This just in from the National Bureau of Economic Research: The Great Recession officially ended in June 2009. Despite the formal end of the recession, a meaningful economic recovery has yet to begin.
Even with massive Keynesian pump-priming, economic growth has been far weaker than the typical postslump rebound. While some private-sector jobs have been created over the last few months, there is no momentum propelling the job market, and unemployment may well continue at current levels for some time to come. The U.S. has actually shed more jobs than it has created since June 2009, when the recovery officially began.
Real estate also continues to be a drag on the economy. Even though home prices are well below their 2007 levels and mortgage rates are at historic lows, the residential real estate market has fallen into another slump since the expiration of the first-time home-buyer tax credit on Apr. 30. Fears of further erosion of real estate values may be keeping buyers on the sidelines.
Since World War II, the resilient U.S. economy has emerged relatively quickly from each and every recession. Over the last several decades, the deeper the recession, the more powerful the recovery. A recovery with the strength to create a substantial number of private-sector jobs has just not happened this time around.
Following the 1973 recession, one of the deepest postwar downturns, triggered by OPEC's rapid and significant increases in oil prices, the U.S. economy took seven quarters from the start of the recession to grow back to prerecession levels of gross domestic product. We are now at 10 quarters and counting since the start of the Great Recession, and prerecession economic levels are but a distant dream.
Clearly the Great Recession was different. Most recent slumps have been the consequence of tight monetary policy. In such a recession, you could spark demand by loosening monetary policy. Not this time. The financial crisis and the subprime mortgage crash were the catalysts for the Great Recession, and changes to monetary policy alone will not get us out of it.
Despite trillions in U.S. government spending and a ballooning national debt, inflation has remained eerily tame. Low inflation and slow growth are worrisome and may indicate that "the economy is just one modest contraction away from dipping into a Japan-like deflation," according to Steven Ricchiuto, chief economist at Mizuho Securities.
The so-called "lost decade" in Japan could be a perfect analogy for America's current economic woes. In the same way that the financial crisis in the U.S. was caused by the bursting of the residential real estate bubble in 2007, the Japanese economic malaise was sparked by the bursting of their real estate-driven asset bubble in the late 1980s.
The Japanese government and central bank attempted to deal with the symptoms, rather than the cause, of the crisis. While Japan's response to their bursting real estate bubble allowed the Japanese economy to grow throughout the 1990s, its rate of growth of real GDP was painfully low—essentially 1 percent per year—and resulted in economic stagnation. By not acting boldly and dealing with the underlying causes of the problem, slow growth and low inflation were assured. But was that the right prescription for Japan's ills?
Bernanke, a respected expert on the Great Depression, published a paper in late 1999 while he was chairman of the Economics Dept. at Princeton University, focusing on the Japanese economy in the 1990s. The paper's title itself—"Japanese Monetary Policy: A Case of Self-Induced Paralysis?"—gives some insight into what he saw as the cause and effect of Japan's economic woes.
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