America’s economists face a delightful but baffling mystery? The mystery is: “why has the United States economy avoided a recession for over a decade.”
In fact, the last decade was America’s first decade without a recession in nearly 160 years, Business Insider notes. To clarify the last official recession lasted from December 2007 to June 2009. Hence, America has been out of recession for over 10 years.
The last decade without a recession was the 1850s, the decade just before the Civil War. That will give the paranoid another reason to fear a Second American Civil War.
Has the Civil War Economy Returned?
Politically, the 1850s had many similarities to our current era. For example, the 1850s was a time of great political upheaval and fragmentation.
Notably, one major political party; the Whigs, collapsed during the 1850s. Moreover, a second major political party, the Democrats, split in two in 1860.
Additionally, the 1850s was the decade in which the national consensus over slavery broke down. To clarify, the Founding Fathers reached a comprise on slavery at the 1787 Constitutional Convention that held until the 1850s.
Crudely, the compromise was that Northerners would not interfere in Southern Slavery. In exchange, Southerners would not try to expand slavery to the North or new territories.
The compromise broke down when Northern radicals began demanding total abolition of slavery. In addition, Southern radicals began demanding and getting the right to expand slavery to new territories such as Kansas.
The Roaring 1850s
Notably, the 1850s was a decade of rapid economic growth that benefited the few. Money poured into the Federal treasury, Wall Street, and the wealthy’s bank accounts from many sources.
For instance, Europe’s insatiable demand for cotton enriched Southern planters and the New York bankers who financed the plantation economy. Meanwhile, California gold and Nevada silver; captured in the Mexican War, gave America a fantastic new source of wealth.
Cheap credit flowed into America from European financial centers, including London and Paris. European credit financed railroads, northern factories, California mines, Wall Street, and Southern plantations. Finally, railroads, factories, and other new enterprises enriched Wall Street with new stocks and investments.
Ordinary Americans saw little of the bonanza because they were almost all small farmers, laborers, and merchants. Unlike Southern planters; or Wall Street speculators, Midwestern farmers could not borrow money from British bankers.
The Civil War Economy and Now
Additionally, the Industrial Revolution destroyed many people’s livelihoods. Small craftsmen; such as carpenters, tailors, and tinkerers, could not compete with cheaper factory-made goods.
Merchants had to borrow money to buy more expensive goods brought by train. Commodity prices sometimes collapsed because railroads and canals flooded markets with cheaper goods from other areas.
Today, the internet social media, and e-commerce are destroying many people’s livelihoods. Amazon and the retail apocalypse are destroying brick and mortar stores while Google has thrown tens of thousands of journalists out of work by stealing newspapers’ advertising revenues.
Corrupt Political Power
One result of the wealth explosion was to corrupt the political process.
The primary goal of 1850s politicians; such as President James Buchanan (D-Pennsylvania) and U.S. Senator Stephen A. Douglas (D-Illinois), was to serve wealthy special interests. Buchanan, in particular, acted as a lobbyist for the Southern Slave Power while Douglas was on the railroads’ payroll.
Today people on both sides of the aisle make similar complaints about leaders; such as President Donald J. Trump (R-Florida), and U.S. Speaker of the House Nancy Pelosi (D-California). In particular, Fox News talk show host and conservative folk hero Tucker Carlson accuses Trump of selling out to “vulture capitalism.”
As a result, many ordinary people turned against the establishment and began voting for radical anti-establishment parties such as the Republicans and the Know-Nothings in the 1850s. Today, Americans are flocking to alternative political figures such Trump, U.S. Senator Bernie Sanders (I-Vermont), and Andrew Yang (D-New York).
Demagogues and new Communications
Another result, was that populist politicians began offering scapegoats for income inequality.
The Know Nothings blamed immigrants and Catholics while radical abolitionists blamed the “Southern Slave Power.” Plus, the radicals used powerful new communications technologies; such as the telegraph and steam-powered presses, to spread their propaganda to mass audiences.
For instance, a newspaper article on a radical speech could reach hundreds of thousands of readers all over the country by 1859. Likewise, today’s demagogues; such as President Donald J. Trump (R-Florida), use powerful new communications including social media to spread their messages. Tellingly, Trump had 67.4 million Twitter followers on 10 December 2019.
Interestingly, Trump blames immigrants for the Nation’s problems, much as the Know Nothings did. Trump’s main rival; U.S. Senator Bernie Sanders (I-Vermont), demonizes the Billionaire Class. just as 1850s demagogues attacked the Slave Power.
The Mystery of the Missing Recession
Politics aside, the lack of a recession perplexes economists. Despite the confusion, economists offer several solutions to the mystery of the missing recession.
Strangely, Dr. Ioana Marinescu; assistant professor of economics at the University of Pennsylvania, blames the great Economic meltdown of 2007-2008 for recession’s absence. Marinescu thinks the Meltdown was so bad the economy had only one place to go up, Business Insider reports.
In contrast, Dr. Tara Sinclair, an associate professor of economics at George Washington University, blames wage stagnation. Sinclair’s theorizes that low wages slow economic growth and prevent the economy from overheating and going into recession.
Finally, Harvard economics professor Dr. Robert Barro thinks a steady rate of economic growth (around 2%) is preventing recession. Essentially, Barro claims the economy is moving too slowly to go into recession.
Why has there been no Recession?
Other explanations for Mr. Recession’s disappearance include technology and Modern Monetary Theory.
Data-driven tech companies such as Alphabet (NASDAQ: GOOG), Facebook (NASDAQ: FB), Amazon (NASDAQ: AMZN), and Microsoft (NASDAQ: MSFT) operate outside the traditional economy. For instance, business journalist Rana Foroohar observes that tech companies make vast amounts of money while employing few people.
Tech companies; such as Amazon and Facebook, have incredible rates of revenue growth. For instance, Amazon had a revenue growth rate of 23.69% for the quarter ending on 30 September 2019. Meanwhile Facebook reported a quarterly revenue growth of 28.59% on the same day.
Thus, tech companies could be free of traditional economic constraints and shoring up the economy. This theory has an obvious dark side. The dark side is that growth could end and the economy will collapse if the tech companies falter.
Hence, one bad earnings report from a company; such as Amazon, could trigger a recession. Therefore, the economy could be more fragile than ever. Notably, the collapse of too big to fail financial institutions such as the fall of Lehman Brothers in 2008; and the Hermann Biggs & Co cotton brokerage in 1837, caused past downturns.
Is Modern Monetary Theory Working?
A final possibility is the infamous Modern Monetary Theory (MMT); or Magic Money Tree.
Essentially, MMT teaches that you can keep the economy growing by pumping lots of money into it through government spending. To clarify, MMT advocates such as Professor Stephanie Kelton think the stimulus from spending will fuel economic growth.
Notably, the U.S. Treasury invested $426.4 billion in Wall Street through the 2008 Troubled Asset Relief Program (TARP). Since 2008, the Federal Reserve keeps propping up the US economy by keeping interest rates low. Notably, the Fed has cut interest rates three times in 2019, The New York Times reports.
Another possibility is that massive spending elsewhere in the world; particularly China, is propping up the U.S. economy. For instance, the People’s Bank of China (PBOC) and the Chinese government have offered two massive stimulus packages since 2015, Forbes reports.
The Chinese stimulus benefits industries such as appliance manufacturers and automakers. Such stimulus can help American firms by increasing the demand for machine tools and parts made in the USA. China’s growth gives the People’s Republic the money to buy American goods such as agricultural products.
The Dangers from Modern Monetary Theory
Similarly to technology, MMT presents dangers to the economy. For instance, you need a government willing to spend a lot to make MMT work.
In recent decades, the US Congress has been increasingly stingy in spending. For example, America has not seen a major expansion of the welfare state since the 1960s.
In recent years, Congressional Republicans have been reluctant to spend even on basic science and even health research. Thus, America could see recession soon, if voters do not elect Bernie Sanders President and a Democratic majority to Congress next year.
Furthermore, the Fed can only cut interest rates so far. In fact, some policy makers; including President Donald J. Trump (R-Florida) are considering zero-interest rates, USA Today reports. Under zero-interest rates the banks literally pay people to borrow money to stimulate economic growth.
Zero interest rates are dangerous because some people and businesses rely on bank interest for income. Frighteningly, some banks are already paying savings interest rates as low as 0.01%.
For instance, ValuePenguin claims Citibank was paying an annual savings interest rate of 0.04% and Bank of America was paying an average savings rate of 0.03% in December 2019. Meanwhile, several banks including Wells Fargo were paying 0.01% interest.
Zero-interest rates could hurt savers because banks base savings account interest rates on the fed’s interest rates. Hence, you could soon lose money on your savings account.
A New Economic Age
Finally, government will have to repay any money it borrows for a stimulus. If the stimulus does not lead to new tax revenues governments could face deficits, they cannot pay.
In the final analysis, the mystery of the missing recessions is rather frightening. I think we have entered a new economic age in which old rules no longer apply. Thus, we could soon face unforeseen economic dangers that could be worse than past recessions.