The New Normal?

So the U.S jobs numbers for August were released last week, and they should scare the tits off of all of you. 23 months after the Wall Street economic crisis, American unemployment is still at 9.6%. That's the twelfth consecutive month that it's been over 9.5%, which can't be good.

A lot of observers have compared this recession to Reagan recession of 1982-83. Those observers are wrong, and possibly terribly so.

The Reagan recession was unique in that it was deliberate. By the time he was inaugurated, inflation had been playing havoc with the American economy for nearly fifteen years, with both unemployment and inflation in double digits. The economy was growing, but nowhere near the level it should have been. This was known as stagflation.

Jimmy Carter's appointee to the chairmanship of the Federal Reserve, Paul Volker, decided that the only way to break to break stagflation was with a deep, long and brutal recession. President Reagan understood this as well, and promised to support Volker and shoulder the political blame from Congress and the American people. Having been so assured, Volker raised interest rates to about 22% and the economy crashed hard.

However, there were significant differences between then and now. It could very well be true, as Republican partisans and the Cult of Reagan argue, that the 1981 Kemp-Roth tax cuts were stimulative to the economy, and helped bring the country out of the recession when they fully took hold in late '83 and early '84. On the other hand, it shouldn't be forgotten that Reagan had raised taxes - specifically the payroll tax, which most consumers immediately feel - in 1983.

Taxes are significantly lower now than they were during Ronald Reagan's first term. Indeed, since the recession began in the fall of 2007, President Bush issued over $100 billion in "tax refunds" and President Obama passed $300 billion in tax cuts as part of his stimulus plan. None had any effect, other than to add to the deficit.

Then there's the matter of the deficit and the debt. Reagan had the most gargantuan deficits in American history up until that time, but even they are dwarfed by the Bush-Obama levels of debt.

Some commentators have compared these deficits to the ones incurred by World War Two, and they're wrong about that, too. The war debt was mostly brought about by the U.S government borrowing from U.S banks, which isn't the case now. Paying off that debt was made considerably easier by the fact that the major industrial economies of Europe and Asia were destroyed by the war. The United States was uniquely positioned historically to service not just it's own economy, but the markets of most of the world as well.

For the last 20 years or so, the Americans have been outsourcing most of their industrial capacity to the developing world, on the premise that the financial services and Internet technology sectors could drive the economy, which they can - in good economic times.

Previous recoveries have happened by stimulating consumer demand, which in turn stimulates the industrial sector. But there really isn't an industrial sector anymore, and consumers, seemingly having learned a lesson from the financial panic, are saving and paying down personal debt. Even if people weren't saving, increased consumer demand would only widen the trade deficit with China and move even more money and jobs overseas.

This might very well be "the new normal." The 2008-09 stimulus isn't working, and further spending or tax cuts will only broaden the deficits and debt, which I believe are a prime factor behind the economy's collapse (as opposed to the financial sector's, which has recovered nicely) in the first place.

The problem is ultimately the debt. Unfortunately, you can't take care of that with spending cuts and tax increases without further wounding the economy in the near term, and there's no political appetite for that. The Democrats want to spend money in stimulus programs and the Republicans want to give it away with tax cuts, neither of which the international bond markets will take as a sign of American seriousness. And neither - or a combination of both - is likely to work. This is the new normal.

The United States government has been spending more than it has taken in since John Kennedy was sworn in. The American people have been doing that since Reagan was president. That debt has taken away the flexibility for Kensyianism or supply-side theories to be practiced.

Under George W. Bush, the U.S dollar lost nearly half it's value in just five years and the stock market lost half of it's value in a day. And I think that this is just the beginning of a steep and rapid decline. Americans have traditionally thought that their exceptionalism made them immune from the laws of economics and history, but they forgot that the British thought that a century ago, as well.

What you're going to see in the next few years is Republicans and Democrats arguing over how to actually make things worse. And if I'm right, the American people will soon be longing for the days of 9.6% unemployment.

Welcome to the new normal, America. It might not last very long.