Double-Dip Recession? How Our Dysfunctional Political Class Has Made Another Grueling Collapse Far Likelier

The single bright spot in this anemic “recovery” had been steadily rising stock prices. Although the market staged a modest rally on Tuesday, news of the debt ceiling deal was followed by a massive sell-off in stocks – the S&P 500 saw its biggest one-day drop in more than a year the day the deal was announced. After losing $14 trillion in household wealth in the crash, Americans' nest eggs had rebounded to some degree, but whether their 401(K)s and investment accounts hold their value in the coming months remains to be seen.

The outlook for the economy is extraordinarily bleak. But we've pulled ourselves out of deep recessions before. What's different now is the profound, Tea-Party stained dysfunction plaguing our political class. As I wrote recently, if the economy does end up contracting in the near future, it will be a recession driven by the “age of austerity” embraced by Washington – and the contractionary policies it has ushered in.

That scenario appears more likely today. Just a few short months ago, there were very few analysts who would predict that the American economy stood a decent chance of sliding into another period of grueling recession. The consensus held that while we were recovering far too slowly in light of the depth of the crash, we were nevertheless on the rebound. But that thinking has changed. Last week, former Treasury Secretary Larry Summers estimated there was a 33 percent chance of the economy once again falling into recession – the dreaded “double-dip.” Other economists put the likelihood a bit lower, but researchers at the Federal Reserve tell us that, since World War II, about half of the times the economy has grown as slowly as it has in the first half of this year, a recession has followed within 12 months.

For the majority of Americans, the official end of the last recession was merely an abstraction – it in no way reflected the profound economic pain tens of millions of working people continued to feel. Since 2009, when the wonks at the National Bureau of Economic Research (NBER) set the official end of the Great Recession, the unemployment rate has edged down, but most of that was due to people giving up and dropping out of the workforce. The share of the population that has a job today is about the same as it was in the early 1970s, before women entered the workforce en masse.

Housing prices bottomed in 2009, then had a brief and sputtering recovery, before hitting a new low early this year, well after the official end of the recession. Around one in four homeowners with a mortgage still owe more on their properties than they're worth, and the foreclosure crisis continues unabated. New business creation has ground to a halt, people are running up credit card debt to make ends meet and new grads aren't leaving home to start out on their own.

High oil prices have squeezed already strained household budgets -- consumer spending dropped in June and “consumer confidence” about the future plunged in July. The Japanese tsunami caused supply disruptions, the eurozone is a mess and China's economy is slowing. With our trading partners slumping, we certainly won't see an export-led boom anytime soon.

The slump in demand for companies' goods and services remains our core problem, and that problem will only be magnified as the last of the stimulus funds dry up, the temporary payroll tax break expires and extended unemployment benefit run out later this year. Without more help from Washington, states and municipalities are expected to shed 450,000 public sector jobs next year.

Last year, with the private sector economy continuing to slump, an analysis by Moody's Analytics found that almost one in five dollars in American consumers' wallets came from one government program or another. The public sector has already seen deep cuts, and that trend will only worsen with Washington's relentless focus on deficit reduction. Without those dollars, there will be fewer consumers demanding American companies' goods and services, and the private sector will continue to have little incentive to hire. Although the cuts in the debt reduction deal are “backloaded” to some degree, $70 billion in cuts will hit before the end of next year, which will cost the economy hundreds of thousands of jobs, resulting in more people out of work, missing mortgage payments and not spending much money.

And they're not done. In downgrading America's debt last week, S&P relied on some dodgy economic analysis, but its view of the political situation is spot-on: the GOP's absolutism is making governing next to impossible. Not only are all revenue raises effectively off the table, in all likelihood any significant effort to kickstart the economy is as well. Senator Jim DeMint, R-South Carolina, said the debt ceiling was simply “round one” in a 15-round brawl over spending and “entitlements.” If their position were that we need to pay down the debt as soon as unemployment drops below 7 percent and the housing market stabilizes, it wouldn't be an entirely insane position. Doing so in this economic climate is ideologically driven madness.

The real danger is that we'll get into a disastrous kind of feedback loop if the economy starts contracting. That would certainly lead to higher deficits, as tax revenues sank to new lows and the demand for anti-poverty services grew. The deficit hawks will use that rising deficit to call for more cuts, and without some new engine of private sector growth emerging, we'll be stuck treading water. We've already lost a decade – after the dot-com bust, median incomes only surpassed those in 1999 during one year – 2006 – and have only declined since then.

In his book, Collapse, Jared Diamond looked at a bunch of societies that had seen their physical climates change and tried to determine what made some cultures die out while others persevered. It wasn't the severity of the change, or its speed that was the determining factor, but the foresight of those societies' leaders – their ability to properly diagnose the problem and adapt: to come up with proactive solutions to the problems they faced. The economic woes we're suffering are man-made, but we may look back on the era in which American prosperity collapsed and see the same kind of stubborn refusal to acknowledge reality as a proximate cause.


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