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This Too Shall Pass
A personal reflection on economic fluctuations
by Natalie Gochnour, COO, Salt Lake Chamber
King
Solomon was feeling blue and asked one of his advisors for help. The King had
dreamed about a silver ring that would quell his suffering. You see, during the
good times the King worried that his joy would not last; in the bad times, he
feared his sorrows would continue forever. He longed for a calm, steady
stability.
The
dutiful advisor searched throughout the kingdom, but to no avail. Just when he
was about to give up, he met a merchant who showed him a ring with an
inscription inside: “This too shall pass.”
Miraculously,
when the King received the ring, he found the peace he was seeking. His sorrow
turned to joy because he knew the pain would end. His joy turned to sorrow
because he knew wealth was fleeting. Then both joy and sorrow gave way to an
enduring calm. This too shall pass.
During
these uncertain and challenging economic times we would do well to heed such
counsel.
The
late R. Thayne Robson, the spokesperson for the Utah economy for well over
fifty years and a mentor of mine, taught that the only certainty during a
downturn is that a recovery is imminent. I can still remember him saying, “Just
as certainly as markets create excesses, markets certainly correct.”
So
we find ourselves during the worst economic downturn since the end of the 1930s,
wondering when it will end. The asset price bubble that interacted with new
kinds of financial innovations and masked risk sent our economy into a
financial freefall. We suffer from a system-wide failure of risk assessment,
over spending and rock-bottom consumer confidence. The contraction, which at 13
months is already longer than most recessions, continues and is expanding its
reach. Nearly every industry, occupation, and region in our state and country
feel the pain.
We
search for the positives – and there are many – but still lack the confidence
to spend and invest like in normal times.
The
obvious question is what to do about it. How should a seasoned public policy
maker, a prudent business leader and a head of household respond to the current
recession?
I
suspect there are many answers to this question, each of them based on the
unique circumstances of the moment and a realization of what history teaches us
about responding to economic crises.
My
experience in this regard is limited, although I did have a front row seat
during the last major economic catastrophe – the 2001 bursting of the dotcom
bubble and the crashing of hijacked planes into our homeland. At the time, I
was Governor Mike Leavitt’s Deputy for Policy and Communications and a close
economic advisor.
Even
though today’s challenges are quantifiably worse, I have to tell you that in
late 2001, the circumstances were quite dire. It was a disaster of nationwide
proportions that left the high tech, finance, insurance, and tourism industries
reeling. Even worse, the American psyche was incredibly vulnerable, even
fearing for our own personal safety. And we had the world’s largest peace time
event – the Olympics – just a few months away.
The
challenges felt even more daunting given that the Unites States and Utah had
just experienced the longest economic expansion in modern economic history. We
had almost forgotten that severe recessions occur.
In
Utah, for instance, 2002 was the first time in 38 years that we lost jobs on an
annual basis (see Figure 1). Sure, we
had experienced fluctuations and slower growth, but rarely did we ever
experience full out declines in total jobs.
During
the dotcom/9-11 crisis, we experienced many of the same circumstances as
leaders face today:
- Government grows
during a recession.
During a recession
government’s customers actually increase in the form of more unemployed,
more people in need of medical and basic assistance, and more students at
our institutions of higher learning. When coupled with our steady and
nation-leading population growth, government faces a Herculean task of
serving many more people with dramatically less revenue.
- People resist cuts
in education.
In a state that has so many children and an
already under-funded public education system, draconian cuts in education
become untenable.
- Executive/Legislative
tension builds.
Tension builds between the executive and
legislative branches as the governor manages the state and the legislature
appropriates its finances. The real battles on Capitol Hill aren’t
partisan; they are between branches of government.
- Forecasters miss
the inflection points.
Forecasters are too
prone to extrapolate the recent past. They miss the turning points and so
the good times and bad times are predicted to last longer than they really
do. Surpluses and deficits are the natural consequence.
- Prosperity returns.
In
the end, Utahns’ work ethic, entrepreneurial spirit, and talent helps the
economy rebound. State government prudently manages its budget by funding
critical needs, maintaining triple A credit worthiness and securing, yet
again, the label of “Best Managed State in the Nation.” We live in a great
state.
So
our response to any recession requires a healthy dose of perspective – a perspective
that is rooted in the common themes of a downturn and a sure confidence in a
brighter future. So what are these themes?
The
first of these is that economic fluctuations are irregular. Since World War II,
the U.S. economy has suffered through 11 recessions (see Table 1); each lasted
for varying amounts of time and in unevenly spaced cycles. There is no method
to the madness, making the term “business cycle” a non sequitur because of the
order and regularity implied.
Table
1: Recessions and Job Losses-A Historical Perspective
|
|
Recession
|
Number of Months
|
Peak Employment
|
Month Peak Employment Obtained
|
Number of Jobs Lost During
Downturn
|
Lost Jobs as a Percent of Total
Jobs
|
Number of Months to Return to Peak
Employment
|
|
Nov 48-Oct 1949
|
12
|
45,194,000
|
Nov-48
|
2,244,000
|
5.0%
|
9 (Jul-50)
|
|
Jul 53-May 1954*
|
11
|
50,536,000
|
Jul-53
|
1,711,000
|
3.4%
|
12 (May-55)
|
|
Aug 57-April 1958
|
9
|
53,128,000
|
Aug-57
|
2,216,000
|
4.2%
|
12 (Apr-59)
|
|
Apr 60-Feb 1961
|
11
|
54,812,000
|
Apr-60
|
1,256,000
|
2.3%
|
10 (Dec-61)
|
|
Dec 69-Nov 1970
|
12
|
71,453,000
|
Mar-70
|
1,044,000
|
1.5%
|
10 (Sep-71)
|
|
Nov 73-Mar 1975*
|
17
|
78,634,000
|
Jul-74
|
2,171,000
|
2.8%
|
11 (Feb-76)
|
|
Jan 80-Jul 1980
|
7
|
90,991,000
|
Mar-80
|
1,159,000
|
1.3%
|
6 (Jan-81)
|
|
Jul 81-Nov 1982*
|
17
|
91,594,000
|
Jul-81
|
2,838,000
|
3.1%
|
12 (Nov-83)
|
|
Jul 90-Mar 1991*
|
9
|
109,775,000
|
Jul-90
|
1,579,000
|
1.4%
|
23 (Feb-93)
|
|
Mar 01-Nov 2001*
|
9
|
132,500,000
|
Mar-01
|
2,678,000
|
2.0%
|
38 (Jan-05)
|
|
Dec 07-Present
|
14
|
138,152,000
|
Dec-07
|
3,572,000
|
2.6%
|
TBD
|
Source:
US Bureau of Labor Statistics,
Current Employment Series
(CES), Seasonally Adjusted
Data and National Bureau
of Economic & Business
Research, Business Cycle
Dating Committee
|
*Jobs in
these recessions hit their low point after the recession was official
declared over. For most, this low point was within a few months. The 2001
recession is the exception--jobs did not reach the trough until March 2003
|
The
second is that economic fluctuations are unpredictable. Analysts can know that
an imbalance is occurring, but they cannot predict the inflection points.
Third,
each downturn occurs for varying reasons and requires its own set of policy
responses. History is rich with these examples.
The
early 1900s brought us the Panic of 1907 where J.P. Morgan put up his own money
to stop a run on the banks in New York. In 1911, the Supreme Court ruled that
Standard Oil was an unreasonable monopoly and the Federal Trade Commission was
established shortly thereafter. The 1929 crash lead to the Great Depression and
ushered in the New Deal, including the creation of Social Security, Fannie Mae,
the Federal Deposit Insurance Corporation, and the Security and Exchange
Commission.
In
more recent times, we witnessed economic contractions as the manufacturing
economy shifted to the service economy in the 1960s. We felt the burden of
spiraling stagflation and an oil crisis in the 1970s and 80s. We experienced
the consumer spending slowdown of the early 1990s and the irrational exuberance
of the early 2000s.
The
policy responses included a mix of countervailing measures. We reduced marginal
tax rates, launched supply-side, trickle-down economics, and deregulated. Later
we increased marginal tax rates to help with the deficit, and created more
regulation.
The
result is an economic history and series of policy responses of mind-numbing
complexity, and quite frankly, inconsistency. Such is the fabric of our
governance system and the policy balance that occurs based on competing
ideologies.
The
good news is the last lesson of economic fluctuations. Just as sure as
recessions are irregular, unpredictable, and policy confusing – they end. They
end because spending, investment, taxes, government spending, and the money
supply all adjust – some naturally, some purposefully – to get the economy back
on track. That is the magic of markets. That is the magic of our mixed economy.
That is why on average over the past 50 years, the U.S. economy, as measured by
real GDP, has grown about 3 percent per year. Markets are a great way to organize
economic activity and we have the evidence to prove it.
Even
now, I am confident that the root causes of the economic crisis are being
addressed. Housing is becoming more affordable, the inventory of unsold homes
is shrinking, the personal savings rate is rising, and the trade deficit is
narrowing. An imperfect, but badly needed, federal stimulus package will funnel
upwards of $1.4 billion into the Utah economy. And a can-do Legislature will
deliver on smart spending and wise investment to create jobs and invest in a
more prosperous future.
So
when you see one of the bumper stickers or t-shirts that say …
Standard and Poor: My life in a
nutshell
Money talks … mine said goodbye
Or,
Since
the recession, I’ve had to play in the sandbox with the kitties.
Just
remember the Wisdom of Solomon. This too shall pass.
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