[Marxism] Second Recession in U.S. Could Be Worse Than First

Louis Proyect lnp3 at panix.com
Mon Aug 8 10:27:59 MDT 2011

NY Times August 7, 2011
Stocks Slump in First U.S. Trading Since Downgrade

Stocks on Wall Street plummeted on Monday, following global 
markets lower, as skittish investors reacted to last week’s 
unprecedented downgrade of the United States’s credit rating.

The declines, reflecting the first opportunity for investors to 
sell since Standard & Poor’s cut its rating on the nation’s debt 
late last Friday, set the equity market on track to extend losses 
that were beginning to recall the days of the 2008 financial 
crisis. They also reflect anxiety over the United States economy 
and Europe’s debt woes.

Following on from a dismal showing in European and Asian markets, 
the broader United States market as measured by the Standard & 
Poor’s 500-stock index was down 41.13 points, or 3.43 percent, 
just before noon. The Dow Jones industrial average was down 322.64 
points, or 2.82 percent, and the Nasdaq was down 90.56 points, or 
3.58 percent.

Within the first two hours of trading, the S.&P. 500 was down 
about 14 percent over the last 11 sessions, one analyst noted, 
bringing back echoes of the last financial crisis. Last week 
represented the worst five-day trading period since November 2008.

“The rapidity of the decline and its force now rivals almost 
anything we’ve seen in the post-war era,” said Dan Greenhaus, the 
chief global strategist for BTIG. “We have fallen so far and so 
quickly that we are up there with the most vicious sell-offs.” The 
market took a sharper turn downward less than an hour into New 
York trading as Standard & Poor’s announced additional downgrades, 
including cuts to the debt ratings of the housing giants Fannie 
Mae and Freddie Mac.



NY Times August 7, 2011
Second Recession in U.S. Could Be Worse Than First

If the economy falls back into recession, as many economists are 
now warning, the bloodletting could be a lot more painful than the 
last time around.

Given the tumult of the Great Recession, this may be hard to 
believe. But the economy is much weaker than it was at the outset 
of the last recession in December 2007, with most major measures 
of economic health — including jobs, incomes, output and 
industrial production — worse today than they were back then. And 
growth has been so weak that almost no ground has been recouped, 
even though a recovery technically started in June 2009.

“It would be disastrous if we entered into a recession at this 
stage, given that we haven’t yet made up for the last recession,” 
said Conrad DeQuadros, senior economist at RDQ Economics.

When the last downturn hit, the credit bubble left Americans with 
lots of fat to cut, but a new one would force families to cut from 
the bone. Making things worse, policy makers used most of the 
economic tools at their disposal to combat the last recession, and 
have few options available.

Anxiety and uncertainty have increased in the last few days after 
the decision by Standard & Poor’s to downgrade the country’s 
credit rating and as Europe continues its desperate attempt to 
stem its debt crisis.

President Obama acknowledged the challenge in his Saturday radio 
and Internet address, saying the country’s “urgent mission” now 
was to expand the economy and create jobs. And Treasury Secretary 
Timothy F. Geithner said in an interview on CNBC on Sunday that 
the United States had “a lot of work to do” because of its 
“long-term and unsustainable fiscal position.”

But he added, “I have enormous confidence in the basic 
regenerative capacity of the American economy and the American 

Still, the numbers are daunting. In the four years since the 
recession began, the civilian working-age population has grown by 
about 3 percent. If the economy were healthy, the number of jobs 
would have grown at least the same amount.

Instead, the number of jobs has shrunk. Today the economy has 5 
percent fewer jobs — or 6.8 million — than it had before the last 
recession began. The unemployment rate was 5 percent then, 
compared with 9.1 percent today.

Even those Americans who are working are generally working less; 
the typical private sector worker has a shorter workweek today 
than four years ago.

Employers shed all the extra work shifts and weak or extraneous 
employees that they could during the last recession. As shown by 
unusually strong productivity gains, companies are now squeezing 
as much work as they can from their newly “lean and mean” work 
forces. Should a recession return, it is not clear how many 
additional workers businesses could lay off and still manage to 

With fewer jobs and fewer hours logged, there is less income for 
households to spend, creating a huge obstacle for a 
consumer-driven economy.

Adjusted for inflation, personal income is down 4 percent, not 
counting payments from the government for things like unemployment 
benefits. Income levels are low, and moving in the wrong 
direction: private wage and salary income actually fell in June, 
the last month for which data was available.

Consumer spending, along with housing, usually drives a recovery. 
But with incomes so weak, spending is only barely where it was 
when the recession began. If the economy were healthy, total 
consumer spending would be higher because of population growth.

And with construction nearly nonexistent and home prices down 24 
percent since December 2007, the country does not have a buffer in 
housing to fall back on.

Of all the major economic indicators, industrial production — as 
tracked by the Federal Reserve — is by far the worst off. The 
Fed’s index of this activity is nearly 8 percent below its level 
in December 2007.

Likewise, and perhaps most worrisome, is the track record for the 
country’s overall output. According to newly revised data from the 
Commerce Department, the economy is smaller today than it was when 
the recession began, despite (or rather, because of) the feeble 
growth in the last couple of years.

If the economy were healthy, it would be much bigger than it was 
four years ago. Economists refer to the difference between where 
the economy is and where it could be if it met its full potential 
as the “output gap.” Menzie Chinn, an economics professor at the 
University of Wisconsin, has estimated that the economy was about 
7 percent smaller than its potential at the beginning of this year.

Unlike during the first downturn, there would be few policy 
remedies available if the economy were to revert back into recession.

Interest rates cannot be pushed down further — they are already at 
zero. The Fed has already flooded the financial markets with money 
by buying billions in mortgage securities and Treasury bonds, and 
economists do not even agree on whether those purchases 
substantially helped the economy. So the Fed may not see much 
upside to going through another politically controversial round of 

“There are only so many times the Fed can pull this same rabbit 
out of its hat,” said Torsten Slok, the chief international 
economist at Deutsche Bank.

Congress had some room — financially and politically — to engage 
in fiscal stimulus during the last recession.

But at the end of 2007, the federal debt was 64.4 percent of the 
economy. Today, it is estimated at around 100 percent of gross 
domestic product, a share not seen since the aftermath of World 
War II, and there is little chance of lawmakers reaching consensus 
on additional stimulus that would increase the debt.

“There is no approachable precedent, at least in the postwar era, 
for what happens when an economy with 9 percent unemployment falls 
back into recession,” said Nigel Gault, chief United States 
economist at IHS Global Insight. “The one precedent you might 
consider is 1937, when there was also a premature withdrawal of 
fiscal stimulus, and the economy fell into another recession more 
painful than the first.”

There is at least one factor, though, that could make a second 
downturn feel milder than the first: corporate profits. Corporate 
profits are at record highs and, adjusted for inflation, were 22 
percent greater in the first quarter of this year than they were 
in the last quarter of 2007.

Nervous about the future of the economy, corporations are 
reluctant to make big investments like hiring. As a result, they 
are sitting on a lot of cash.

While this may not be much comfort to the nation’s 13.9 million 
unemployed workers, it may be to their employed counterparts.

“In the financial crisis, when markets were freezing up, the first 
response was, ‘I’ve got to get some cash,’ ” said Neal Soss, the 
chief economist at Credit Suisse. “The fastest way to get cash is 
to not have a weekly payroll, so that’s why we saw such big layoffs.”

Corporate cash reserves today, he said, could act as a buffer to 
layoffs if demand drops.

“There are arguments that another recession would be worse, and 
there are arguments in the other direction,” Mr. Soss said. “We 
just don’t know at this juncture. But ultimately it’s a question 
you don’t want to know the answer to.”

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