Jun 08 2010

Will the 2011 Economic Collapse Threaten the 2015 Maslow Window?

Published by at 6:30 am under Wave Guide 1: Economic Growth

On a mini-vacation last week enjoying the sensational beaches and other joys of the west coast of Michigan, I stopped at a Dairy Queen on Lake Charlevoix and almost said it. “Double dip, please.” Even at a DQ the words were surprisingly hard because it’s probably the most feared economic prospect facing this country.

According to Arthur Laffer, real quarterly GDP growth from 1981 to 1984 shows the economy took off when the Reagan tax cuts kicked in (WSJ, 6/7/10).
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Recently Christopher Wood of CLSA Ltd. in Hong Kong warned that a “double dip recession” was in the cards (Wall Street Journal, 5/24/10). According to Wood, the hazards include: 1) the European debt crisis ($ 2.8 T at end of last year), 2) “slower growth in China,” and 3) in the U.S., a “decline in bank lending and the velocity of money in circulation.”

Wood believes that “sooner or later … the Obama administration (will) give up on their hopes of a normal recovery.” Indeed on May 1 WSJ characterized our current status as a “respectable cyclical recovery, though one that is so far less robust than we’d expect after an especially deep recession … about half as strong as it was after the last deep downturn.” And the May, 2010 employment data continued to suggest caution because 95% of the new jobs were for temporary government census workers.

Economist Arthur Laffer (co-author of Return to Prosperity…; 2010) recalls that in response to the Reagan tax cuts of January, 1983, “the economy took off like a rocket with average real growth reaching 7.5 % in 1983 and 5.5 % in 1984.” Laffer worries that the expiration of the Bush tax cuts in January, 2011 — plus tax increases at the federal, state, and local levels — will have the opposite effect (WSJ, 6/7/10).

When we pass the tax boundary of January 1, 2011, my best guess is that the train goes off the tracks and we get our worst nightmare of a severe “double dip” recession.

To avoid this fate, Martin Feldstein of Harvard recommends extending the Bush tax cuts for 2 years (WSJ, 5/12/10) — something that seems politically unlikely.

It’s interesting that — consistent with the current major debt crisis in Europe — prominent Keynesian economists George Akerloff and Robert Shiller (authors of Animal Spirits, 2009) do not attribute the end of the 1930s Great Depression to FDR’s big government spending policies, but instead to the onset of World War II.

The drop of confidence during the Great Depression was so fundamental that it continued for a decade. Confidence — and the economy itself — was not restored until World War II completely changed the dominant story of people’s lives, transforming the economy.

Historian Burton Folsom (author of New Deal or Raw Deal, 2008) concurs that FDR didn’t end the Great Depression, but contends that WW II didn’t either. In fact, a Democratic Congress rejected President Truman’s recommendation of a “New Deal revival” and instead cut taxes across the board. According to Folsom, “The economy took off after the postwar Congress cut taxes,” and unemployment dropped (from double digits in the 1930s) to only 3.9 % in 1946.

Akerloff and Shiller (2009) see parallels between the financial Panic of 1893 and the 1890s great recession, and the Panic of 2008 and our current great recession. Indeed, the severe financial crisis of the 1890s led directly to a golden age of prosperity, exploration, and technology that featured “Panama fever” and the construction of the Panama Canal, “pole mania” and the first international expeditions to both the north and south poles, the civilization-altering Wright brothers first flights, and the Great White Fleet’s show tour around the world. Called the Peary/Panama/T. Roosevelt Maslow Window (1901-13), it was perhaps the most ebullient decade in U.S. history, led by perhaps the most ebullient president in U.S. history: Theodore Roosevelt.

The most recent golden age was the 1960s Apollo Maslow Window initiated by President John F. Kennedy and featuring the first manned Moon landing in 1969. Based on 200+ years of macroeconomic data and historical trends, our next Maslow Window is expected to begin near 2015.

The question is: Will our current great recession threaten the 2015 Maslow Window?

The 1890s great recession is especially revealing in this regard, because it was a double dip. According to David Whitten, professor emeritus in the College of Business at Auburn,

The financial crises of 1893 accelerated the recession that was evident early in the year into a major contraction that spread throughout the economy. Investment, commerce, prices, employment, and wages remained depressed for several years … Meanwhile, restricted investment, income, and profits spelled low consumption, widespread suffering, and occasionally explosive labor and political struggles. An extensive but incomplete revival occurred in 1895. The Democratic nomination of William Jennings Bryan for the presidency on a free silver platform the following year amid an upsurge of silverite support contributed to a second downturn peculiar to the United States. Europe, just beginning to emerge from depression, was unaffected. Only in mid-1897 did recovery begin in this country; full prosperity returned gradually over the ensuing year and more.

In 1893, the year of the Panic, unemployment is estimated at 8.1 % but increased to 12.3 in 1894. In 1895, the year of the “incomplete revival,” it dropped to 11.1, but the “second downturn” resulted in 12.0 and 12.7 in 1896 and 1897, respectively. The first year since 1894 with sub-10 unemployment was in 1899 with 8.7 %. By 1900 it was 5.0 and the Maslow Window was already taking off.

Although only sketched here, the 1893 – 1913 great recession/Panama Maslow Window decades have more key economic and political parallels with our current situation than does the 1950 – 1970 post-War/Apollo Maslow Window interval. Because the 1890s great recession lasted about 6 years, this model suggests that even in a worst-case scenario — i.e., assuming a double dip recession — we should easily recover before 2015. And our recovery should be accelerated by proper leverage of the last 100 years of economic history since the 1890s great recession.

This is consistent with the historical observation that over the last 200 years, no Maslow Window has ever been delayed or diminished in any observable way by a panic/great recession in the decade preceding the Window.

One response so far

One Response to “Will the 2011 Economic Collapse Threaten the 2015 Maslow Window?”

  1. Monique D Mageeon 08 Jun 2010 at 10:08 pm

    I sure hope you’re right on this.

    My concern these days is the fact that so much of our economy is based on consumer spending and as the baby boom generation reaches retirment age it is not ging to be in a real spendy frame of mind. Now, this is normal for retirees but could be a bit of a problem for an economy based on consumer spending…

    I suspect that demographics are conspiring here to make this a most difficult recession. Well, that and our collective failure to properly plan for this most predictable event (meaning the impact of the aging baby boom generation)!

    But, I love reading about why my negative view of the coming years may be wrong. I’ll keep tuning in here at the 21st Century Waves!

    Hi Monique,
    Thanks for your comments.

    On the flight home from Chicago last weekend I was re-reading one of my favorite books: The Next 100 Years — A Forecast for the 21st Century (2009) by George Friedman.

    Friedman is convinced that the U.S. will continue its global dominance throughout the 21st Century. Part of the reason is that he and his colleagues at Stratfor are forecasting that China will undergo a Japan-style economic collapse by 2015. And that Russia will decline by 2020. There will be major challenges and new regional competitors for the U.S., but the future is bright.

    One challenge that you mentioned for the U.S. (and the world) is demographics — specifically an aging population. But, being a nation of immigrants — e.g., my grandparents came from Germany to the U.S. just before the Peary/Panama/T. Roosevelt Maslow Window — the U.S. will have a cultural and economic edge in attracting the best the world has to offer, unlike many other countries.

    One thing I like about Friedman is that he’s a bit of a contrarian, which to me means he follows the data, not just the headlines. Another is that he uses 50 year economic/political cycles to facilitate his long-term thinking. This is basically my approach too except that I have focused on technology and exploration which led me to the concept of the fractal Maslow Window, also fundamentally driven by a long economic wave.

    Friedman’s approach and mine often lead to compatible results (forecasts and trends) as they should if they are aligned with historical and current reality. I was thinking about writing a post specifically illustrating the complementarity of our approaches and compatibility of our results, with a focus on demographics. And based on your comments, I think I will.

    Thanks again!
    Bruce

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