The Cruel Prospect of Deep Recession

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and the Congress and President work out
the details of a proposed fiscal stimulus,
some are asking whether it will be enough
to keep the economy out of a recession.
The answer is very likely no.
The timing, length, and depth of a
recession depend on many variables and
is therefore difficult to predict. But there
are certain things that we already know.
First, we are witnessing the bursting of an
unprecedented bubble in house prices.
Nationally, a loss of wealth of about $8
trillion would be necessary just to bring
these prices back to their normal longterm
trend. Even conservative estimates
of the effect of such a drop imply a decline
in consumer spending of $400 billion, or
about 3 percent of GDP. Some economists
think it would be much more than that,
because of the expansion in recent years
of consumers borrowing against the (previously
rising) values of their homes.
We also have the first official GDP
growth numbers for the last quarter, which
show the economy at a near standstill with
just 0.6 percent annualized growth. Consumer
spending, which accounts for about
70 percent of the economy, has been holding
up; but this cannot last as the price of
homes that people have been borrowing
against continues to fall.
The size of the proposed stimulus,
which is about $150 billion, is just not
large enough to compensate for the kind of
spending declines that we can expect. Near
the peak of the housing bubble in 2005,
homeowners were cashing out about $780
billion in home equity at an annual rate.
Although not all of this was used for consumption,
a lot of it was; this ‘ATM
machine’ has now run out of cash.
It is worth looking at the total fiscal
stimulus provided by the federal government,
when the last huge asset bubble—in
the stock market—burst. The federal budget
went from a surplus of 2.4 percent of
GDP in 2000, to a deficit of 3.5 percent of
GDP in 2003. This is about 6 times the size
of the proposed stimulus package,
although the federal government will automatically
provide at least some more stimulus
than the current package, as tax revenues
fall and some social
spending rises.
Based on the experience of
the last three recessions, the
Center for Economic and Policy
Research has estimated that
the next recession could
increase unemployment by
3.2 to 5.8 million people, and
poverty by 4.7 to 10.4 million,
with at least 4.2 million also
losing health insurance. The
range depends on whether it is
a mild-to-moderate recession
like the last two (2001 and
1990–91) or more severe as in
Given the magnitude of the risks and
economic pain that our economy is facing,
it is imperative to demand measures that
will soften the blow—especially for the
most vulnerable, including the elderly,
unemployed, and poor. The package that
passes Congress, despite some positive
additions by the Senate, will be especially
inadequate in this regard.
Out of the Great Depression came the
New Deal, which included Social Security, the
legal right to organize unions, unemployment
compensation and other reforms that transformed
the United States into a more just
society while setting the stage for the post-
World War II boom. Over the last 30 years,
the country has become vastly more unequal
and economic performance has also deteriorated
with the ascendancy of the Right.
We are not facing a depression, but the
hard times ahead will highlight the need
for structural changes such as universal
health care and labor law reform. These
and other major reforms—including a bigger
and ‘green’ fiscal stimulus that would
reduce carbon emissions—should be
pushed to the top of the political agenda.

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