The North Wind Doth Blow

It is bad news, yet it is good news. It is late news, yet it is hot of the press. There is nothing surprising about it, yet everyone is shocked. The experts have finally spoken. On Monday the 26^th of November, six top economists at the National Bureau of Economic Research (NBER) publicly pontificated that the United States entered the darker side of the economic landscape, also known as a “recession” in March 2001. Which means, before summer this year, the economy caught a cold, and now we know why there has been so much sniffling.

The NBER, according to itself, “is a private, nonprofit, nonpartisan research organization dedicated to promoting a greater understanding of how the economy works”. While most of us, the unwashed masses realized there was something ominously wrong with the economy for the last year or more, finally the even the experts at NBER concur.

The news is bad, yet it is good. According to the NBER findings, in the past 80 years, there has been 16 recessions. All but one of these have lasted for about a year, give or take a few months, Since the current recession started in March, it means recovery is around the corner. The one case where a recession lasted longer was the “Great Depression”, the horrific and unbelievable man-made disaster of the period 1929-1934.

Due to the globalization of trade and services, the recession is not only impacting the citizenry of the United States, but is pounding its way around the world. . According to an article in the New York Times, "One by one, every major country is tipping into a rare and possibly lethal recession," said Stephen Roach, chief global economist at Morgan Stanley in New York, who has been predicting a worldwide slump since early in the year. "It is far-reaching and deep, and much of that has to do with the fact that we've become much more interconnected."

Because of the timing, the finger is solidly being pointed at the technological boom and especially the “dot-com fiasco” for one of the significant cause of this malaise. This indictment is of course, not without merit.

There is no good definition of a recession. The NBER says a recession is a period of diminishing economic activity. More commonly, the media defines a recession as two or more quarters of declining GDP. Even more commonly the general public thinks of recession as when people lose jobs, employment is hard to find, those who are employed fear the pink slip and salary raises are a pipe dream. Also, the much-quoted stock market indices (especially the “Dow”) decline most of the time. These definitions make pinpointing recessions difficult. For example, the common folks felt the cold rush of the recession of 2001, at the end of 2000, when the stock markets tumbled, layoffs became rampant and the job market all but dried up. Then the media caught on as the GDP numbers became available. Then the NBER found out about it, just this week.

In theory, in the bed of roses of the capitalist economy, there should be no recessions. In this economic model, producers produce and consumers consume. The producers charge money and the consumers pay. But since every consumer is also a producer, every person makes money. As this cycle actively rotates, everyone should benefit and be able to partake in the pleasure of the proverbial martini, in front of the proverbial TV every proverbial evening.

But then, things do not quite work according to plan, especially since there is no plan. There is no central planning authority. There is no one controlling what is being made and when and being sold for how much.. It is all a “market-driven” game where millions of individuals make mostly incorrect decisions and the strange power called the market plays the referee. For example, in the US, the Christmas season is a time when consumers spend a lot of money on clothing, trinkets, toys and electronics. To meet this demand, the producers have to plan the Christmas season offerings around March or April. But guessing how much stuff the consumers will buy is impossible. Both overproduction and underproduction hurts the bottom line.

Most of the time the business cycle runs fine. In fact, in recent memory there have not been downturns to speak of. The 1970’s were a time of economic malaise. The oil embargo of 1973 shook up the foundations of the world economies. It was followed by a general period of slow growth and runaway inflation. Inflation in stable economies is generally accompanied by excessive growth, but that was not the case in the 70’s and the word “stagflation” was coined (economy is stagnant, yet inflation is rampant). However the end of the 70’s saw a major turn maybe due to massive tax cuts and massive increases in US government spending brought about by the “Reagan Era”. Suddenly the sun shone on the world and the warmth radiated everywhere.

Since 1980 there has been no looking back. The Dow Jones Industrial Index rose from 950 (1980) to 11,200 (2000) a whopping gain of 10 times, or about 14% a year (yearly compounding). In these twenty years, there has been a hiccup or two. Technically speaking there was a recession in 1991. That one was quite shallow and no one really noticed it. The Democrats did, and gleefully rubbed the nose of the incumbent president George Bush, in it. Mr. Bush lost the election.

Twenty years of economic growth, that too at top speed has been unprecedented. Sustained growth leads to too much money in the hands of consumers and that leads to shortages, which leads to inflation, at least that is what the textbooks say. Even the textbooks are sometimes wrong.

Inflation management has been the crucial issue in the long-term expansion and all the major economies of the world kept a hawkish eye on the inflation numbers. Supposedly, the last two Federal Reserve Chairpeople (Paul Volker and Alan Greenspan) are the people much credited for exemplary orchestration of the inflation waltz for over 20 years. Consequently, the world populations enjoyed the longest sustained period of much martini consumption. In fact a whole generation of people, the so-called “generation X”, the current twenty-somethings, have no recollection of what “bad times” feel like.

Good times, even the really good times have to come to an end. Towards the end of this 20-year period, the euphoria induced by the “nothing can go wrong” euphoria led to the demise of the good times. The euphoria numbed everyone to abandon thinking of reality. When in 1995 the Internet went live, the investors found the new gold rush. Money poured into the Internet ventures with no heed to caution. Many a young kid who wanted to start a useless Internet company (also called a “dot-com”) suddenly found lines of investors at the doorstep holding bags of cash and begging to be relieved of it. This money fuels a crazy fiasco. The dot-coms had built fortunes and empires and employed a lot of people. These people became instantly rich and splurged on expensive cars, houses and fancy things

The stock market did not want to be left out of the gold rush. Startups with no chance of survival became darlings of Wall Street. Companies who had not made a penny in earnings were valued at billions of dollars; there are too many examples. One of the companies that invested in startups, CMGI became the enviable giant with holdings in the most of the dot-coms. CMGI stock started at $0.005 (yes half a cent, split adjusted) in 1996, went to $130 in December 1999 and now sells for about $1.

But reality is a hard thing to avoid. When the lights were turned out on the party, the tumble of riches was felt worldwide. Suddenly a lot of people not only had no jobs, but also were essentially unemployable. The sudden ceasing of their spending habits led to income reductions in many service industries.

The downfall of the stock markets and the dot-coms sent shockwaves through the consumer psyche and the general public reined in spending. “Lets not buy that computer and take the vacation this year”. Such actions on a large scale triggers instant economic catastrophe that is felt around the world.

Every dark cloud has a silver lining. The excesses of the computer industry are over. Life is slowly but surely returning to normal. All the economic gains made over the last twenty years are still in place and the economic engine is just as vibrant as it was a few years back and hence there is not a real chance of a long-term illness.

There is already evidence of a rebound. A rebound that has been greatly buffeted by the terrorist strikes that set progress back a few months and poured salt on a recovering wound. The healing will take longer but barring any more crazy shenanigans by ill-minded outlaws the road to prosperity will be paved again. The cold north wind will turn to the warm glow of spring and the robin will be back singing. March 2002 should be the next milestone that the NBER will record.

Partha Dasgupta is on the faculty of the Computer Science and Engineering Department at Arizona State University in Tempe. His specializations are in the areas of Operating Systems, Cryptography and Networking. His homepage is at http://cactus.eas.asu.edu/partha