One of the warnings in Rules for Economists reads: Never say it's different this time. It comes right after a rule prohibiting the use of clear language in presentations, and right before a rule about how to revise forecasts while leaving the impression you've been correct all along.
But, in 2008, things are different - at least different in terms of what triggered the most recent U.S. economic downturn.
The nasty recession of the early 1980s was a corporate-led downturn. With its manufacturing might challenged by Japan, overleveraged balance sheets and lots of debt, corporate America was in serious trouble. Massive layoffs and shuttered factories gave us the term "the rust belt," which aptly described much of the industrial Midwest. High energy costs and interest rates added to the corporate bloodshed. Unemployment soared as companies laid off workers in desperate bids to control costs.
In the 1990s, the U.S. was plagued by a government-led downturn. Suffering a pounding hangover from excessive government spending in the Reagan years, the federal government's annual deficits and debt were rising. That begat some inflation pressures, which begat higher interest rates. Households were left with higher borrowing costs - et voilà! a recession.
In 2008, the U.S. is suffering from a consumer-led downturn. In the early 2000s, the Federal Reserve lowered interest rates to combat the economic pullback stemming from the tech-market meltdown and 9/11. Looking back, America's interest rates stayed too low for too long, and that gave birth to the enormous housing bubble. Subprime mortgage lending and loose credit were fuel on the fire. The toxic combination of bad debt, tumbling housing prices and overly complex lending instruments caused the credit market to seize up. Add to that some energy and food inflation, and U.S. consumers are singing the blues.
In terms of actual economic output, the U.S. economy has remained well in the black this year. But that's entirely due to rising exports (thanks to the low value of the U.S. dollar) and higher government spending. Measured by job losses, falling household wealth, sinking real-estate prices, consumer confidence and a bevy of other indicators, America is in recession plain and simple.
Because U.S. consumers account for nearly 70 per cent of the economy, it's not likely this recession will end any time soon. The credit markets remain stuck in the mud. A few times this year, it looked like things were improving, but along came headline trouble for some big-name financial players (Bears Stearns, Fannie Mae, Freddie Mac). Optimism quickly evaporated.
The housing market is mired in deep trouble, and many observers suggest prices will still fall by another 10 per cent to 15 per cent. Even worse, it's estimated 14 per cent of American homes have negative equity - they are worth less than the balance remaining on the mortgage. And the huge inventory of homes on the market is going to dramatically limit new-home construction.
For its part, the Federal Reserve knows that any further cuts to interest rates probably would have limited effectiveness. The problem is not that Americans are unwilling to borrow, it's that lenders are unwilling to lend. Even 0-per-cent interest rates can't do much to stimulate growth if lenders are holding their cash so tightly.
Unlike previous recessions, this current unpleasantness is consumer-led. The darkness will lift only when the credit market improves and U.S. consumers start to mend their own balance sheets. What hasn't changed, though, is a theme that has run through all previous recessions: debt. It was corporate debt in the '80s, government debt in the '90s and consumer debt today. The actors may be different, but the storyline remains timeless.
The opinions are Mr. Hirsch's own.