The June unemployment numbers do not look very pretty for the United States. After four months of improvements in the number of jobs lost, the numbers again increased to 467,000 up from 322,000 in May. The unemployment rate, now at 9.5 percent, is the highest in 26 years. The recession is entering its 20th month and will soon reach two years with little end in sight.
While the great recession of the 21st century grinds on, explanations for it continue to elude us. Some think that it is a depression and they may be right. I suggest that we have at least four issues on our plate that have emerged as a perfect story. The solutions to all are institutional. First, let’s start with the financial crisis. This financial crisis resulted from market failure. The lack of rules or what some like to call regulatory arbitrage, that is, working the rules led to the financial meltdown. We are still not out of the woods on this one because the rules have not been fixed. Without rules markets cannot work.
Second, we now have a global recession with falling demand and rising unemployment. A classic case of underused resources. The recession was in part caused by the financial crisis, but only in part. It is clear now that at least two interpretations are in order. First, it was a classic case of over-investment in housing. We have about two to three million too many houses. It will take about six years to work this off through population growth and attrition. This “inventory recession,” to use an old phrase, is nothing new, only the sector is – housing. The other interpretation is that it was caused by imbalances in the global economy between rich and poor countries. In either case, as Richard Florida pointed out with housing, or Business Week with global imbalances, new rules are needed.
Third, we have finally realized that we do indeed have a sustainability issue in the environment. It is both about the carbon footprint and about the type and amount of energy used. This is not a cause of our current financial and economic problems but it impacts it directly since it is about investment, and with a huge amount of uncertainty where to invest it is also putting a drag on the economy. Rules would help.
Finally, we are just realizing that globalization that started a few decades ago might be a dead end. It is a dead end not because the world does not want to globalize (most do) but because markets cannot work without rules. And in a global economy we need global rules. Here is the rub. All of the above problems in some way suffer from having a global economy without a set of global rules. When the last era of globalization ended at the dawn of the first world war, the rules that governed up to then also evaporated and it took decades to put them back in place after the second world war.
We are now into the second decade of the second globalization of the world economy. Until we are able to put the “rules of the game” in place markets, I am afraid the economy, and the financial sector, cannot be expected to lead to growth. The environmental rules are even more onerous. We just might need to start working on the rules of the game sooner rather than later. This seems like a task for the creative class. What is needed is talent and honesty in order to put a global structure in place where all can prosper. This is no small task.
July 2nd, 2009 at 1:55 pm
Steve Ballmer did an interview where he says recession is a misnomer, that the economy has reset to this new lower level. It won’t bounce back, but will grow from this new lower normal. Richard and others have also talked about reset, maybe meaning slightly different things.
The interview is here, scroll down about 2/3 of the way.
http://money.cnn.com/2009/07/01/markets/markets_newyork/index.htm?postversion=2009070116
What has globalized most successfully are entities that don’t use rules, like organized crime and terrorists. Also big corporations, which are playing local rules against each other, but are finding limits to this. Same with finance, money now has no borders, making us all vulnerable. Setting new rules is going to require entirely new paradigms, national governments can’t do it and 60 year old institutions like the UN and IMF aren’t up to the task either.
July 2nd, 2009 at 2:18 pm
There is a fifth issue that has contributed to the recession. Through borrowing too many people have consumed more than they have produced. As we bring the overleveraged situation back into balance it means many people will consume less and thus there is less need for goods and services which results in people being laid off.
Unfortunately, the corrective action being taken is for government to assume even more debt – both to fund the stimulus and to bailout banks that were stupid in their lending criteria.
Historically, inflation has been used as a means of decreasing the burden of debt by devaluing currency. Thus those stupid enough to be responsible in their finances end up taking a hit while those who overconsumed are bailed out.
July 2nd, 2009 at 5:05 pm
“This financial crisis resulted from market failure.”
Who in their right mind could honestly believe this? The failure is a direct result of an easy money policy by the Fed, specifically, Greenspan. Loose money led to a bubble in the form of easy loans, which in turn led to loans going bad.
July 3rd, 2009 at 2:23 am
Quote: “new rules are needed.”
The US Congress is enacting thousands of pages (and trillions of dollars) of new rules. Will these help? Or are they designed to prop up the old failing system?
July 4th, 2009 at 7:09 pm
New rules are needed and will be implemented but this piece grossly misstates the problem. This is the same author who cited the Baltic Dry Index as an indicator of further recession when, in fact, it had tilted up dramatically in the prior weeks and continues to surge.
EVERY ONE WHO CONTRIBUTES TO THIS SITE ON ECONOMIC ISSUES SHOULD DISCLOSE WHETHER HE OR SHE IS SHORT OR LONG, IF AT ALL, IN THE MARKET.
Good points in the piece, it just grossly overstates the issues. The economy is showing strong signs of recovery and a reset that creates new winners and losers is both inevitable and desirable. In any event, these disclosure issues need to be appreciated to maintain the credibility of this otherwise phenomenal forum and site.