an editorial opinion
In the future these could be the good old days
By Marvin Cetron
President, Forecasting International
Protesters in New York's Times Square supporting the "Occupy Wall Street" movement sensed that something had gone wrong in US society.
What follows is not the kind of prediction that is our usual stock in trade. It is more a cri de coeur, a heartfelt protest against Washington's neglect of economic, technological and workplace issues that will cause needless pain in the years ahead. It may not be easy reading.
It may not be credible, either, depending on your political and economic philosophy. "The fundamental problem I see with it is its Keynesian prejudice," writes General Atomics Vice Chairman Linden Blue. He has a point. If you reject Keynesian economics, this essay will seem poorly considered.
However, decades of watching economic cycles in many lands have convinced us that recessions end fastest and with least damage when governments intervene to stimulate the economy, rather than waiting for the downturn to run its course. Paying off debt is an issue for later, when funds are easier to come by. With that caveat, please join us in the future.
Ten years on
The year is 2021. Recession is a distant memory, according to the official numbers. Throughout the developed world, economies are growing slowly, but they are growing, as they have for much of the past decade.
Unfortunately, the benefits of economic progress are unevenly distributed. Many of those who were comfortable 10 years ago remain so today. But in the US, Europe and Japan the poor are poorer, and there are many more of them than there were in 2011. The jobless rate has soared, and unemployment has spread from factory workers to professionals such as doctors, lawyers, pilots and college professors.
Let us consider what went wrong with the global economy in the decade since 2011. Even if this difficult transition was unavoidable, could it have been eased? Are there better times ahead?
By 2007, we almost had it coming. The US had not experienced a long, deep recession in 25 years. The 2 brief, shallow downturns since 1982—8 months in 1991 and again 10 years later—had been all but forgotten.
A toxic combination of federal tax cuts and 2 wars, run on credit and off the books, had turned a budget surplus of $232 billion in 2000 into a deficit of $412 billion just 4 years later.
(By late 2011, the wars in Iraq and Afghanistan alone had cost some $2.4 trillion, according to the Congressional Budget Office, as Teal Group VP Analysis Richard Aboulafia noted at the time.) Worse, Washington had deregulated the banking and financial industries and done little to enforce such rules as remained. We were set up for a fall.
It arrived, of course, at the end of 2007. By 4Q2008, the US economy was contracting at a rate of 8.9% per year—a pace not seen since the 1950s. And the world by then was so closely interlinked that 4 of the world's remaining 6 largest economies also went into decline. Only China and France were spared.
In the US, the recession lasted 19 months. During that time, 4 million Americans lost their jobs, home values fell by 1/3 and international trade declined by nearly 1/5. But by Jul 2009, according to the strict technical definitions that economists apply to such things, it was over.
And yet something had changed. Solid growth of the kind America was accustomed to never returned. By 2011, the economy was barely expanding—GDP growth had peaked at just 1.3% in the 2nd quarter. Employment numbers remained 5% off their peak in Nov 2007, nearly 4 years earlier. "We have now lost 8 million jobs that will never return," Dennis Bushnell, Chief Scientist at NASA's Langley Research Center, pointed out late in 2011.
A decade later, we still have not seen GDP growth above 2.3%, and the official unemployment rate—known to economists as U3—has climbed from 9% to 15%.
True unemployment is probably much worse. U3 counts only people who are still looking for work.
U6, the most inclusive measure of joblessness, includes those who have given up as well as those who want full-time work but have found only part-time jobs. Over the past 10 years, U6 has grown from about 16% in 2011 to 25%. This is as bad as it was during the worst days of the Great Depression in the 1930s.
The rest of the world
In Greece in 2011, protestors took to Syntagma Square in Athens to rally against harsh austerity measures imposed by the EU authorities in an attempt to stabilize the failing Greek economy.
Ten years ago, people had more to worry about than the state of the US economy. Those were the days when Europe was imploding.
Greece had been admitted to the European Union (EU) in 2000 after reporting that it had gotten its budget deficit under control, as the EU government in Brussels had demanded. The Greek government had lied. By 2004, it was clear that the deficits were still growing. By 2011, no one truly imagined that Greek borrowing would ever be repaid.
At the same time, other European economies were in trouble. Public debt in Italy, Ireland, Spain and Portugal all amounted to substantial portions of their GDPs.
In all, foreign banks eventually had to write off some $2.7 trillion in loans to Greece, Ireland, Italy, Portugal and Spain. Nearly all those losses were transferred to taxpayers in France, Germany, Britain and the Benelux countries.
Beijing had problems as well. Its economy was slowing from double-digit growth to 8 or 9%, inflation had climbed above 6%, real estate speculation was out of control, and lending—much of it not publicly accounted for and much of it to bad credit risks—was believed to total about 120% of GDP. Any of those factors could have brought down the world's strongest major economy. They nearly did.
Japan had long been the weakest of the industrialized nations. In this respect, 2011 was no different from previous years. The earthquake and tsunami that March had cut economic production, and by October the economy was just beginning to grow again. Unfortunately, speculators around the world were buying up yen as a safe haven for their capital, driving up the Japanese currency's price on foreign exchange markets.
That threatened to cut export sales for an economy that depended heavily on them. Public debt amounted to some $10 trillion—twice the country's GDP—and any attempt to bring it under control risked sending the economy into recession. It was one more vulnerability in a world that was already oversupplied with them.
As we'll see, nothing could have prevented the rise of permanent unemployment. Technology had made that inevitable. But the transition could have been easier than it was.
Blame any needless pain on politics. Washington fiddled while the American Dream burned, and European leaders were not much better at meeting the challenges of 2011. When the US economy needed further stimulus to head off a 2nd dip into recession, Congress sat on its hands. When Europe required prompt, decisive action to keep its debt crisis from undermining its economy, officials marked time.