It might turn out that in a few months the ominous clouds we all seem to be seeing will turn out to have been just a nasty squall and the figurative sun will be warming our wallets just as the literal one begins to melt this winter into memory. Care to place a bet on that? Thought not.
There are two kinds of recessions. The common or business cycle recession caused by a simple imbalance of supply and demand that can be corrected by a few months of increasing unemployment and relatively minor pain. And then there's the structural recession, a much more nasty beast caused by more fundamental imbalances and often a change in the actual source of 'surplus value' that really drives wealth creation.
The proximate cause of the problems we face is the bursting of a financial bubble inflated by rotting loans and the gassy chemistry of derivative instruments designed to cover the bad smell of the former like a dose of Febreeze in a downmarket gym. On their own, bad loans, even in large numbers don't necessarily indicate structural problems, since some number of people and businesses can reliably get themselves into trouble in any business cycle. What seems to be behind this bubble though is a middle class struggle to maintain a set of expectations for themselves that the real economy can't support. Those people (FULL DISCLOSURE: I'm one of them) saw their incomes stagnate and even fall behind the level required by their own material expectations, and responded either by not saving at all or by using other people's money (loans) to keep up. This was okay in their (okay, our) minds because the assets they (yeh, we) did own were reliably increasing in value so their (our) equity (in housing, stocks, whatever) kept increasing, often at a rate that exceeded the increase in debt. I think most of us know that this kind of thing is inherently unsustainable, but we also think we're smart enough to cash out in time to avoid the inevitable crunch. (Is it surprising that this crisis is hitting just as the leading edge of the baby boom is turning 60?) So nearly everyone in the middle-aged middle class, raised to expect constantly rising expectations, raised their expectations just at the time retirement was raising it's enticing head, realized they didn't have enough, and tried to finesse the difference with a little harmless speculation. To be clear: many of us were not crazy or particularly foolish speculators. But we were placing bets on an unforseeable future with the capital we need to make it to that future.
Fair enough as far as it goes, but of course the issue driving all that behaviour is the erosion of economic supports for the middle class itself. That small problem of 20 or more years of little to no growth in real income in the bottom, middle and even upper-middle income slices of the population. This is partly explained by tax and other policy choices starting in the 1980s up to Dubya's tax cuts, which favour in extremis the top percent (or half-percent) of the population. But I don't think reversing those choices (sensible though that may be in lots of cases) would really address the crux of the problem.
My read on our situation at the moment is that the source of that surplus value I mentioned earlier has shifted in a way that is greatly disadvantageous to the middle class. In the early and middle part of the 20th century surplus value was created in the industrial processes of the great extraction & manufacturing companies. Surplus value came from successive refinements and efficiency improvements in those processes, and in the latter half of the 1900s the middle class benefitted thanks to the rise of organized labour, and later still the rise of the white-collar management and professional 'salarymen' who were increasingly needed to control the increasingly complex manufacturing systems.
Now, it seems that we have reached the end of the era in which wealth was created principally by improvements in industrial efficiency. Of course there are efficiencies to be found in industrial processes, many of which will be significant generators of wealth for some companies. The point is that these gains will be much more limited and not as likely to benefit the larger economy in the way the assembly line (the obvious example) did, spreading from its initial development to every corner of manufacturing as its principles were more and more widely applied, refined and improved upon. I think of it as manufacturing becoming a commodity; meaning, manufacturers have to work very very hard just to keep up with the competition. This is very similar to the plight faced by the small family farmer, circa 1930.
So the challenge we face is to reinvent the economic foundation for a large, stable middle class. I don't claim to have an answer (although I think Richard Florida and others like him are on the right track) but I think it's useful to see the challenge for what it is. Huge. Intimidating. Not band-aid sized.
More later.
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