It’s not so bad, really
Another recession could be about to arrive, or even be here already. Some people fear it will be as bad as the last one, which reduced output in the United States, euro zone and Japan by 5.1, 5.5 and 8.9 percent respectively. Those GDP declines are often described in cataclysmic terms: staggering, disastrous or traumatic. Such words are vast – and dangerous – exaggerations.
Even at the trough of the last recession in 2009, real GDP in most rich countries was as high as it had been five or six years earlier – when economic conditions were not considered particularly bad. And that comparison is too harsh on the 2009 consumer experience, which included iPhones and the Airbus A380 super jumbo jets, both better than the comparably valued goods available in 2003.
Americans and Europeans have little enough reason to moan about their recessions; citizens of the world have much less. For mankind as a whole, the small travails of the wealthy are much less important than the entry of the truly poor into the modern economy. Industrial production in emerging economies, a good measure of that development, has increased at a heartening 6 percent annual rate over the last decade, according to the most recent data from Dutch consultants CPB. The recession reversed two years’ progress, but only briefly.
Of course, production is only one part of the economy. The recession has been harder on other parts. It led to both increased unemployment and a decline in the relative position of the poor, especially in the United States. Neither of those bad trends has been fully reversed. But the former was caused mostly by the end of an unsustainable excess of construction activity while the latter only amplified a decades-old pattern.
The last decline is often compared to the Great Depression, but was nothing like the economic pains experienced during the two decades after World War One. Then a series of crises, including a 25 percent reduction in U.S. GDP, helped lead the world into the most destructive war in history. The desire not to repeat the inter-war experience spurred on the potent official response to the 2008 financial crisis.
That response basically worked, but the scary headlines and wild assertions continue, as if fascist governments were once again coming into power and hungry mobs were breaking into food stores. In fact, the few rioters have had less noble objectives: the defense of unaffordable pensions in Greece and the acquisition of branded consumer goods in the UK.
What causes the wide gap between perception and reality? I have two suggestions.
First, too many people look at the economic world largely through financial glasses. The recession made only a slight dent in industrial prosperity but the financial crisis which preceded it really was cataclysmic. Several major institutions almost failed, central banks lent and governments borrowed as never before, and the cult of free financial markets was discredited. And unlike the economy, the financial system has not really recovered. If anything, the crisis has broadened – from banks to governments.
Still, financial insecurity cannot really explain the prevalence of tragic rhetoric. The fear and trembling reflects a more profound error – a mistaken understanding of the economic good. Many people judge economic success only by the pace of expansion. For them, it is not enough to have adequate or even abundant quantities of necessities, comforts and luxuries. They say that an economy is only good if it consistently provides more of all these things, and that the faster the pace of increase, the better the economy.
That approach to life has bad consequences, even ignoring the limited satisfaction provided by material things. For individuals, it is a recipe for discontent. Those who always covet more wealth will inevitably spend much of their life feeling that they do not have enough, with or without recessions. The irrational craving for GDP growth also distorts economic policy. It makes small, temporary and otherwise trivial setbacks in consumption – a few less days of holiday or a few more months with the old car – look like, yes, staggering disasters.
It is right for policymakers to respond strongly to genuine or possible disasters. But when economic times are good, financial conditions should be something like normal. That is not happening right now. Despite three years of stability in rich countries and strong growth in poor ones, monetary and fiscal conditions remain extreme and policymakers, worried about another recession, are reluctant to make big changes.
The combination of financial extremism and fear of any decline in GDP could lead to a truly painful decline in output, if the already weakened global financial system becomes totally dysfunctional. The irony would be painful. The foolish desire for constant and fast economic growth would have made those scary headlines – otherwise completely unmerited – come true.