Usually, a deep recession is followed by a steep recovery. A deep recession usually leads to a host of pent-up demands while in a mild recession spending patterns don't change that much. Whatever the case, our economy should be zooming by now but instead, the current recovery is feeble and not living up to expectations.
By Irwin Kellner
June 4, 2013, 8:02 a.m. EDT
Market Watch
PORT WASHINGTON, N.Y. (MarketWatch) — The rubber-band theory did not work this time.
Usually, a deep recession is followed by a steep recovery. It’s like pulling on a rubber band: The more you pull, the more it snaps back.
Translated to the economy, a deep recession leaves in its wake a host of pent-up demands.
For example, the long bout of high unemployment that accompanies a deep recession means that consumers must forego a number of purchases, such as a new car, the latest smartphone, a more modern refrigerator, and so on. Once the economic climate improves, shoppers are off and running in order to make up for lost time.
The same can be said for business. When faced with a prolonged bout of weak earnings, the first thing companies do is cut expenses. Buying the latest computer or other technological innovation goes on the back burner until profits pick up.
On the other hand, a mild recession, either short in duration or shallow in depth, means that both employment and profits are only slightly dented. Thus, spending patterns don’t change all that much. Of course, you could argue, that’s what makes the recession mild in the first place.
Whatever the case, if you go by the past recession, the economy should be zooming ahead by now. After all, they don’t get much deeper or much longer than the 2007-09 downturn.
As a matter of fact you have to go back to the first leg downward of the Great Depression, the 1929-1933 plunge, to exceed the 18 months that the past recession spanned.
All that said, the current recovery is, alas, feeble. It is not living up to expectations because things are different this time.
First and foremost, there is Potomac politics. The only thing you can be sure of when it comes to dealing with members of Congress is that there will be battles for political turf with little or no regard for their constituents.
In other words, no one is sure what the political climate will bring this year and next. This means uncertainty over taxes and regulations — not to mention the granddaddy of them all, health care.
Then there is foreign competition. And while this has always existed, it is different this time because Washington has allowed the dollar to become too strong against the currencies of our major trading partners. As a consequence, this makes our exports less competitive in world markets, while foreign-made products are cheaper.
To get around this, many firms outsource a big chunk of their operations. This is facilitated by the rise of the Internet and other forms of technology.
Finally, the Great Recession resulted from the bursting of a financial bubble. When this happens, it takes a while before businesses and individuals are able to pay down their debts and borrow anew.
In today’s context, the net result is less hiring, which begets less spending, which, of course, leads to less hiring.
The rubber band theory may not work, but the vicious cycle still does.
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