The X-Shaped Recovery

Robert Reich blogs the recovery, and says something very similar to what I said yesterday in San Diego:

My prediction? Not a V, not a U. But an X. This economy can’t get back on track because the track we were on for years — featuring flat or declining median wages, mounting consumer debt, and widening insecurity, not to mention increasing carbon in the atmosphere — simply cannot be sustained.

The X marks a brand new track — a new economy. What will it look like? Nobody knows. All we know is the current economy can’t “recover” because it can’t go back to where it was before the crash. So instead of asking when the recovery will start, we should be asking when and how the new economy will begin.

This is related to Mohamed El-Erian’s “new normal” idea — while previous recessions were part of economic cycles within a certain economy, what we’re going through right now is a painful disruption from that economy to something else. I fear that the flat or declining median wages, however, might well survive the transition — at least so long as unemployment continues to remain as high as it is now. Which is one reason not to worry overmuch about inflation: If consumer spending accounts for 70% of the economy, and consumers don’t have any money, it’s really hard for prices to rise very quickly.

Comments

[Roger Knights:]

X = h

Jul 10 11:36 AM

[JPSmith:]

I agree that as long as the global economy is in the crapper it is hard for prices to rise. But it won't be so hard once global recovery starts pushing up raw material costs. Since the U.S. is likely to be a laggard in the recovery we'll then be hit with 70's-style stagflation where everyday goods cost more even though demand for discretionaries remains weak.

Jul 10 11:44 AM

[W.E. Heasley:]

Reich is trapped in a 1975 Keynesian Economics class. Further, Poor Old Robert is never coming out of that classroom. He's afraid Milton Friedman is laying for him right behind the classroom door.

Reich mentions declining median wages. Reich never mentions nominal median wage vs. real median wage. Real median wages is inconvenient to Robert's argument.

An "X" recovery might well be the case when the deployment of Keynesian Deficit Spending (Quasi-Stimulus Package) is based on Political-Political rather than Political-Economy.

Reich‘s "X" does not denote a new normal. Rather the "X" denoting the spot on the economic map of persistent high unemployment due to the lack of incentive for Private Capital Formation leading to Private Sector Jobs.

If one wants to deploy Keynesian Theory, one has to, at the very least, understand that Keynes went on to say Deficit Government Spending was temporary until the Private Sector Recovered. With no incentive for Private Capital Formation on the radar screen, no Private Sector jobs will occur.

Regarding Reich’s reference to "not to mention increasing carbon in the atmosphere", that's Reich exercising Political Science not Economics.

Jul 11 08:42 AM

[Mark Bern:]

How true. That is why it will be important to be on the right train that is headed down the right track to achieve investment gains. This isn't an end of the world scenario. We're heading in a different direction and at a very different pace overall.

The best word use in the article was the use of disruptive. We need to find those "disruptive" technolgies and strategies that will win in the new economy. Buy an hold isn't exqactly dead. It just takes a lot more time and research to find the right companies headed by the right management heading in the right direction to take advantages of the changes facing our economy. The game hasn't really changed. It's just a little harder.

Jul 11 12:04 PM

[Greame H:]

<But it won't be so hard once global recovery starts pushing up raw material costs. Since the U.S. is likely to be a laggard in the recovery we'll then be hit with 70's-style stagflation where everyday goods cost more even though demand for discretionaries remains weak>

and add to that a depreciating US Dollar and the resulting rising prices will be part of the adjustment of real US incomes that is the end-game of the globalization of the world economy

Jul 11 03:32 PM

[Northstar10000:]

Watch the surprise when inflation is the problem and we could not intellectually see any way for it to happen. You can in no way get to an inflationary spot in the near term based on any number you look at. Everything that effect the economy in any big way is down from last year. No way for inflation. that's why it's coming.

Jul 11 06:04 PM

[Wisdom vs. ...:]

carbon has gone up a few parts per 10 million during the period Reich is talking about, that comment is idiotic; where is Felix's acidic pen? Heasley hits the nail on the head above: Reich being too dense to understand Friedman is the tip of the iceberg, he is always wrong. The fact that he was in the federal cabinet tells you something important; of course, Obama has loaded his administration with failed demand siders as well (Goolsby?! are you kidding me? that guy should have quit in disgrace over the CRA scandal). Volcker/Friedman fixed this mess once before, let Volcker do it again

Jul 11 06:06 PM

[perceptions...:]

I agree about the crapper!

The global recovery in raw materials could be different, as the supply of Oil HAS PEAKED and that will continue to be a problem, until &/or if a solution is found to replace the use of oil, in its many forms.

In addition, an aging population throws up another dilemna, with increasing costs & slowing demand.


On Jul 10 11:44 AM JPSmith wrote:

> I agree that as long as the global economy is in the crapper it is
> hard for prices to rise.
>But it won't be so hard once global recovery starts pushing up raw material costs. Since the U.S. is likely to be a laggard in the recovery we'll then be hit with 70's-style stagflation where everyday goods cost more even though demand for discretionaries
remains weak.

Jul 11 09:24 PM