Uncommon Sense

April 28, 2012

Recession and Recovery Explained!

Filed under: Economics,Politics — Steve Ruis @ 9:48 am
Tags: , , ,

Apparently a poll has shown that 75% of Americans believe our economy is still in recession. This gives economists fits as people are not using proper definitions. The economy stopped being in recession, a term meaning that the economy as a whole is not only not growing but shrinking, in 2009. Since then we have been in “recovery.” A recession is like digging a hole. When you reach bottom that is the end of the recession. When you start filling that hole back up, that is recovery. Unfortunately, there is still that hole until you have finished filling it, so the recovery phase feels much like the recession phase and hence the confusion. And when you have finished filling it, you are just back to where you started, having made no progress whatsoever.

The important point people are missing is that looking at the economy as a whole is kind of a blunt instrument. Various parts of the economy are recovering much faster than others. Take the Stock Market. Most people use the Dow Jones Industrial average as an indicator of stock market health, why I don’t know as it is its own blunt instrument. Before the 2008 “crash” the Dow Jones was at about 14,000. Shortly thereafter it hit about 7000, indicating that about half of the value of all stocks in that index had evaporated into thin air. As of today, the Dow Jones index is 13,228.31, so you can consider the stock market to have fully recovered. It’s recovery is over.

The big banks? Fully recovered. Basically you and I provided free money to these banks, either as interest-free loans or gifts which they then used to their advantage, but not necessarily ours. They are still receiving basically free money from us (via the Federal Reserve System) which they are using to invest, speculate, and hire lobbyists to make sure that their behavior isn’t restricted by any pesky regulations.

American corporations? The big ones are pretty much fully recovered. The auto industry got unwarranted loans from you and me (boy, we are generous) and has recovered more than nicely (probably a very good investment even though it was a bit of a risky investment). Other big corporations are making record profits, so they can be considered as being fully recovered. (In fact, total corporate profits are at an all-time high.) The businesses that are hurting are relatively new ones and quite small ones as the banks, the banks we lent so much cheap money to, aren’t lending freely, so the capital needed by these startups is scarce. (In fact, my partner and I closed our business this year, partially due to this situation.)

Nonprofit organizations? Not at all recovered, as giving has dried up considerably and if you serve the needy, demand has gone up like crazy. Running a food bank, for example, is currently very challenging.

Ordinary American citizens? Not a chance, sparky. So many are without jobs, or in a job with fewer hours of work than they need, it is painful to even dwell on the topic. Not only that but because jobs are so precarious, workers are laying low and not making pay demands or really any demands. (The United Auto Workers made major concessions to keep the auto industry alive, for example.) Productivity keeps going up, which means people are working harder and smarter, but wages are down. And the housing situation is a disaster, with millions having lost their houses and more millions sitting on mortgages much higher than their ability to pay.

Rich American citizens? Rich folks have recovered more than completely. Some made money on the recession and since this cohort of Americans has stacked the deck in their favor by buying any legislation that would favor them, they are sitting pretty. Yes, many lost a bundle in the stock market but they have since gotten much of that back. Record low taxes on the rich have helped then greatly.

The Federal Government? Dysfunction aside, the lost revenue from taxes not being paid on salaries not being earned and dubious political decisions over the last ten years or so have left the federal budget in deficit. That is, the government is borrowing money to pay its bills. Currently about 15% of the federal budget is just paying on the debt (the National Debt) already incurred. While much of this debt is owned by American citizens and can be considered to be borrowed from ourselves, it still needs to be repaid. As the overall economy improves, tax revenues will rise and if spending can be held down, the Feds will be recovering, too.

State Governments? A disaster. The states do not have the borrowing or taxing power of the federal government and many were in dire fiscal straits before the recession. States like Illinois and California are in a world of hurt. These problems will no go away any time soon.

Some, generally the rich and powerful are fully recovered from the recession, but far too many are still hurting to feel good about the “recovery” . . . that started in 2009.

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