“My Baby’s Only Known Recession”

Mark Zandi, author of the Financial Shock, the best book on how we got into this economic mess is now covering the proposals to get us out.

Quick context setting:

“Every dollar decline in household net worth reduces consumer spending by 5 cents over the next two years. If sustained, the wealth lost over the past year could thus cut $300 billion from consumer spending in 2009 and a like amount in 2010.” – Mark Zandi [pdf]

Ouch.

According to the NBER, I’ve lived through 4 recessions 1. 54 months (+ 13 and counting) of my life spent from peak-to-trough.

Seems like a fortunate amount of time.

Also fortunate, Zandi continues,

“Assuming gas remains below $2 per gallon through the coming year, Americans will save well more than $100 billion in 2009 compared with fuel costs in 2008.”

“Boosting food stamp payments by $1 increases GDP by $1.73…”

Huh.

Overall, Zandi is for the House stimulus plan – if only to stop the bleeding (something he argues could/should have been done years ago).

“The House stimulus plan would not forestall a sizable decline of 2.3% in real GDP in 2009, but it would ensure that real GDP returns to its previous peak by the end of 2010”

Overall if he’s in, I’m in.

The problem I have is the principle of the thing.

For individuals and businesses that have behaved fiscally responsibly over the long run, any stimulus package unnecessary. In the exact same way it’s a life saver to those that have behave irresponsibly. This is why Detroit’s auto makers want to get in on the TARP funds – why Circuit City2 didn’t lobby congress the same way, I don’t know. 😉

Additionally, what if the stimulus works?

Moral Hazard.

Doesn’t saying the overall economy requires government intervention to recover set a bad precedent?

Primarily because Congress is structured to move much, much more slowing than the economy overall. Secondarily, because – unlike healthcare – there are so few comparable economic situations.

Zandi reminds us:

“A long history of public policy mistakes has contributed to the financial and economic crisis.”

Same with the auto makers and Circuit City. Their problems were not sudden or surprising. It just looks so, because declines (like ascents) are cumulative.

May you live in interesting times.

1. My daughter’s only known recession. And based on the business cycles dates, I too was a recession baby. Also, I have a very distinct memory of PBS’s Nightly Business Report playing in my house around and following the 1987 crash.

2. Perhaps you also remember the presently liquidating Circuit City was profiled in the business management book “Good to Great”. Peter Galuszka does.

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