Thomas Palley has a new op-ed in the Financial Times. Palley overviews some facts which give credibility to those economists predicting a double dip recession. If recession goes on long enough, it can be classified as a depression. A recession can be classified as a depression if it lasts more than 3 years.
There is a simple logic to why the economy will experience a second dip. That logic rests on the economics of deleveraging which inevitably produces a two-step correction. The first step has been worked through, and it triggered a financial crisis that caused the worst recession since the Great Depression. The second step has only just begun.
Deleveraging can be understood through a metaphor in which a car symbolises the economy. Borrowing is like stepping on the gas and accelerates economic activity. When borrowing stops, the foot comes off the pedal and the car slows down. However, the car’s trunk is now weighed down by accumulated debt so economic activity slows below its initial level.
With deleveraging, households increase saving and re-pay debt. This is the second step and it is like stepping on the brake, which causes the economy to slow further, in a motion akin to a double dip. Rapid deleveraging, as is happening now, is the equivalent of hitting the brakes hard. The only positive is it reduces debt, which is like removing weight from the trunk. That helps stabilise activity at a new lower level, but it does not speed up the car, as economists claim.
Now, I want to point to a very good overview article on 30 years of the Middle Class squeeze. In this article is a great summary on how tax structures have encouraged no real valued added economic growth and stymied the production economy, i.e. manufacturing. Ya know, the one where people have good jobs, make useful things....
Government policies actually encouraged this sort of risky speculation over actually investing in productive assets. To name but one example: hedge funds were allowed to report much of their speculative income as long-term capital gains, lowering their tax rate to 15 percent. Meanwhile, the tax rate paid by manufacturers of washing machines (for example) was 35 percent. Why invest in jobs, goods and services when playing with leverage and "innovations" was essentially rewarded by government policy?
The post lists a host of major reasons why the middle class has been squeezed and mentions globalization as a strong reason. But notice the government policies. It should be obvious that a bunch of glorified gamblers, i.e. hedge funds, getting that level of tax break, yet our manufacturing base pays over 2 times in taxes than these guys...uh, there might be an incentive problem!
We went from making things to making bubbles too:
The 1970s also saw the first beginnings of a loosening of financial regulations and the growth of credit and financial "innovations," such as securitization and derivatives. Capital increasingly fled real production for finance, which became the key profit-center of corporate America. GM didn't make money manufacturing autos; they made money selling loans to buy their cars. General Electric made more with its GECC finance arm than it did selling light bulbs and generators.
As a result, where finance and banking once generated a mere six percent of total U.S. corporate profits, by the height of the housing bubble in 2006 it was churning out 45 percent of all corporate profits. Indeed, U.S. "financial services and innovations" were the most heralded exports of the nation.
Now the question is....will this corrupt as hell government enact legislation and policies which actually are economic common sense, not written by various lobbyists to turn this nation around?