When Wall Street rang the opening bell last Monday — literally just nine days ago — both the Dow Jones Industrial Average and the S&P 500 stood at nearly three-year highs. I wrote, “Republicans will likely wipe out those gains very quickly.” Regrettably, that’s what has happened — in the last 12 days, the Dow has lost about a thousand points.
The market and the economy are not, of course, synonymous. When Wall Street soars, it doesn’t mean the rest of us are in great shape, and when it slumps, it doesn’t mean we’re necessarily in trouble.
But the market slide does point to growing anxiety about the nation’s economic health. Here, for example, is Lawrence Summers, President Obama’s former chief economist.
With growth at less than 1 percent in the first half of this year, the economy is effectively at a stall and facing the prospects of shocks from a European financial crisis that is decidedly not under control, spikes in oil prices and declines in business and household confidence. The indicators suggest that the economy has at least a 1-in-3 chance of falling back into recession if nothing new is done to raise demand and spur growth.
Some are giving us worse odds.
“This economy is really balanced on the edge,” Harvard University economics professor Martin Feldstein, a member of the Business Cycle Dating Committee of the National Bureau of Economic Research, said yesterday in an interview on Bloomberg Television’s “Surveillance Midday” with Tom Keene. “There’s now a 50 percent chance that we could slide into a new recession. Nothing has given us much growth.”
This isn’t going to help.
The number of planned layoffs at U.S. firms rose to a 16-month high in July as sectors which had been seeing fairly few layoffs unexpectedly bled jobs, a report on Wednesday showed.
There’s a lot of talk about 1937, too.
“Unless we are missing something the US is one false move away from a recession,” says Jim Reid, strategist at Deutsche Bank, who has warned the US could be approaching a “1937 moment” — when authorities removed post-Depression stimuli from still-fragile markets and triggered another recession.
Just to flesh this out a little further, after Democrats ended the Great Depression and helped get the economy back on track in the mid-1930s, FDR was under enormous pressure to curtail public investments and focus on deficit reduction. In 1937, at the demands of Republicans, the president relented, took the foot off the gas, and started cutting back. The nation immediately slipped backwards — the assumption from the right that that the economy was healthy enough to grow on its own, without government backing, was wrong, and Roosevelt made a mistake in going along. The United States slipped badly until the biggest stimulus project of all time: World War II.
If the debt-reduction agreement approved yesterday made you think of 1937, you’re not alone.
Relevant historical parallels aside, we appear to be in a very precarious position — exacerbated by the Republicans’ deliberate debt-ceiling crisis — and anxiety and perceptions have the potential to make matters worse. Democrats would likely jump at the chance to make public investments to prevent a downturn, but Republicans consider the very idea out of the question. The Fed could consider additional steps, but it probably won’t.
The public, meanwhile, not only elected an anti-jobs House majority, but actively opposes the very idea of creating jobs through public investments, convinced that “stimulus” is a dirty word. And the American media is focused almost exclusively on the deficit, thanks to a “Beltway Deficit Feedback Loop” that has drowned out any talk of what really matters.
It doesn’t have to be this way, and we know what we should do. The country needs the wisdom and courage to do the right thing, but as of today, with the recovery faltering, the right thing isn’t even on the table.
It’s cause for concern.