THE SOCIETAL CONSEQUENCES OF ECONOMIC STAGNATION

By Bill Breakstone, August 25, 2010

The economic news continues to be unrelentingly disappointing, to say the least. This morning, the Commerce Department said orders for goods expected to last at least three years (durable goods) rose just 0.3 percent last month. That was much worse than the 2.8 percent growth economists had forecast, according to Thomson Reuters.

Excluding the volatile transportation sector, orders actually tumbled 3.8 percent in July. Economists were expecting 0.5 percent growth.

The weak report adds to evidence that the manufacturing sector is weakening as the year wears on. Manufacturing activity had shown some of the most consistent growth during the first half of the year, but reports recently have shown that growth is fading.

Adding up the damage reported over the past three weeks, we have seen a GDP growth rate in the second quarter of 2.4%, down from a revised first quarter figure of 3.7%, and well below economists’ expectations; unemployment remaining at 9.5%; initial claims for unemployment insurance climbing to 500,000; sales of existing homes falling by 27.2% over the past month and 25.5% from year ago levels; and now, the unexpected drop in durable goods orders.

As many economic commentators have suggested, a “new normal” appears to be taking hold, a period of economic stagnation that threatens to last for an extended period of time, perhaps as long as a decade. What is missing from these analyses is what the societal costs could be.

First, continued high joblessness will lead to decreased expectations on the part of wage earners and a feeling of helplessness, as opportunities for personal improvement and wealth creation evaporate. As millions of people remain among the ranks of the unemployed, the drag on economic activity will continue unabated. GDP growth will fall to levels that will not create new employment; many economists are revising their forecasts for future GDP down to a level of between 1% to 2%, a full percentage point below their previously disappointing number. Compare that with the average growth rate during previous recoveries of 5% to 6%.

This dire scenario will have a marked effect on the public. Frustration on their part will lead to calls for remedial action, but the options available to public officials will continue to be extremely limited, given the state of nearly total political paralysis. What emerges could be social unrest.

Should this occur, people will become increasingly susceptible to rhetoric promising “easy” solutions, based upon simplistic answers to what are very complex economic challenges. It may be a rather large overstatement to compare our present day situation, as bad as it is, to the state of affairs during the Great Depression. On the other hand, the effects of the 2007—2008 crash was far greater than economists originally foresaw, and the recovery is thus far more fragile.

What must be avoided, at all costs, is a repeat of the German experience during the inter-war years of the 1930s. For it was exactly the economic frustrations of that period that gave rise to the most virulent form of demagoguery the world has ever witnessed.