Early in 2012, broad indices of income and employment turned upward. Although not dramatic, the upturn raised hopes that at long last the economic recovery was about to shift out of low gear and into overdrive.
Of course, there were nagging problems with this optimistic scenario. For one thing, the transportation sector did not participate in the upturn. Trucking in particular languished. This seemed odd in view of the fact that roughly two-thirds of all freight travels by truck. While puzzled by this seeming anomaly, commentators like Edward Leamer of UCLA voiced optimism that trucking would soon get with the program. And it seemed unlikely that the pace of trucking activity could long lag that of the general economy.
Well, one quarter later, trucking’s rate of growth has lined up with that of the overall economy. But convergence has not been effected by a growth spurt in trucking. Instead, it is the overall economy that has dropped back into line with the dismal growth rate of the trucking sector.
What might account for the seemingly inexplicable pattern of economic fluctuations that have plagued the Great Recession and its stunted offspring, the Little Recovery? Can we identify the keynotes that distinguish this Great Recession from past business cycles?
The Greek Chorus on the Economy
In ancient, classical drama, the Greek chorus served the function of narrator and commentator on the events depicted. Over the last few years, economic commentators have formed their own Greek chorus. This suits the dramatic quality of world economic history ever since the financial crisis of 2008 – crisis following crisis, the major industrial nations bleakly eyeing a wall of worry. No sooner has one fraught moment passed than another pops up.
The Greek Chorus may be theatrically effective, but they are analytically deficient. They lack the experience and assurance needed to ad lib an explanation for this, the least conventional business cycle of them all.
The traditional model of the business cycle posits wave-like movements of economic activity joined by high (peak) and low (trough) points. The falling portion of the wave is the contraction phase. The rising part is the expansion. This roughly corresponds to the experience of living Americans. But the current Great Recession is new and different.
At the outset, the recession began in December 2007, but few would have made book on its existence until the meltdown came in the fall of 2008 – at which point the economy nosedived like a crooked prizefighter. The official end of the recession in June 2009 came and went without notice; unemployment remained sky-high for months afterward.
Eventually, it became apparent that a recovery was underway. Make that an apparent recovery – two or three months of modest growth was succeeded by a backslide in income and employment. This is hardly a classic business cycle scenario and it’s no way to run a railway to economic growth. You can travel between two points by dancing a box step but it’s not an efficient way to traverse the distance.
But the Greek Chorus could only sing its part from a script. It could moralize about the Greeks and their woes, and how those woes would wound the West if we weren’t careful. It could sing about morality – greed and inequality and protest and such. It could narrate a familiar tale about the business cycle. But it couldn’t analyze. It lacked a theoretical framework in which to look beyond history and tradition to ask why this episode differed from all that had gone before.
The Greek Chorus Sings the Same Song, Different Verse
In the fourth quarter of 2011, the U.S. economy achieved annualized growth of 3.0% and unemployment fell to 8.3%. The Greek Chorus raised its voices in hosannas of praise and thanksgiving. In January, employment jumped further. This was an “unmistakable” sign that we had turned the corner.
Alas, first quarter of 2012 simply repeated the same song heard ever since 2009. This verse featured reduced annualized growth of 2.2% and slightly lower unemployment, culminating in an 8.1% rate in April, 2012.
Unfortunately, even a lower unemployment rate became a mixed message. While the number of unemployed persons fell by 175,000 between March and April, 2012, the number of employed persons also fell, by 165,000. The job gain of 115,000 was well below the 200,000 job gain usually considered necessary to absorb increases in population and labor-force growth in a typical month. Of course, this month was anything but typical – the civilian labor force fell by 342,000. Since the unemployment rate is calculated by dividing the number of unemployed (12,500,000) by the total number of people in the labor force (154,365,000), the resulting 8.1% was only a razor-thin improvement over the previous month (12,675,000 divided by 154,707,000 equals 8.2%). The total number of employed people was 141,865,000 – up from 137,968,000 in December 2009 but well behind the 146,595,000 in 2007, before the recession started.
Once again, the “unmistakable” signs of recovery had become mistakable.
Why the Greek Chorus Sings Off-Key
In its narrative role, the Greek Chorus is not performing but instead “phoning in” its performance by relying on pre-digested Keynesian platitudes and bromides, as if it had substituted a pre-recorded instrumental for live performance. And that instrumental is like an old phonograph needle stuck in a crack, playing the same notes over and over again.
The Greek Chorus excoriated Wall Street for the failures of its “rocket scientists,” who developed complex derivative securities and relied on statistical databases to develop safety ratings for mortgage-backed securities. Rightly so, for radically changed credit standards had made the databases worthless for evaluating creditworthiness in today’s environment. But now the Chorus fails to recognize that the textbook business-cycle model cannot describe today’s reality, in which policymakers manipulate markets in vain efforts to make miracles or buy time in which to maneuver.
The simple business-cycle model only worked when markets were allowed to work. Today, the economy functions like an automobile whose fuel supply is impaired by some flaw such as a clogged filter. The vehicle lurches forward, stutters, stops, and lunges forward again. Something is obviously wrong, even if the source is not quite clear.
Insofar as they have any economic training at all, most people are trained to look to aggregate demand, or total spending, as the key to all mysteries. But that is not the problem.
In a functioning economy, markets tend to reconcile diverse perspectives of different people by providing objective knowledge about reality. People rely on that. Each of us knows that we don’t know everything, so we rely on what markets tell us and we rely on our ability to get information on the future and in the future. We can’t do that today because we all know that today’s economy is not “real.”
The best example is the “zero interest rate” policy (ZIRP) followed by the Federal Reserve. Everybody knows that interest rates do not reflect the actual saving and investing desires of consumers and businesses. We all know that ZIRP cannot go on forever, and when it ends the interest-rate environment will change drastically. We know that all those drastic changes will have tremendous effects on most of the economic choices we make now and in the immediate future.
In effect, most of the country is living with one ear attuned to daily life and the other one keenly listening for the other shoe to drop – that is, for any sign of the change that we know is coming. Obviously, we can’t live in a state of suspended animation. But just as obviously, it’s in our interest to do the minimum necessary to get by until this state of massive uncertainty clarifies.
And guess what? Everybody “doing the minimum necessary” translates into an economy with minimal growth and confused direction. Long-term investment is attractive only when the circumstances are absolutely ideal – or when political corruption or cronyism tips the scales in favor of action. Hiring is analogous to long-term investment because it entails assumption of so many costs and because firing has become correspondingly difficult. It’s no wonder, then, that we’re in the fix we’re in.
Waiting – But Not for Godot
Some other paralysis-inducing factors are related to ZIRP. Current and future projected spending at the federal level is producing unprecedented peacetime accounting deficits. These require federal borrowing. Interest payments on the necessary bonds threaten to eat up the entire federal-government budget before the decade ends. Everybody knows that this process cannot continue. Everybody knows that its termination will require massive dislocations. Some of these might be large spending cuts, huge tax increases, elimination of federal-government agencies and departments, privatization of government functions, and large-scale reductions in federal employment. Nobody can dispute the stunning impact of these measures. Everybody is waiting to see what will happen.
Many state and local governments are in bad financial shape as well. Included among them are some of our largest and most populous states, such as California, Illinois and New York. Most people realize that the promises made to many public-employee unions regarding retirement pension and health-care benefits have placed government finance in an untenable position. Once again, the necessary remedial actions will have dramatic effects on all the affected parties. Everybody is waiting to see what will happen.
In Europe, Americans can watch a preview of coming distractions. The European welfare state is imploding. Whether the implosion becomes an explosion will depend on where the charges are set and on their strength. Greece is facing default on its public debt and withdrawal from the European Monetary Union. In an unprecedented action, Spain is about to bail out its largest bank. Everybody suspects that the stronger European countries are rapidly running out of time to deal with the depredations of the weaker ones. Deep in our hearts and heads, we know that Germans will not work until age 67 so as to pay higher taxes whose revenues will allow Greeks to retire at age 50.
We are waiting to see what happens.
The Federal Reserve has created astounding amounts of money by purchasing both new and existing federal debt. Instead of entering the flow of income and expenditure via the loan process, most of this created money has sat on bank balance sheets in the form of excess reserves, drawing interest paid by the Treasury. This policy was deliberately contrived by the Fed and Chairman Bernanke, presumably because of fears that many banks required bolstering to forestall insolvency and couldn’t be expected to bear the risks of normal operations. Everybody knows that this situation cannot continue indefinitely. Everybody knows that if this flood of money is injected via the usual loan process, hyperinflation will result. Everybody knows that hyperinflation would throw the U.S. economy into chaos. We are waiting to see what happens.
Tune Out the Greek Chorus
All this “waiting to see what happens” is frighteningly real. It cannot be quantified into a simple model like the Keynesian multiplier of income and expenditure, so it is beyond the ken of the Greek Chorus. It requires economic analysis of a kind that went out of fashion at the point when economics became “scientific” by relying exclusively on mathematics and statistics. We are beset by radical uncertainty, a term that is qualitative rather than quantitative. We cannot meaningfully assign probability values to possible outcomes, so the so-called economic theory of uncertainty is mostly useless here.
The solution, counterintuitive though it may be to so many of us, is to step back and allow markets to work. Every single source of radical uncertainty listed above is caused by policymakers either trying to overwhelm the market or trying to buy time to decide what to do next. Only time and markets can lift the fog of uncertainty, because only markets can generate and collate the objective information necessary to dispel the uncertainty that currently paralyzes us. In the meantime, we should ignore the Greek Chorus. If necessary, use earplugs.