As Americans brace for a new financial siege with the sour taste of 2008 still fresh in everyone’s mouths, it will be critical to form new policy approaches to deal with the economic circus.
No longer should leaders treat this financial calamity as a recession, caused by poor lending and borrowing. Instead policymakers must recognize that America is in an on-going depression, caused by a multitude of issues including lending and debt and exacerbated by fractured leadership. Terming any further economic problems as a “double-dip recession” is a cop-out, as it doesn’t adequately distinguish the magnitude of the situation. Only in acknowledging the severity of this crisis will the U.S. rally, solving the range of political and economic impasses holding the country back.
Policymakers in Washington are clearly not getting things done, a point S&P made as part of its rationale in downgrading the U.S. credit rating from AAA to AA+. Tuesday’s debt ceiling deal was political rancor at its worst, a case study of broken government.
But worse than the debate was the deal that was “negotiated.” Little more than a band-aid on a deep wound, the deal will be ineffective in combating America’s debt, as it only pushes off the problem. Republican and Democratic leaders were hoping, maybe, for some ovation for the hard work they put in to get Tuesday’s deal through. Instead the stock market continues to crash.
For two years now, American leaders have approached this financial Charybdis like it was a simple recession. All we had to do was weather the storm.
Over 8 million lost jobs later, and with a financial storm that has swept the globe, American policymakers must change their approach, treating the situation like the economic depression it really is.
The term “depression” is taboo in economics, with no clear definition. Psychologically, the term invokes ghost towns and broken society, and is understandably used sparingly. But in its simplest form, a depression is an abnormally long and deep economic plunge, tremendously affecting the credit, growth, and output of a nation. Even a nation’s political stature is shaken in a depression. The worst depressions extend into the global community, affecting a multitude of nations.
Recession assumes we will rebound shortly, and also assumes that only minor policy reforms are needed to stimulate the economy.
Depression policy would not only seek to stimulate, but also significantly change aspects of our economy and society. Calling the situation a depression would allow Americans, U.S. leaders, policymakers, and organizations to unify against a common threat, much like in war.
The policy decisions made under this paradigm would be more effective, allowing for the government to curb debt and unregulated lending at the same time and make significant cuts to government programs like Medicaid and defense. With this strategy, the government would not only seek cuts, but it would also lead in pushing new growth and output. In the Great Depression, government employed masses to build basic infrastructure, which became the engine of American growth for decades. Today, depression policy could focus on innovations in energy creation, education, and technology, fostering new layers of economic development. Policymakers must also target investment by focusing on the hardest hit groups, namely young people, who hold the highest unemployment rate. Investing in young people ensures that we will invest in tomorrow's work force instead of letting it continue to atrophy.
But to solve any depression, unified leadership is needed. It is testament to the brokenness of our current political environment that American leaders have not once had a rally-around-the-flag moment during this economic calamity. Such a moment, akin to the political cohesion immediately after Sept. 11, would allow our political system to run more fluidly. Terming the economic situation a depression would help shock our leaders into finding common ground, adding stability in government and easing accusations that our leaders are ineffective.
An argument can be made that S&P used its downgrade to highlight that significant change is needed in dealing with the economic situation. Others have advocated a more extreme action that would shock leaders to handle the situation better, namely a call for self-default on American loans.
But a paradigm shift in understanding the situation would be the simplest strategy to helping find a solution to the ongoing financial crisis. Coming to terms and understanding that our economic situation is worse than we originally thought is a first step in righting the course of the ship away from dire straits.
We must first hit rock bottom before we bounce back up. Call it what it is: The United States has entered a depression.
Photo Credit: Beverly & Pack