What to expect from the Recession and what to do about it.

The Pollyanna days of denial by financial professionals and Economists abruptly ended last week, and now no one is ignoring the economic downturn the bursting of the housing bubble and the resulting credit crunch have brought us. The most optimistic of the financial professionals are reduced to objecting that the current economy is not officially in recession, because the committee of economists (a grizzly concept in itself) that officially determines the beginning and ending dates of recessions does not yet have enough data to make an official pronouncement of what happened in reality.

Only most of us live in reality and do not need a conclave of economists to tell us what that reality is. Even the Bush administration economists, with their vested interest in not admitting to a recession during an election year, have hit rock bottom and convinced their political masers that they simply have to stop trying to convince others of their irrational denial and actually try to look like they are doing something. Unfortunately, they are trapped in the same conservative ideology that President Herbert Hoover was from 1929 to 1933. Conservative free market ideology states that there is nothing the government CAN do to alleviate a recession, so they choose to permit only government actions that look good politically while the continue to work to enrich the wealthy. That's why the stimulus program is a fraud. So let's face it. The Recession has begun, and for political reasons rather than economic, there really is nothing the government is going to do about it that is effective.

So a recession has started. So what? What does it matter? John Schmitt and Dean Baker of the Center for Policy Research have published a paper telling us what to expect.

A recession is officially two quarters in which total gross domestic production is lower than previously. A mild-to-moderate recession would last either two or three calendar quarters or roughly six to nine months long. A severe recession can be expected to last about two years.

The two most recent recessions, those of the early 1990s and early 2000s, were mild recessions. Each was kept from getting more severe because the federal reserve lowered interest rates and created the conditions for an economic bubble, first the dot com bubble and then the housing bubble. The "double-dip" downturn of 1980-82 was a severe recession, one created by then Fed Chairman Paul Volker by sharply increasing interest rates in order to wring inflationary expectations out of the economy. But the reduction of overall gross domestic product (GDP) only measured national economic product. The most important effects on the economy are the labor effects, and those last longer than the production effects do.

The unemployment rate in 2008 can be expected to increase somewhere between 2.1 percent in the case of a mild-to-moderate recession up to 3.8 percentage points if the recession is severe. That means somewhere between 3.2 million and 5.8 million unemployed Americans. But that's not the end of it. The unemployment rate outlasts the official economic downturn. In the case of a mild-to-moderate recession unemployment can be expected to rise up to 6.7 percent through 2010, and in the case of a severe recession we can expect unemployment to rise to 8.4 percent and last through 2011.

The unemployment rate among Blacks, and especially Black teenagers, will go significantly higher than those average figures, and even in the case of a mild recession an additional 4.2 million people will lose health insurance coverage. And the loss of income? In a mild-to-moderate recession the median family will lose about $2,000 per year by 2010. The median family loss in a severe recession would be almost $3,750 per year by 2011. These numbers are in constant, inflation-adjusted dollars. Obviously the national poverty rate will increase, going up between 1.6% and 3.5% from the 2006 level of 12.3%. That's an increase of between 4.7 million and 10.4 million people living in poverty.

So the next logical question is whether we should expect a mild, moderate or severe recession. That will depend on how the economy comes out of it.

The last two recessions were mild because the interest rates were lowered to the level that a boom was created. But they didn't last primarily because workers didn't get any significant level of the new income that was created. That new income all went to making the wealthy richer. But 70% of economic demand comes from consumption.

If the economy is going to grow, then economic demand has to increase, and that means consumers have to get increased wages for their labor. The dot com bubble was created in large part by Alan Greenspan as he eased interest rates to keep the American economy buying. The Southeast Asian financial bust threatened to put the entire world into recession, so Greenspan pumped up American purchases to protect the world economy. He overdid it. The dot com bubble was allowed to last too long because it was the only major source of increased wages for consumers, but when the projects that were making financial deal-makers rich got too irrational the bubble collapsed.

So Greenspan lowered interest rates again, prompting irrational increases in housing prices, and he encouraged Americans to refinance their homes to get the artificially inflated wealth out of those homes and into consumption. Essentially the first recession was kept mild by low interest rates and the dot com bubble, but it created the second recession which was kept mild by low interest rates, the housing bubble, and consumption pumped up by wealth extracted from the artificially increased home prices. Like the dot com bubble, the housing bubble was extended by making irrational and non economic deals.

The result is the collapse of home prices (still to go down 20% to 30% in the most effected areas), the collapse of the credit system when bankers and investors found that no one knew they were undervaluing the risk they invested in, and now the recession which will be validated later as it is proven that GDP has declined. The clear symptom of unemployment is already recognizable.

This is the normal boom-and-bust cycle of an economy in which all the rewards of productivity are passed to the wealthy owners and investors while wage earners are not rewarded for their increased productivity.

A strong, stable and growing economy requires a strong, well-paid middle and laboring class in order to avoid the recurring boom-and-bust events. It has been obvious since 2000 that the consumers were not getting real wage increases, so they had to be somehow artificially provided with funds to increase consumption. Those funds have come in the absence of savings and in new and more efficient methods of extracting wealth from (artificially over-valued) homes. In short, the financial community and the government have artificially pumped up consumption by getting consumers to borrow future income. They had to, since consumers were not getting increased income from the economy!

But even that had to end, and now it has. So lets recap.

• Since the Reagan Revolution America's economic structure has been changed so that the rewards from the economy have flowed to the wealthiest individuals.
• American labor has not had real increases in wages since 1970. Increased consumption came about because
  • Housewives entered the labor market to increase household wages.
  • Households have stopped saving.
  • Credit has been eased so that almost everyone can borrow money.
  • Usury laws were eliminated so that banks could make more loans to riskier customers.
  • Mortgages laws and procedures were eased so that consumers could get access to the increased value of their homes caused by lower interest rates.
  • Credit standards were eased, making it easier to make loans to more people.
  • Regulations of businesses were eased or eliminated so that no one was in a position to question irrational or exploitative transactions.
• Since 1980 the U.S. has undergone three recessions and is now heading into the fourth.
• While the recession of 1980 - 82 was caused by Paul Volker of the fed tightening interest rates to depress the economy until inflationary expectations were eliminated, both of the two since then were caused by a combination of excessively low interest rates by the fed and by a failure of consumers to consume enough to keep the economy growing.
• The redistribution of wealth in America since 1980 has redirected the gains in the economy to the wealthiest Americans and away from the workers who are the consuming class.
  
• Investments do not boost consumption.
  
• Investments are made when demand for a product or service (demand is both desire for the product or service together with the necessary money to buy it) is recognized. When demand does not exist, any additional money will be invested in bonds or other international economies with better prospects.
  

So the redistribution of money from the working classes to the wealthy investor classes in America has resulted in a series of recessions. This is the inevitable result of the Reagan Revolution and the Conservative movement.

What's the cure?

• Vote the conservatives out of office at all levels.
  
• Invest in the single most productive factor of production in America - its labor.
  • Subsidize more education. Give grants instead of loans. Fund more K to 12 education from general revenue rather than property taxes.
  • Provide Universal health care.
  • Generally rebuild the safety net for unemployment and illness.
• Reregulate banks and financial businesses so that the excesses that have created and extend the last two bubbles cannot happen.
• Stop shifting economic risk from businesses to individuals, and reverse the trend so that families can predictably raise and educate their children.

And that's a start.