We Don't Have to Break the Record

We Don’t Have To Break The Record by Rich Karlgaard

The longest U.S. recessions since World War II were the 1973-74 and 1982-83 slumps, at 16 months each. Will this nasty one break the modern record? “Likely,” says James Poterba, president and CEO of the National Bureau of Economic Research, the official umpire of U.S. recessions.

The shape of the 2007-2009 recession has been odd. The first 10 months of the recession, from December to mid-September, did not seem like a recession to many. If you did not work in the housing or financial services industries, or if you lived outside the old industrial Northeast and the U.S. subprime slime regions, such as east Los Angeles or Las Vegas, you did not hit this ditch until mid-September.

Oddly, and perhaps suspiciously, the first 10 months of this recession were characterized by growth, not retraction, of real gross domestic product. Here is where the word suspicious must apply. Some of you regular readers thought the government was lying about real GDP growth by understating inflation during this “growth” period. This might be true. That second-quarter GDP deflator of only 1.3% was particularly smelly, wasn’t it?

In May I interviewed some CFOs onstage and each complained about rising costs in their supply chains. Stealth inflation was occurring, too, as anyone knew who opened a box of cereal that contained more air than flakes.

Now, if December 2007 was the start of the recession, as per NBER, then we are more than halfway through this nasty downturn if historical averages can predict. Bad economic news is plentiful, and will be plentiful for months to come, but the stock market has discounted this. Notice how stocks have lately absorbed bad news with a shrug? That’s another sign of a bottom.

If the first quarter of 2009 is recessionary, our economy will tie the post-WWII record of 16 months. That seems very likely. Another recessionary quarter after that would smash the record. Will that happen? I don’t know. I feel more confident in saying that extending the bad streak beyond 16 months does not have to happen.

Four government policy decisions could contain this recession to the first quarter of 2009 and not beyond:

1.    End or amend mark-to-market accounting rules
2.    Get rid of Sarbanes-Oxley
3.    Extend the 2003 tax cuts to 2012
4.    Announce the policy goal of a stable dollar. One reason banks are not lending is that they fear high inflation in the wake of an economic recovery.

Do these four things, and the U.S. economy will show marked improvement by spring. Let another generation of fools break the post-WWII record for recession length. I would be thrilled to just tie it.

How long do you think this recession will go? Could proper policy changes, such as the ones listed above, or others suggested by you, end this recession by the spring?



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