Why the economy hurts so bad

We know there was a housing bubble that burst and a financial panic, but something else was involved in the Great Recession we're still trying to recover from.

And that was the price of gasoline, Derek Thompson writes in The Atlantic.

In 2009, economist James Hamilton published a paper that retroactively forecast what an oil shock, like the one we experienced in 2007-08, would do to GDP. And guess what? His model accurately predicated much of the collapse in GDP that resulted from the Great Recession -- as if there had been no housing bubble or financial crisis! The oil spike was that bad.

Still, there was a housing bubble. And there was a financial crisis. How do we account for them and still hold onto the gas story? Here's a one-paragraph theory of the Great Recession that begins with gasoline. Cheap gas ruled in the 1990s. This encouraged families to settle down farther from the cities where they worked. In the 2000s, super-low interest rates, declining lending standards, and an appetite for mortgages on Wall Street (among other factors) further encouraged sprawl and residential development in the 'burbs. As the price of gas went up, families stopped buying homes 30 minutes from the city. For folks shacking up in the exurbs, higher gas bills ate into mortgage money. For companies, higher energy bills shocked productivity. Classic oil-shock + housing development arrested + financial crisis = Great Recession.

That's why President Obama's energy policy/religion matters so much. Here's what the White House itself has to say about energy. This is the White House's energy page.

The President has taken unprecedented action to build the foundation for a clean energy economy, tackle the issue of climate change, and protect our environment.

"As we recover from this recession, the transition to clean energy has the potential to grow our economy and create millions of jobs - but only if we accelerate that transition. Only if we seize the moment." -- President Barack Obama

Nothing there about filling your tank to get to the grocery store. What do we know about Obamaman's energy policy? Roadblocks everywhere to brining online more oil and gas. Corruption and mismanagement in wishful thinking boondoggles like Solyndra.

If you approve of all this, go plug your car into a windmill.

A long, bumpy ride

Here are some numbers on the recession, the worst since the Great Depression, from The New York Times.

At the current rate of job creation, the nation would need nine more years to recapture the jobs lost during the recession. And that doesn’t even account for five million or six million jobs needed in that time to keep pace with an expanding population. Even top Obama officials concede the unemployment rate could climb higher still.

Median house prices have dropped 20 percent since 2005. Given an inflation rate of about 2 percent — a common forecast — it would take 13 years for housing prices to climb back to their peak, according to Allen L. Sinai, chief global economist at the consulting firm Decision Economics. 

Commercial vacancies are soaring, and it could take a decade to absorb the excess in many of the largest cities. The vacancy rate, as of the end of June, stands at 21.4 percent in Phoenix, 19.7 percent in Las Vegas, 18.3 in Dallas/Fort Worth and 17.3 percent in Atlanta, in each case higher than last year, according to the data firm CoStar Group.

Demand is inert. Consumer confidence has tumbled as many are afraid or unable to spend. Families are still paying off — or walking away from — debt. Mark Zandi, chief economist of Moody’s Analytics, estimates it will be the end of 2011 before the amount of income that households pay in interest recedes to levels seen before the run-up. Credit card delinquencies are rising. 

And we'd best settle in for a long bumpy ride:

“We are in a situation where our vulnerability to any new problem is great,” said Carmen M. Reinhart, a professor of economics at the University of Maryland.

“We still have a lot of strengths, from a culture of entrepreneurship and venture capitalism, to flexible labor markets and attracting immigrants,” said Barry Eichengreen, an economist at the University of California, Berkeley. “But we’re going to be living with the overhang of our financial and debt problems for a long, long time to come.” .

This recession compared to others

Catherine Rampell explains in The New York Times: The chart above shows job changes in the most recent recession compared with previous ones, with the black line representing the current downturn. The line has risen since last year, but still has a long way to go before the job market fully recovers to its pre-recession level. Since the downturn began in December 2007, the economy has shed, on net, about 5.6 percent of its nonfarm payroll jobs. And that doesn’t even account for the fact that the working-age population has continued to grow, meaning that if the economy were healthy we should have more jobs today than we had before the recession.

When is a recession not a recession?

When the NBER says so. This is the National Bureau of Economic Research, a private, nonprofit, nonpartisan research organization. We generally follow its determination of the beginning and end of business cycles.

A few days ago the NBER announced that the recession ended in June 2009.

The trough marks the end of the recession that began in December 2007 and the beginning of an expansion. The recession lasted 18 months, which makes it the longest of any recession since World War II.

In determining that a trough occurred in June 2009, the committee did not conclude that economic conditions since that month have been favorable or that the economy has returned to operating at normal capacity.

No kidding. Here's a picture.

How are you doing? According to a new poll from CNN/Opinion Research Corporation, Americans overwhelmingly disagree with the NBER's assessment. Here's that picture.

The difference is in semantics. We use the term recession to describe how we're doing right now. Economists use it to refer to the direction of the economy. Note, however, that public opinion tracks economic activity fairly accurately.