After first recession, the government fought back with stimulus; this time, politicians are squabbling over cutting spending.
Double dip may be back. It has been three decades since the United States suffered a recession that followed on the heels of the previous one. But it could be happening again. The unrelenting negative economic news of the past two weeks has painted a picture of a United States economy that fell further and recovered less than we had thought.
When what may eventually be known as Great Recession I hit the country, there was general political agreement that it was incumbent on the government to fight back by stimulating the economy. It did, and the recession ended.
But Great Recession II, if that is what we are entering, has provoked a completely different response. Now the politicians are squabbling over how much to cut spending. After months of wrangling, they passed a bill aimed at forcing more reductions in spending over the next decade.
If this is the beginning of a new double dip, it will have two significant things in common with the dual recessions of 1980 and 1981-82.
In each case the first recession was caused in large part by a sudden withdrawal of credit from the economy. The recovery came when credit conditions recovered.
And in each case the second recession began at a time when the usual government policies to fight economic weakness were deemed unavailable. Then, the need to fight inflation ruled out an easier monetary policy. Now, the perceived need to reduce government spending rules out a more accommodating fiscal policy.
The American economy fell into what was at first a fairly mild recession at the end of 2007. But the downturn turned into a worldwide plunge after the failure of Lehman Brothers in September 2008 led to the vanishing of credit for nearly all borrowers not deemed super-safe. Banks in the United States and other countries needed bailouts to survive.
The unavailability of credit caused a decline in world trade volumes of a magnitude not seen since the Great Depression, and nearly every economy went into recession.
Overreaction
But it turned out that businesses overreacted. While sales to customers fell, they did not decline as much as production did.
That fact set the stage for an economic rebound that began in mid-2009, with the National Bureau of Economic Research, the arbiter of such things, determining that the recession ended in June of that year. Manufacturers around the world reported rapidly rising orders.