David Post: Our ongoing recession

Published 12:00 am Monday, August 22, 2011

Are we in a double dip recession? Economists hedge their bets using percentages. Most suggest a 30 percent chance we’ll go back into a recession, though some go out on a limb and peg the odds at up to 50 percent.
The better question is whether we are out of the one we entered three years ago. Unemployment rose from 5 percent to 9 percent and has not come down since.
I’m not an economist, so what do I know? But the answer is, yes. 100 percent. We are in a recession. My money says the Labor Department will confirm this after it accumulates and analyzes the data in 45 days.
A recession occurs when a country produces less than it did for two prior quarters. Production declines when people stop buying, and the U.S. economy relies upon the consumers buying 70 percent of production. Another 30 percent comes from federal, state and local governments.
Congress is locked in a death spiral to cut federal spending. Federal discretionary spending — dollars not on auto-pilot — will be the lowest as a percentage of the economy in more than 50 years.
Entitlement spending — those dollars on auto-pilot like Social Security and health care — is rising. Most entitlement spending is merely a transfer of money from one taxpayer to another. For example, Social Security takes money from current workers and transfers it to retirees. That’s government spending, but not production.
Medicare, Medicaid and military health costs are rising because we are getting older, poorer, and wars have hidden costs.
The federal government’s stimulus two years ago — a continuing source of political warfare — was very small and mostly offset by spending cuts by state and local governments. Teachers, police officers, firefighters and government employees were fired. School budgets and local governments have reduced services. Highways and bridges and other infrastructure needs are not being built or fixed. In the end, the net additional government spending was close to zero.
A fired teacher who starts a new lawn care or baby sitting business earns less and buys less.
Consumers buy less for many reasons. Wages haven’t grown in 30 years. Increased gas prices and food costs mean more money goes to the same quantity of goods, so fewer dollars are available to buy other consumer goods needed to pump up the economy.
Home values have declined 30 percent, and demand has declined even more. Sellers are receiving less for their property and have less to spend after they sell. New construction is almost non-existent, so construction workers have not had work for years.
Foreclosures are four times higher than just a few years ago. Banks are nervous that flooding the market with almost 2 million foreclosed houses will push values down further. If that happens, more banks risk becoming insolvent and being taken over by the government.
History teaches that recovering from a recession doesn’t happen when real estate values decline. Jobs cannot grow without a stable real estate market that pulls construction, manufacturing, banking, furniture, materials like steel and concrete and aluminum, and so many other industries with it. These industries that feed construction are suffering. The real estate industry is in tatters — probably the equivalent of a depression.
Banks are nervous about lending because they are afraid they won’t get paid back. Even with historically low interest rates, lending standards make it more difficult for borrowers to qualify for loans to buy a house or start a business. Consumers are buying fewer new cars.
Fewer consumers are using their credit cards that allow them to buy-now, pay-later. For years, economists have scolded consumers for using their credit cards and told them to save more. Nervous consumers are paying down their credit cards and using them less. Fearful about an uncertain future, consumers are saving more.
Stock markets have lost 15 percent of their value — trillions of dollars — in a few weeks. Retirement accounts are lower. Consumers are scared. The U.S. public and world markets have lost confidence in the United State’s ability to govern itself. Other countries worldwide have their own economic problems, so they are buying less.
If we’re not in a recession, that is merely a technicality. We went into a recession when unemployment rose from 5 percent to 9.8 percent. Because 90.2 percent of the workforce doesn’t produce and buy what 95 percent of the workforce would, the new goal line for determining growth became the 90.2 percent. So if unemployment drops to 9 percent and the economy rises to 92 percent of full production, that’s about 1 percent growth, though lower than the 95 percent production before the recession began. Only an economist could call that growth.
Are we in a recession? Absolutely. Have we come out of the past recession? No. We all know this. Only the economists don’t.
• • •
David Post is a co-owner of the Salisbury Pharmacy and an adjunct professor at Georgetown University.