When Will The Recovery Begin? Never.

The so-called “green shoots” of recovery are turning brown in the scorching summer sun. In fact, the whole debate about when and how a recovery will begin is wrongly framed. On one side are the V-shapers who look back at prior recessions and conclude that the faster an economy drops, the faster it gets back on track. And because this economy fell off a cliff late last fall, they expect it to roar to life early next year. Hence the V shape.Unfortunately, V-shapers are looking back at the wrong recessions. Focus on those that started with the bursting of a giant speculative bubble and you see slow recoveries. The reason is asset values at bottom are so low that investor confidence returns only gradually.

That’s where the more sober U-shapers come in. They predict a more gradual recovery, as investors slowly tiptoe back into the market.

Personally, I don’t buy into either camp. In a recession this deep, recovery doesn’t depend on investors. It depends on consumers who, after all, are 70 percent of the U.S. economy. And this time consumers got really whacked. Until consumers start spending again, you can forget any recovery, V or U shaped.

Problem is, consumers won’t start spending until they have money in their pockets and feel reasonably secure. But they don’t have the money, and it’s hard to see where it will come from. They can’t borrow. Their homes are worth a fraction of what they were before, so say goodbye to home equity loans and refinancings. One out of ten home owners is under water — owing more on their homes than their homes are worth. Unemployment continues to rise, and number of hours at work continues to drop. Those who can are saving. Those who can’t are hunkering down, as they must.

Eventually consumers will replace cars and appliances and other stuff that wears out, but a recovery can’t be built on replacements. Don’t expect businesses to invest much more without lots of consumers hankering after lots of new stuff. And don’t rely on exports. The global economy is contracting.

My prediction, then? Not a V, not a U. But an X. This economy can’t get back on track because the track we were on for years — featuring flat or declining median wages, mounting consumer debt, and widening insecurity, not to mention increasing carbon in the atmosphere — simply cannot be sustained.

The X marks a brand new track — a new economy. What will it look like? Nobody knows. All we know is the current economy can’t “recover” because it can’t go back to where it was before the crash. So instead of asking when the recovery will start, we should be asking when and how the new economy will begin. More on this to come.


Originally published at Robert Reich’s Blog and reproduced here with the author’s permission.

6 Responses to "When Will The Recovery Begin? Never."

  1. Guest   July 10, 2009 at 5:11 pm

    President Obama is now like the Oncologist who does not want to tell the terminal patient the truth about their condition siting the ‘hope’ factor. Though some think this act is one of kindness, it actually takes away the patient’s ability to make good decisions about how to spend their remaining time and resources. In essence, the doctor has taken away the patient’s control over the end of life. I have many friends in the construction and banking industries who daily talk about the post-recovery era to come and who are banking on the hope that the old economic model will emerge shortly. Expectations need to be in line with the new reality in order to prepare for a different kind of future. I hope that Obama will speak out remembering that “the truth shall set you free”, even if it is only freedom from denial.

  2. Anonymous   July 13, 2009 at 9:27 am

    So, Prof. Reich, you are not a Keynesian? Most of the “green-shoot” camp was following the mantra of more and more government spending by more and more government borrowing. I suppose that you might not then support another round of stimulus spending, as advocated by Krugman et. al. The shapes of the letters V, U or even L can be understood from a graphical perspective. But X? Strange. Maybe something unique to the Aharnold land.

  3. kebu77   July 17, 2009 at 10:50 am

    So right you are, Dr. Reich, but add an additional factor: That giant sucking sound is the decline in free energy available to support our middle class. Fifty years ago U.S. oil production cost one barrel of energy for each 100 barrels extracted. Now, an increasing amount of energy is required to extract our difficult to find and recover oil – – deepwater, polar, heavy oil, and oil sands. This ratio of “Energy Returned on Energy Invested” (EROEI) has been falling falling for years, leaving less energy available for society to use.So you’re right, “we should be asking when and how the new economy will begin.” Obama will not get us there as long as he and his science advisors pretend not to know — and talk honestly to us like Carter did — about Peak Oil and falling EROEI. We need to save energy in a hurry through conservation and efficiency measures in order to buy the time to transition to less energy-intensive life styles using less carbon-intensive fuels.

  4. Guest   July 18, 2009 at 6:51 pm

    In this economy, today, 61% of Americans have credit scores of 650 or above.So this idea that Americans are all poor and dependent on credit is invalidly unproven. Even with the millions of bankruptcies and foreclosures, and credit card defaults that represents less than 39%. In addition 10% of Americans are unemployed, the positive side is that 90% are still employed, we are not suffering as much as your scenario leads the audience to believe. If you take the 10% unemployed and minus that out of the 39%, thats 29% of Americans dependent on credit, not the majority, therefore a recovery is possible once middle class Americans stop penny pinching.I have heard a great report on housing cycle recessions, and the exact math, is 6 years for the economy to have a profitable back to business recovery. This began May 2005, so we are in 4.5 years, the mathematics of slimmer of indicators showing green shoots are right on target. 2010 will be slow growth, 2011 will have a normal economy.

  5. financial matters   July 22, 2009 at 6:31 pm

    thank you, we should be hearing this sort of thing more often…

  6. Guest   July 25, 2009 at 1:17 am

    in no particular order1) the offshoring of US manufacturing due to declining costs of transportation and subsequent “unfair” competition between US manufacturing wages and foreign manufacturing wages; leading to the shift of US middle class to information workers2) the offshoring of US information work, due to the IT/telecomm revolution and subsequent “unfair” competition between US information worker salaries and foreign information worker wages3) the end of the epoch of cheap energy crippling everybody and everythingquestion: does item 3 partially repeal item 1? or does the increased costs of transporting things from one part of the US to another cancel out the increased costs of transporting things from China to the US?