Today's DeLong is about bond prices, and, in part, about the effect of uncertainty on savings decisions (emphases mine) ...
Hoisted from the Archives: If You Are Looking for a Monument to John Hicks, Look Around You - Grasping Reality with Both Hands
... Let me give you the Hicksian argument about what happens in a financial crisis--a sudden flight to safety that greatly raises interest rate spreads, and as a result diminishes firms' desires to sell bonds to raise capital for expansion and at the same time leads individuals to wish to save more and spend less on consumer goods as they, too, try to hunker down...
The economic event currently known as the "Great Recession" started and ended within the past 3-4 years. The period of economic uncertainty for many of us is older than that ...
Manufacturing collapse - Karl Smith - The Washington Post
... manufacturing did collapse. Yet, it’s hard not to look at the graph above and think that the real manufacturing recession began in 1999 and simply never stopped. What’s amazing is that we had any recovery at all....
I'm in the business of producing software; I believe for the purpose of US statistics I'm in manufacturing (we can capitalize production for example). For my sector the 1990s were a golden era. Since the 1990s things have been ... different.
The times have not necessarily been bad at leasts in terms of work income [1]. Many of us have similar or even higher incomes than we had ten years ago, even adjusting for inflation. The times have not been bad, but they have been turbulent. Close calls are frequent. Even if yearly winnowings have been modest, employment options have been comparably modest. "Lean" investments means there are no reserves, no excess capacity. Business infrastructure is shaky; IT departments are cut to the bone. Predictable small disruptions have major impacts on a weakened enterprise. Projects go slowly, and are easily derailed. Productivity falls.
I suspect most sectors of the US economy have had similar experiences, even in years of relatively good GDP growth. Even growth sectors, like healthcare, face enormous regulatory uncertainty.
Uncertainty has become endemic, and the outcome is, of course, that households spend less, save more, and save more as cash. Instead of being able to go for 6 months without income, we aim for 1-2 years. When millions of us reduce consumption, the economy shrinks.
What could the US do to reverse these trends, and climb out of Long Depression II?
The US could do a lot. Health care cost and access is a major contributor to economic anxiety. Obama's ACA is better than nothing, but it left coverage tied to employment in general, and employment with large corporations in particular. This was a necessary political compromise, but it has hobbled the ACA and made it easier for the GOP to sabotage America's future.
Beyond health care, economists like DeLong, Krugman and Jared Bernstein have a wide range of ideas.
Unfortunately, nothing will happen as long as the GOP can paralyze the US government [2]. The bursting of China's bubble and the Euro crisis will make things particularly interesting leading up to Nov 2012.
See also:
[1] Investments have been utterly lousy however -- and we avoided all but the real estate crash. The reason we were relatively lucky, however, is due to uncertainty making us more conservative.
[2] Though it's certainly unjust, given the sheer wrongheadedness of today's GOP it's entirely possible that a Romney or Huntsman would be able to do more than Obama -- simply because they're only pretending idiocy and today's Dems are far higher quality than today's GOP.
