The Letter

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There has been a lot of talk about a double-dip recession recently by people like Paul Krugman and Nouriel Roubini, how to define it, and what it means. What is missing from these discussions is the most obvious question of all: why won't the economy recover?
Capitalism is supposed to be self-correcting - or so we've been told - and a recession like the one we've had is supposed to be that reset button. So why aren't businesses hiring?
I'm going to try to answer that question in the simplest way possible.

There are two primary reasons why the economy isn't recovering, one reason is cyclical, the other is secular.

Today the ECRI Weekly Leading Index was at 9.8%. Notice from the graphs below, (fxmarketalerts.com), this index was -10% around the start of this recession.

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The Philadelphia Fed Index dropped sharply.

Barry Eichengreen and Kevin H. O’Rourke have been updating us on the progress of this depression by comparing it to the big one, The Great Depression. Their original post, in April 6, 2009, captivated their audience.

One thing that struck me was that we might compare the two events to the totally overlooked depression of the 1970s – The Great Stagflation. The reason why this one is missing and, perhaps, lost from official economic history is that it did not look anything like how we expect a depression to look – at least by the accepted, albeit vague, standard of what constitutes a depression. For instance, as shown in the graph below, year over year Gross Domestic Product enjoyed an unbroken expansion during the entire period.

Chart 1 (Source: Bureau of Economic Analysis)

Compare this performance to the contraction of GDP during the Great Depression

Chart 2 (Source: Bureau of Economic Analysis)

I know that the narrative on Wall Street, and some places in Washington, is that the recession is over, but Main Street feels otherwise.

More than 7 out of 10 in the U.S. say the economy is mired in recession, and the country is conflicted over how to balance concerns over joblessness and the federal budget deficit, according to a Bloomberg National Poll.

The interesting thing about this story is how it is reported. For instance:

Just like the experts, Americans are torn about whether the federal government should focus on curbing spending or creating jobs, the poll conducted July 9-12 shows. Seven of 10 Americans say reducing unemployment is the priority.

70% to 28% isn't "torn". That's a clear and overwhelming majority. You don't find a more clear mandate in a democracy.

Another poll that came out today shows similar pessimism from the public.

Three in four Americans now say the effects of the recession will last another two years or more. More than eight in 10 say the condition of the economy is bad, up five points from last month...

The most absurd thing is happening. Claiming to push exports, President Obama is planning on pushing a host of policies that are well documented to offshore outsource jobs and displace U.S. workers. On Obama's export council is Verizon, a notorious labor arbitrager. Ford, Disney, Pfizer (another notorious offshore outsourcer of advanced R&D), and Dow Chemical are also appointed.

Business Week:

He’ll have to push new trade agreements, higher quotas for skilled foreign workers, and tougher enforcement of intellectual-property rights.

On what planet, besides a made up one, does someone believe displacing a U.S. worker with a foreign guest worker helps U.S. workers get jobs? Of course firing Americans and replacing them with cheaper labor does not create U.S. jobs for American workers. Evidence of U.S. workforce displacement through global labor arbitrage is overwhelming. The top users of foreign guest worker visas are offshore outsourcers and even the GAO has documented the displacement and wage repression of U.S. workers.

Before you have a finished product you have a commodity, and before that commodity becomes a finished product it has to be shipped to market. That's why the Baltic Dry Index is a leading indicator.

The index of freight rates on international trade routes fell 38 points, or 2 percent, to 1,902 points today, according to the London-based Baltic Exchange. Today’s drop was the 31st straight decline. That’s the longest since the 34 sessions to Aug. 15, 2001, according to Baltic Exchange prices. Charter rates for all types of ships tracked by the exchange fell.
“We don’t see anything in the next two to three weeks that’s going to turn the market around,” Guy Campbell, head of dry bulk at Clarkson Plc, the world’s largest shipbroker, said by phone.

While the Baltic Dry Index hasn't fallen nearly as far as it did in 2008, it is falling faster than it did in 2008. It has collapsed by over 50% since May.

The most heated debate in Washington these days involves deficits and unemployment. There are lots of heated rhetoric, finger-pointing, and hyperbole.
What there isn't is a surplus of actual facts.

For instance, this headline reads "U.S. should cut deficit to spur recovery, IMF says". It implies that cutting the deficit would automatically increase economic growth.
That sounds good to me. The problem is that the IMF never actually says that. In fact, the article spends most of its time warning about a drop in economic growth.

The headline was misleading, as is just about everything said in this debate.