Why We're In the 'New Normal' (ie. Permanently Depressed) Economy

Recently, there's been a lot of talk in the media of the 'new normal' in the economy, where there is a recovery going on, but then again, there isn't.  The stock market has recovered, along with the banker's bonuses, etc., but unemployment, job growth, income growth throughout the American economy are all still very bad.  It's like this is a new discovery, but really, this is what I've expected all along.

Here's what I wrote last November, 2009:

On the way into the office this morning, the NPR news break announcer proclaimed the recession over. Happy days are here again, or to arrive shortly!

Oh really?

Mainstream economists and the media are really pathetic. They are living in a dream world of wishful thinking and wide-eyed optimism, totally divorced from reality.

The only people I know of for whom the recession is over are the Goldman Sachs bankers receiving their bonuses for Christmas.

Of course, even the optimists don't really mean we're on the path to recovery, they just mean the economy has bottomed out. Which may or may not be true, given all the uncertainties still looming. But we are by no means starting to recover. If anything, we're just digging ourselves deeper in a hole, having replaced private debt with public debt.

And the worst of it is, nobody is leveling with the people about our true condition. It's too politically unpalatable. The truth is too unpleasant.

Or perhaps they've just deceived themselves. Denial is one of our biggest vices here in the USA.

And then, 18 months ago, on April 13, 2009, I tried to explain why I saw a 'new normal' coming:

We are now in the throes of 'revisioning' our economy. What it has been is not what it will be.

First, some historical perspective on the 20th Century experience of 'Americana Economus.' We became a great power in the late 19th century, based on our abundant natural resources, the rise of our industrial base, and a vibrant capitalist economic system. After World War II, we were the dominant world superpower, economically and militarily. And with the New Deal reforms in place, wealth flowed to the average person in astounding ways, to the point where we truly became the most affluent nation the world has ever known.

That era basically ended in the early 70s, with the first oil embargo and the rise of stagflation. Our domestic oil had run out. Add to that the rising global economic competition of, first, nations like Germany and Japan, and then China and India, and you have an American economy in relative decline. We went from being the largest creditor nation to the largest debtor nation. With the beginning of the Reagan era in 1981, our affluence continued declining, although now the decline was masked by inflation, rising debt levels, easy money from the Fed, two-income households, various economic bubbles (dot-com and housing), Wall Street innovations such as CDO securitization and derivatives, and technological developments like computers, the internet, and DVDs.

The masking of our three-decade-long economic decline ended with the financial and economic collapse of the last two years. Now we find ourselves in a difficult situation, which will not be easy to get out of. And to some extent, I agree with [Robert] Samuelson that the Obama team doesn't seem to have come to grips with our dilemma. Many critics are saying that the Obama people think we can return to the status quo ante of prosperity that we knew prior to 2007. I don't think we can.

I believe that we have effectively lost something like a quarter to a third of our 'wealth' in the last two years, wealth that cannot be recovered because it was never real to begin with. It was funny, easy, illusory wealth that only existed on paper. We have continued to outsource and deindustrialize our economy to the point where well-paying jobs are getting harder and harder to find. Many baby boomers are not ready for retirement and probably will never be ready, because of the current economic situation. Younger people are beginning to realize that many of the good things they thought just came with being American will never be within their reach. The extent to which incomes and wealth has been concentrated in the upper 1-2% of the population is outrageous and needs to be reversed, though I'm not sure that our politicians are free enough from their plutocratic masters to do so. If oil has really peaked, as more and more people are thinking, then the future gets even more precarious, because energy supplies will get more expensive.

In other words, we are becoming a much more 'normal' and average country in the world. At this point, only our bloated military (along with our dollar as the world's reserve currency) keeps us in the game, so to speak.

And a week before that, on April 7, 2009, I wrote in response to a NYT editorial predicting a return to basic, pre-crash economic prosperity:

How can we conceivably return to the kind of economy we had in the recent housing-bubble of the past 5 years, or the dot-com bubble before that? Are we finally going to attempt to move into some kind of non-bubble economy, or are we fated to just have one bubble after another, followed by collapse? But the reason we have to have economic bubbles is that a non-bubble US economy wouldn't support full-employment or the kind of affluence we have experienced over the last two decades, and we haven't yet accepted that reality as a nation.

All of this wishful thinking is predicated on increasing debt levels which are simply not sustainable for very much longer. Not only that, but the looming oil shortage and the corresponding price increases (which we tasted last summer) are going to really throw us for a loop. When I read statements like that above, I realize how out-of-touch our economic conventional wisdom really is.

If our government, the economic powers that be, and the public refuse to adjust to realities (meaning a considerably smaller economy and lower standard of living), then our desperate efforts to return to 'normal' will only cause much greater economic suffering in the years to come.

It is like an addict that refuses to acknowledge their addiction and continues abusing until they collapse. We can continue to snort or we can go to AA. I think I know what we're going to do, and it ain't AA. We just don't have that much self-discipline as a people.

On April 4, 2009, I wrote:

To some extent, there is no recovering the money that's been lost in the great financial debacle. It's already been spent or looted. Everyone has already taken a big hit, in the value of their homes, the value of their 401(k)s and stocks, and continuing with lost jobs and lower wages, etc. The only ones not having taken as big a hit as they deserve are the big boys who steered us wrong to begin with and scammed us silly. They need to put on notice and certainly not feted at the White House, as if they're some kind of damn royalty. They--the Robert Rubins, Stanley Neals, Ken Lewises, Stan Greenbergs etc,--should never be allowed back in the industry (maybe because they're in federal penitenturies, along with Mr. Madoff). Will the recently fired CEO at GM ever head up a major auto firm? Unlikely.

The unappealing fact is that our economy is going to shrink by what, a third? We are so overleveraged as a nation, and our economy so revved up on fiscal caffeine, that it is now unwinding in a very natural, if painful way. That's the price we're paying for 30 years of blissful ignorance, and I don't see any way of really changing it. We've got to get down to business and doing the things that will produce true and sustainable wealth, not the faux, illusory wealth that finance produced for us, or we will become a poor, pathetic country.

And finally, I wrote this analysis of the American economy, based on the writings of Kevin Phillips, on March 14, 2009, which examines why we're in a 'new normal' economy:

First of all, the American economy reached a high point of true strength and wealth in the post-WW II period, when the rest of world's wealth was exhausted or destroyed by the war while America was the world's only true economic and military superpower. (The industrial age had begun in the 1870s). This period lasted through the mid-sixties, at which point we had the largest middle class that has ever existed in any industrial society, largely due to the fact that there was a positive working arrangement between industry, labor, and government.

Beginning with the Vietnam War, things began to go downhill for the American economy. Various circumstances led to an economy in which the following things happened over the next 40+ years: our manufacturing declined from around 50% of our economy down to about 10% today; the financial sector went from below 10% to above 30%, we went from being a creditor nation to the world's largest debtor nation, and the national economic wealth and income was the most inequitably distributed since the Roaring Twenties.

This all began with the Vietnam War, and its guns and butter philosophy, was continued through the seventies, with its oil embargo and stagflation. By 1980, with the economy reeling and the nation demoralized from the loss of the Vietnam War, it was almost inevitable that someone like Reagan would come along, with his optimistic philosophy. What he also brought was a free-market, laissez-faire economic philosophy which has led to the situation as described above.

Reaganomics/Thatcherism, which has been the reigning economic philosophy until 2008 (even throught the Clinton years), was essentially an overturning of the New Deal/Fair Deal/Good Society initiatives, returning America to the economics of the Gilded Age of the 1890s and the Roaring Twenties, just prior to the Great Depression. It was characterized by the following traits: (1) removing government from economic intervention, especially the deregulation of industry and finance; (2) hostility to labor unions; (3) the rise of mergers and corporate consolidation, with their negative effects on employees and communities, with outsourcing becoming more prevalent more recently; (4) tax reduction as the economic elixir that could solve anything; (5) the inexorable increase of indebtedness at every level of society, both public and especially private; (6) the concentration of wealth in the richest 1-2% of the population; (7) the decline of upper-middle, middle-class and lower class incomes; (8) the disguising of inflation and unemployment behind faked government numbers; (9) boom and bust cycles, characteristiced by stock-market and asset-price instability and crashes; (10) the rise of the finance sector as the leading source of wealth; and finally (11) the near-worship of the 'market' as the source of all economic knowledge and good.

Obviously, if you are in the, say, top 1 or 2% of the population, you have benefited tremendously from the last 40 years. You are set up, with anywhere from $10 million to $80 billion, in such a way that you and your descendents will probably never run out of money, and can set up shop wherever you desire in the world, if America falls apart.

If you are in the bottom 95%, things are not looking so good. Hence, the term 'plutocracy.'

So, based on this historical analysis, I'm not at all surprised by the 'new normal' economy. How do we recover? I'll put that in the next post.