There's a famous metaphor where several observers glimpse a passing circus parade through knotholes in a wooden fence. Each sees something different: one observer sees an elephant, while another sees a clown. That's the way Americans experience this recession. A laid off GM worker or Citicorp employee views the economy differently than does a retired UC professor.
Because the 2009 US economy feels like the aftermath of a horrendous auto accident, a more apt analogy is the medical triage process. Recession casualties are being sorted according to degree of urgency and the most grievous wounds are being attended to first.
When he became President, Barack Obama found the economy flat on its back, hemorrhaging from multiple lacerations. Five months later, these lesions have been bandaged and the bleeding has stopped. Nonetheless, there were severe internal injuries and the US requires further medical attention.
The financial industry suffered a head wound and went into intensive care. Fortunately, its condition stabilized and some central nervous system functions have reappeared; there's not the fear of a total meltdown that many expected after the collapse of Lehman brothers. No other major financial institutions have failed although several AIG, Bank of America, Citicorp, and Wells Fargo needed massive Federal transfusions to survive. While there are positive vital signs the LIBOR rate is down and many banks offer attractive refinance terms commercial lending remains weak.
Many banks labor with huge inventories of bad residential and commercial loans. As a result the real estate market is mixed. On the one hand, sales of previously owned homes are up. On the other hand, foreclosure rates are high, as are the total number of mortgage delinquencies.
The US economy is contracting. Because of the real estate mortgage crisis the finance and construction sectors of the economy are diminishing. With the exception of the Federal government, much of America industry is on bed rest. Reduced capital investment has decreased demand for goods and services and, therefore, for the workers that provide them.
While the economy continues to receive transfusions and its medical prognosis is unclear, Americans are hopeful. Consumer confidence has increased and Obama continues to have strong support. Some of this optimism is warranted, as most economists believe the recession is at or near the bottom. Nonetheless, there's not agreement about what actions to take next and whether the "patient" will recover rapidly or instead stay in the hospital for a series of medical procedures.
Recent recessions have been relatively short lived because Americans kept spending. That's not the case in 2009. The public is in shock and, as a result, Americans are holding onto their money. Only Federal spending is growing. As stimulus-funded public works programs kick in for example, for new high-speed rail initiatives they will create jobs and spur investment.
The state of the US economy severe injuries coupled with post-traumatic-stress disorder suggests that recovery will be slow. After severe trauma some patients initially get better then suffer from secondary maladies. For example, surgery patients get staph infections or suffer side effects from the strong medication they are given. In order to fund the stimulus package and bail out financial institutions, the Obama Administration has substantially increased the deficit. If this action does not produce a quick economic recovery, it may be counter-productive because increase interest rates will rise.
Thus, there is a window for the Administration's actions to have optimal impact. Most economist feel the economy must be in positive recovery mode by the end of the year and performing well in mid-2010.
The recovery must have three parts. First, Americans have to increase their demand for goods and services. Second, the US must take concrete steps to improve its productivity; for example, by reducing healthcare costs and decreasing the costs of goods sold by lowering fuel costs. Finally, there needs to be a new American technical frontier, an area where American entrepreneurs sense opportunity, a sector that generates excitement.
Clean energy technology appears to be the leading candidate for the needed breakthrough. 2010 promises to be the year of the electric car, the year where millions of Americans choose to plug in rather than fuel up. And, during the next eighteen months billions of dollars will be expended on wind and solar systems and billions more on weatherization and energy management systems.
So far, President Obama has successfully engaged in triage economics, but the patient remains in guarded condition. In the next twelve months, the Administration has to get the US economy out of the hospital and on the road to a full recovery.