewards you for saving. Whereas there's always another debt bailout just around the corner.

Sam Grove|5.5.08 @ 2:31PM|#

Another thing that is different now is the proportion of people working in agriculture is much lower and most people are now dependent upon 'the system' for their daily bread.

As long as people keep going to work, we'll be able eat and maintain comfort. And they will keep going to work because they have to.

Brandybuck|5.5.08 @ 2:33PM|#

OMG! Two, not one, but two Austrian economists! Reason may have to turn in its Cosmotarian card, and Lew may have to tone down his snark!

Kolohe|5.5.08 @ 4:11PM|#

"There is a wonderful parallel here to the collapse of the Soviet Union. "

I'm only up to here so far, but this a crappy parallel.

What the big brains on wallstreet were trying to do was get towed into Jaws during a winter swell. Most get wiped out, but a few are able to surf it through a combo of prep, skill, and luck.

What the soviet union was trying to do was build a wave machine.

|5.5.08 @ 4:42PM|#

There is only two things wrong with our economy.

1. Gas prices. These are the fault of the environmental wacos and the global warming hysterics. They are stopping us from drilling for cheap local oil, building new refineries and changing the number of blends down from 60 to 10 or so, that refineries must produce.

This is mostly the fault of liberal Democrats. It amazes me when Americans think the Democrats will be better on the economy. They will push gas to $10/gallon if allowed to and raise our taxes to boot.

2. The fictional home mortage crunch. Once again it was liberals who said it was racist to give high risk borrowers good mortgage rates. So they gave them floaters and the rate went up a few points. They should never have been given credit in the first place unless it was at a very high rate so they would pay for the defaults of their deadbeat fellow travelers. Yet it was the liberals who presured banks to do this.

Now it is a buyers market. Most of the problems are in over priced California and Florida anyway.

Outside of that our economy is wonderful. The only reason anyone thinks otherwise is because of the propaganda coming out of the leftist press who want a Democrat in the white house. A pack of lies every day fools stupid Democrats.

If the press was fair and accurate none of this would be happening!

|5.5.08 @ 5:09PM|#

"There is only two things wrong with our economy. 1. Gas prices. 2. The fictional home mortage crunch."

Those two things don't bother me. The two that worry me are: 1. Potential for insolvent US Treasury. 2. Potential for hyperinflation.

1. With $9T outstanding UST debt, why does anyone want to buy T-bills anymore? When are bond purchasers going to wake up and think "Gee, I'm standing at the end of a long, long line. How the heck am I ever going to get paid back on these treasuries?"

2. If debt investors _do_ wake up, then what does the US do? Hyperinflate the money supply so that all the treasury-holders can get paid back (albeit in worthless dollars.)

I think these two things are most worth worrying about, since the worst historical economic disasters involved either or both.

|5.5.08 @ 7:03PM|#

The $9.4 trillion Bush debt burden in notes with its requisite vacuum of over $200 billion yearly INTEREST payments is the "main" problem with the economy.

The debt lowers the value of the dollar, ignites inflation via Fed rate cuts and sucks capital out of worthwhile endeavors - which in turn drives up the cost of oil and other commodities.

The Bush/GOP sycophants that make up the bulk of posters here can't get past their Christ-Faggotry long enough to recognize basic economics though.

Oh - and they beat off to the war dead too.... Fascists like TallDave take their perversion to Dr. Strangelove levels.

|5.5.08 @ 7:49PM|#

Sorry, but I will not be joining in the doom-and-gloom (note, traditionally, a great buy signal). With a net worth up 50% since Bush took office (as it is for most long-term, well-diversified investors --check pension funds and university endowments, for example), happy days are here again.

|5.5.08 @ 8:02PM|#

"up 50% since Bush took office" - DP

Pure bullshit.

I do, HOWEVER, believe many institutions are up 50% since the market lows of late 2002. The markets plunged from Inauguration Day to fall of 2002 following the Enron and Worldcom debacles.

Kolohe|5.5.08 @ 8:32PM|#

The Bush/GOP sycophants that make up the bulk of posters here can't get past their Christ-Faggotry long enough to recognize basic economics though.

um, perhaps you are confusing this with redstate? or perhaps townhall? lgf?

There are maybe 3 non-troll 'conventional' right-wing committed christians who post here fairly regularly. (talldave, john, and mad max).


And as another point of order, I propose that using the words 'basic economics' should be part of the drinking rules.

|5.5.08 @ 9:07PM|#

"There are maybe 3 non-troll 'conventional' right-wing committed christians who post here fairly regularly. (talldave, john, and mad max)." Kolohe

Well, there is Neil and Guy - if they count.

You no doubt know the posters better than I do.


I just hate fascists.

|5.5.08 @ 10:08PM|#

Well, there is Neil and Guy - if they count.

No Neil does not count as he is clearly performance art.

|5.5.08 @ 10:09PM|#

And as another point of order, I propose that using the words 'basic economics' should be part of the drinking rules.

Subject to invocation of DEMAND KURV, or independent?

|5.5.08 @ 10:16PM|#

The $9.4 trillion Bush debt burden in notes with its requisite vacuum of over $200 billion yearly INTEREST payments is the "main" problem with the economy.

The debt lowers the value of the dollar, ignites inflation via Fed rate cuts and sucks capital out of worthwhile endeavors - which in turn drives up the cost of oil and other commodities.

This is what I wrote that matters.

I have been "Wrighted".

Mr. Blather|5.5.08 @ 10:22PM|#

What is the source of the "two consecutive quarters" definition of a recession.?

This seems very odd to me:
Monday: I have $100
Tuesday: I lose $3.
Wednesday: I earn $1.
Thursday: I lose $2.
Friday: I earn $1.
Saturday: I lose $3.
Sunday: I earn $2.

By my math, I've $4 less by the next Monday, but I've never had two days of loss in a row. Isn't that a recession?

|5.5.08 @ 10:37PM|#

Blather, your understanding of economics is a thing of wonder.

|5.5.08 @ 10:47PM|#

Here, in small town, South Carolina, I'd say the economy is really, really bleak. Bush can be as cheery as he wants but the reality is people are actually walking to work here. I mean if they want to lose weight, more power to them, but I don't think that's the case.
Not to mention the price of milk.
And the truckers, some of them aren't moving their trucks cause it's not worth it.
I think we can only deny the inevitable for so long.

|5.5.08 @ 10:55PM|#

Sorry, Jeb.

The Bush fans will argue, but the trend is set.

Oil is going to $150 a barrel before the election. Food is going up 20% too.

Hang in there. The GOP is dying.

George Dubya Bush|5.6.08 @ 12:02AM|#

Recession? What recession? We aren't in a recession - my friends and I have never made so much money.

gmatts|5.6.08 @ 3:11AM|#

"Sen. Hillary Clinton (D-N.Y.) took a different tack: The "economic crisis is, at its core, a housing crisis," she said in a major Philadelphia address"

Nonsense. The housing "crisis" is endemic of our country's overall economic philosophy: "Don't worry about today, tomorrow simply must be better. After all, its America". Consequences of actions taken seem to be pooh-poohed to a bizarre degree nowadays.
IF someone can present a reasonable scenario where the federal governments fiscal house will be in order in the next 10-20 years I'd love to hear it. If not, I don't see how the expenditures that the gov't is on the hook for the next 20 years in anyway leaves the US economy in a strong position.
Odd that a President, when a private citizen, was only able to head oil companies that drilled empty holes and created debt has taken that "expertise" to the federal level.
But he'll be comfortably retired to his ranch with no cattle at that point. Let freedom ring!

Is there anyone here that would base their own personal finances on the model that our federal gov't is basing it's own fiscal policy on now?

Ebeneezer Scrooge|5.6.08 @ 4:07AM|#

Hang in there. The GOP is dying.

Yeah buddy. And the socialist Democrats will be here to stay for GOOD this time.

We'll be so much better off won't we.

|5.6.08 @ 9:40AM|#

America's worst enemy, economic wise, the US Congress. Gone are the days when upstanding men went to Washington because they had a vision to make things better. Today we have a congress of professional con-men whose sole purpose in life is to get re-elected and experience la dolce vida sucking the life out of the taxpayers. We also have embedded in the Washington establishment a powerful group of socialists who have never learned that since the great Socialist International of 1899, socialism has never delivered on its promise, not once.

|5.6.08 @ 10:17AM|#

I meant "la dolce vita".

|5.6.08 @ 11:10AM|#

In regards to Megan's 'big new health care entitlement' comment:

I find the continuing myth that we need to spend more money to get Universal Health Care (UHC) coverage disturbing. There are numerous industrialized countries that provide UHC to their citizens with better results, universal coverage, less medically-forced bankruptcies than the current US system. The kicker is that they all do so, get this, while spending less of a percentage of their GDP than the US currently does. Some cut the inefficiencies by almost a half.

Part of the problem is thinking that every UHC system needs to be socialized. It doesn't. Some are, but others are a mix of private and public institutions, while some are wholly private and are way less expensive (as a percentage of GDP) than the US system.

PBS and Frontline just aired a examination of UHC systems across the industrialized world. It might be worth the effort to be better informed before making the same old argument about health care being unaffordable and a budget buster.

|5.6.08 @ 5:53PM|#

joe sez The kicker is that they all do so, get this, while spending less of a percentage of their GDP than the US currently does. Some cut the inefficiencies by almost a half.

I don't have the reference handy, but I recall a study that indicated that healthcare spending goes up with income. In which case, it isn't a matter of inefficiency.

Kevin|5.14.08 @ 11:41PM|#

Joe, your comment avoids the question of why we would want universal healthcare coverage in the first place, regardless of how much or little it costs. The next question is why we can't make the US system less, rather than more socialistic, and save money that way instead (I would certainly save money).