On Sept 21, 2010, the longest recession of the post-WWII era was officially declared over by National Bureau of Economic Research (NBER). But most Americans still believe the nation is in recession, regardless of what economists say.
Bob Goodman, an economist and consultant who attracted a wide following among advisors as Putnam Investments' chief economist in the 1980s and 1990s, says the reason for this disconnect is that the United States is in the middle of a short-term, cyclical economic adjustment superimposed over a long-term economic sea change to a slower growth path. This overlap causes recessions to be exaggerated and prolonged, while recoveries tend to be shorter and less dramatic.
"Why people are having a hard time sorting things out is because it's the opposite of the last 25 years of upward economic growth," states Goodman.
Before the 1980s, the typical recession lasted six to nine months, and the duration of the average recovery was three to four years. During the last 25 years however, the U.S. experienced three recoveries lasting eight, ten and six years, respectively.
A Tale Of Two Systems
Goodman believes these longer cycles stem from the ongoing conflict between our economic system of free-market capitalism and our democratic political system.
"When you allow our type of economic system to operate freely, within the law, and let the markets dictate outcomes what you tend to get is a very efficient economic system," Goodman says. "You get lots of growth, you employ a lot of people, you get low interest rates, low inflation, profits grow very rapidly, and equity markets, which reflect that health, typically do very, very well."
However, when markets are allowed to function freely, while you get a very positive economic outcome, the social outcome can be problematic. The reason is, our type of free-market system focuses on maximizing profits. That's an economic motive-not a social motive. The problem is that the media tends to lump them both together and declares our free-market economic system as unfair. That may be true in a social sense, but in an economic sense it is fair.
Not Everyone Is Equal
For example, in an economic sense, it is perfectly "fair" to expect the superstar baseball player Alex Rodriguez, aka A-Rod, to earn $25 million a year and a public school teacher to earn $60,000 a year. In terms of the social implications, nobody would doubt that the teacher is worth more than A-Rod, but in an economic sense, given A-Rod provides entertainment value for millions, the free market system declares A-Rod is worth much more.
There is an inherent conflict between the natural outcomes of a free-market system and the social implications. The reason is that in a democracy everyone's vote counts the same.
"In a political sense you may be as equal as Donald Trump, but from an economic standpoint 'the market' says he is more productive," Goodman added.
Because the American people look at the results of a freely functioning capitalistic system as socially unfair, they equate it with being economically unfair, and when we deem something as unfair, we vote to change it. In a democracy, if the majority of American voters want government to redistribute the wealth from those who have produced it to those who will consume it, that is going to happen, but not without consequences. The result will be a less efficient economic system.