The Long Road to Recovery
It’s finally dawning on people that we’re in this for the long haul. After nearly two years of over-optimistic happy talk about recovery, the reality is sinking in. The U.S. and global economies are in a much deeper crisis than most pundits and politicians believed—or were willing to say out loud.
The unemployment rate remains stuck at 9.1 percent, with some 14 million Americans out of work, and it’s going nowhere fast. Unemployment is likely to remain above 8 percent through this year and most of the next according to one report; jobs are not expected to recover to their pre-crisis peak until early 2014, with a significant number of U.S. metros needing until 2021 and beyond. Even the most optimistic prognostications don’t show housing prices rebounding until at least 2014, and Robert Shiller, the index’s co-creator, recently remarked that “a further decline in property values of 10 percent to 25 percent in the next five years “wouldn’t surprise me at all.” Even if the president succeeds in wresting more short term stimulus out of Congress, the job picture is unlikely to change significantly. An increasing chorus of commentators and economists are worried that we risk not just falling back into recession but that we might be mired in another Great Depression.
What should we expect?
First, the bad news. Recovery will take more time – a lot more time – than usual this time around. In their magisterial book, This Time Is Different, Carmen M. Reinhart and Kenneth Rogoff note how radically different sovereign debt and banking crises like the ones we're currently experiencing are from typical business cycle downswings, taking an average of seven or more years for recovery to set in.
It’s likely to take longer than that. It took more than 25 years for the housing market to recover and the economy to right itself after the crash of 1929, according to the detailed research of economic historian Alexander Field. It took roughly the same time for the U.S. economy to recover after the Panic and Long Depression of the 1870s and 1880s. Deep structural crises like these not only indelibly mark the generations that experience them—they take about a generation to work themselves through.
But there is good news, too: The economy will eventually recover. In my historical review of the factors that shaped recovery from the Great Depression of the 1930s and the Long Depression of the 1870s and 1880s, I identified three key mechanisms.
The first is technological innovation. A number of economists—Tyler Cowen and Michael Mandel most prominently—believe that our economy has run out of creative steam, that we face a prolonged “great stagnation.” The Harvard economist and FDR adviser Alvin Hansen said much the same thing during the Great Depression, only he spoke of “secular stagnation.” Yet the 1930s would be the “most technologically progressive decade of the 20th century,” according to Field’s detailed economic studies, far outdistancing the tech boom of the 1990s and early 2000s. The Panic and Long Depression of the 1870s gave rise to a spate of innovations in manufacturing, electricity, telephony, and transportation as well.
Economic crises reset the innovative engines of economies, as the ability to make easy money through financial or real estate speculation dries up and the action shifts back to real investments. Government can support this process by clamping down on financial speculation and undertaking reforms that channel capital toward productive investment in new technologies, human capital upgrading, and new enterprises that transform industries and create the lion’s share of new jobs.
Second, crises inspire substantial upgrades in our education or human capital system. The economic crisis of the 1870s and 1880s coincided with the rise of mass public education. The Great Depression and its aftermath saw a vast expansion of primary and secondary schooling, while the GI Bill made higher education more accessible than it had ever been in the post-World War II years. Talent is our most precious economic resource and we can’t afford to squander it. It will require substantial investment—bigger than those of two previous crises combined—and new approaches to retool our educational system. But it must be done. We need schools that foster innovation, creativity and entrepreneurship across the population, not just develop rote skills.
Third, real recovery hinges on major changes in the way we live. Crises bring about gradually accumulating but ultimately dramatic changes in our way of life that underpin new demand and fuel the growth of industry. Neither New Deal spending nor the unprecedented mobilization for World War II were sufficient to end the Great Depression. Suburbanization—prompted as it was by substantial public subsidies for home-buying and roads—provided a powerful form of “geographic Keynesianism,” stoking demand for houses, cars, appliances and consumer goods. Massive investments in new infrastructure helped shape and power this economic rebound in the 1950s, just as investments in trains, cable cars, subways, electric power, and modern sanitation powered our move to cities and economic recovery in the late 19th century.
We are in the very beginnings of a similar shift in where and how we live today, as suburban sprawl gives way to more efficient modes of urban living. Government can help bring about a less car-dependent, more sustainable way of life by eliminating incentives for home-ownership and highway subsidies, adopting congestion pricing for our roads, formulating new land use and zoning codes that enable denser development of urban cores, and making substantial new investments in infrastructure—from high-speed trains to more and better bike lanes to speed the movement of goods, people and ideas. This will redirect capital from housing, cars, and energy toward the new technologies and industries that will spur much-needed investment and jobs.
If setting realistic expectations is the task of real leadership, then ours must start out by finally admitting the obvious: that real recovery will take much more time than most people want to think. They’ll also want to own up to the fact it won’t come from quick fixes and “magic lever” solutions, to use David Brooks’ phrase, but from a renewed commitment to technological innovation, substantial upgrades to our education systems, and a whole new geography and way of life. These may not be winning campaign slogans, but they are what long term prosperity requires.