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Way to escape recession not yet apparent

By Martin Feldstein | China Daily | Updated: 2009-03-05 07:49

The massive downturn in America's economy will last longer and be more damaging than previous recessions, because it is driven by an unprecedented loss of household wealth. Although the fiscal stimulus package that President Obama recently signed will give a temporary boost to activity sometime this summer, the common forecast that a sustained recovery will begin in the second half of 2009 will almost certainly prove to be overly optimistic.

Previous recessions were often characterized by excess inventory accumulation and overinvestment in business equipment. The economy could bounce back as those excesses were absorbed over time, making room for new investment. Those recoveries were also helped by interest rate reductions by the central bank.

This time, however, the fall in share prices and in home values has destroyed more than $12 trillion of household wealth in the United States, an amount equal to more than 75 percent of GDP. Previous reactions to declines in household wealth indicate that such a fall will cut consumer spending by about $500 billion every year until wealth is restored. While a higher household saving rate will help to rebuild wealth, it would take more than a decade of relatively high saving rates to restore what was lost.

Way to escape recession not yet apparent

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