The last half year I’ve been feeling like a vindicated Cassandra. When the stock market was climbing with the talking heads claiming things were onward and upward, I kept looking at the fundamentals and found them very disturbing: An unsustainable current accounts deficit, increasing debt, alarming private debt (not just government), lack of production, and a growing gap between the rich and poor. That combined with a bubble economy pointed to disaster, and when it hit I had this sense of relief that my analysis had been right and I wasn’t totally off base. That sounds selfishly myopic — people are out of work, suffering, struggling, and here is this ivory tower academic feeling relieved that he was right?
But that’s not really what I mean. I did feel an intellectual sense of relief that I was seeing reality. But with my own retirement account now worth about half what it used to be, and with concerns about my children and of course my own future, I certainly would be happier without all this mess. On the other hand, the consumerist, materialist world we’d constructed — built on a foundation of sand — was leading us in a spiritually unhealthy direction.
After the bubble burst on the economy, my blog became obsessed with explaining — repeatedly, ad nauseum — why this was not just a minor crisis caused by subprime mortgages or an avoidable credit crunch. No, this is a result of nearly 30 years of living beyond our means and building an economy that was not supported by production. Many early on wanted to see this as a blip — John McCain saying “the fundamenals are sound,” Republicans saying “just cut taxes,” and people seeing this as “just another recession.” No, tihs is real. This is serious. This will hurt.
Now, however, I am starting to think that we’re nearing a point where things might actually start to turn around. The reason? Everybody is talking depression now, nobody thinks this is business as usual, there is real fear out there and, as they say on Wall Street, capitulation. The hopeful are finally giving up hope, those who said “we’ll start another growth cycle next year” are starting to consider the possibility this could go on for years. Optimism has virtually disappeared.
It’s counter-intuitive to see that as good. Usually economics is combined with psychology in the sense that high expectations help support economic growth, while gloom slows things down. But look at what gloom has led to — almost everyone seeing that change is needed, saving rates at their highest since 1995 (still lower than they should be, to be sure), and for all the controversy a government that sees the need to invest in infrastructure. It’s forcing us to rethink military expenditures and inspiring efforts to rethink global economic institutions. The Bretton Woods system instituted after WWII is obsolete, built for a world of discrete nation states rather than a globalized economy populated by transnational enterprises with powerful NGOs and IGOs. We need systemic change, a new regulatory regime, and we need to address structural global inequities. A crisis like this makes it possible to do that.
Moreover, President Obama is in the enviable position of having things bleakest at the start of his Presidency. He can not only plausibly but almost undeniably say he’s inhereted this, but he also does not have to give quick sudden results — he has time. This allows him to make difficult decisions even in the face of fierce criticism. He has large majorities in Congress which, while not “filibuster proof” give him a capacity to act that many Presidents lack. That doesn’t mean he’ll make wise choices, but at least there is the potential to make essential changes.
So I’m starting to think that we’re getting to the bottom here. Unemployment will rise for awhile, and we’ll likely have another bad year in 2009, though perhaps more stagnant by the end of the year rather than continuing declines. By mid-2010 with the stimulus money working we’ll perhaps see a small, slow start of a recovery — especially if Obama can really start cutting the deficit and thus maintain some kind of confidence in the dollar.
It won’t be a return to the high flying years of the ninties and aughts. The gap between the rich and poor will have to again narrow — no more massive bonuses and bubble salaries. Production will have to slowly grow, and the idea of a lifestyle based on cheap plastic goods from foreign lands will fade. We’ll recover, but it’ll be a sober recovery, a realistic one. Our political system will never be the same. It’ll probably veer “left,” though the left will overshoot and there will be a reaction against big government and bureaucracy — the political pendulum will keep swinging.
Yet as we recover we’ll have to again face the threat of oil shortages and price increases — something forgotten as the recession pushes oil prices down. Just as an economic downturn can cause quick and dramatic oil price declines, a recovery can send them upwards just as fast. We’ll have to seriously deal with debt and continue the trend towards a higher savings rate. There are also those old fears of terrorism, violence in the Mideast, global warming, and other problems that only seem to be have receded due to the urgency of the economic crisis. It does seem that world governments are addressing this crisis with those other issues in mind — focusing on energy alternatives, and structural changes to build a sustainable economy for the future.
Perhaps my forray into the seventies has left me a bit optimistic. But I sense something I haven’t before — psychologically I’m starting to feel like the bottom is in sight, even if still a bit distant and to be followed by an excruciatingly long and difficult recovery. Ultimately, the phrase “darkest before the dawn” signifies something real in terms of the political economy. Only when people finally recognize the severity of the situation and give up false hopes does the process start to turn around. Mabye we’re nearing that point now.