The worst — behind us or ahead of us?
The FT says that a “CNN poll found that almost 60 per cent of Americans expect the current recession to turn into a depression.” Brian Wesbury and Robert Stein in Forbes take issue with that gloomy assessment:
hourly wages rose 0.3% in December and were up 3.7% from December 2007. With the Consumer Price Index (CPI) expected to decline by 1.2% in December (data released this Friday), real (or, inflation-adjusted) wages likely increased 1.5%. Moreover, those real wages are likely up 4.8% from a year-ago, the fastest increase since 1972.
In addition, the real purchasing power of workers’ cash earnings (total hours multiplied by real hourly earnings) actually increased by about 0.3% in December, putting it about 0.1% ahead of where it was a year ago. In other words, declines in energy prices, as well as some other prices, have roughly offset the damage to consumer purchasing power caused by job cuts and fewer hours for the remaining workforce…
job cuts will continue to put downward pressure on earnings for at least the next few months. However, the decline in gasoline prices alone is saving consumers $410 billion in annual expenditures. In size, on an annual basis, this is similar to the government “stimulus” measures now under consideration. And instead of the money being allocated along political lines, sometimes by cumbersome bureaucracies, the money immediately gets into consumers’ pockets. The drop in energy prices, which will keep the CPI in negative territory for months to come, combined with moderate wage gains (generated by productivity growth), will continue to offset any decline in purchasing power due to falling employment.
On the other hand, what if this paper by Kenneth Rogoff and Carmen Reinhart is correct? What if the US slump is more typical of worldwide banking crises of recent years? As Martin Wolf summarized: “Banking crises are protracted…with output declining, on average, for two years. Asset market collapses are deep, with real house prices falling, again on average, by 35 per cent over six years and equity prices declining by 55 per cent over 3½ years. The rate of unemployment rises, on average, by 7 percentage points over four years, while output falls by 9 per cent.”
In short, what if the structural imbalances that we and Wolf have elsewhere discussed have to be dealt with before a permanent recovery can be achieved? It would be awfully nice if the Forbes writers turned out to be right.
January 16th, 2009 at 1:56 am
Recently a fellow commenter observed that my optimism is markedly anemic.
The FT says that a “CNN poll found that almost 60 per cent of Americans expect the current recession to turn into a depression.”
Bank of America, which supposedly was going to preserve Merrill Lynch’s role in the financial system, now wants more TARP money to absorb Merrill’s losses. After its stock nearly tripled from its recent low, Citigroup is plunging again.
Barney Frank and Phil Gramm have indignantly declared themselves blameless. Bernanke is an expert on the Great Depression, but he let Lehman fail. Paulson was going to buy up troubled assets, and then he wasn’t. (Geithner didn’t do his taxes correctly.)
This is like we’d broken the Japanese code in 1940 and then let Pearl Harbor happen anyway.
January 16th, 2009 at 1:13 pm
Just as FDR’s and Hoover’s actions turned a panic into a 12 year depression Obama and the Dhimmies with an able assist from RINOs and Bushies will turn this into another Nixon-Carter period of stagflation lasting perhaps ten years. I’d suggest people review Nixon’s price controls and Carter’s tax increases and see what they caused.