The Great Recession of 2007-2008 Could Be Ruinous If Not Resolved

12/02/2011 12:12 pm ET | Updated Feb 01, 2012
  • Nake M. Kamrany Professor of Economics, University of Southern California

Does the great recession of 2007- 2008 signal the beginning of the decline of Western powers and its domination of the global economy which began 500 years ago?

Probably not, because the factors that contributed to the dominance of the West beginning in the 16th century are still valid; most notably its prowess in science, invention, innovation and technological change. And the spirit of entrepreneurship and competition is still alive and thriving.

However, a decline could ensue in our preeminence if the current self-inflicting bleeding wound of inaction is prolonged by politicians concerning the job situation. The dysfunctional Congress has not responded to President Obama's job bill and the failure of the bi-partisan congressional super committee to reduce federal debt by $1.2 trillion over ten years and adjust tax rates on the rich is prolonging the dilemma of the great recession. If the current hyper-partisan environment is not resolved, it could exasperate the contraction of the economy into a depression or the economy could suffer from deflation or stagflation, which means the concurrence of both recession and inflation.

The great recession of 2007, which started with housing bust and prime mortgage, has turned into a political logjam, and is still with us despite of declaration by the National Bureau of Economic Research (NBER) that the recession was over in 2009.

The recession is not over yet since the official unemployment rate has remained at approximately 9% plus an additional 7% who are part-time or have withdrawn from the labor market. This brings the total to approximately 22.4 million workers out of jobs out of a total labor force of approximately 140 million. This level of unemployment is intolerable.

Sociologists rank the hardship sustained by unemployment to death in a family. It follows that at this juncture the Congress and the super committee leave the cynical political divide and get on with the urgent task of providing jobs through fiscal and monetary incentives. It is the confidence of the private sector that is crucial to invest and innovate and re-create a vibrant economy.

Historically, the U.S. economy has rebounded into long expansion after a contraction. For instance, during the Great Depression of 1930 -1939, the unemployment rate maxed at 24.9% but the U.S. economy rebounded. To address the current recession, the super committee of Congress must regain its confidence and attempt at a renewed growth and expansion experience of the past that will resolve the debt and unemployment issue such as the experience of the second half of the twentieth century in which real GDP per capita expanded by 250% in the United States from the end of World War II to the year 2000. In 1982 the unemployment rate was 11%. Then the economy expanded during 1982 to 2007 and unemployment had dropped below 4%.

In general market economies endure business cycled i.e., fluctuate over time in total national output, employment and income. They are marked by simultaneous and widespread fluctuation including contraction and expansion of the economy. It follows that the intensity of the fluctuation-gyration and the duration of the fluctuation determines whether it is a mild recession or a depression. Currently we are stuck with a great recession and the government must implement fiscal and monetary policy vigorously to ward off a depression and get the economy out of the great recession.