That's What I Thought...
columnist: Gene DeNardo

Topic: Economics
The Last Great Recession

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Differences and Similarities between the early eighties recession and our current one.

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by Gene DeNardo
(libertarian)
Saturday, March 28, 2009

We have had some bumps and sharp jolts that have affected segments of the economy, but the last major recession occurred in the early eighties. As is par for the course, some regions were hit harder than others but the impact was felt from coast to coast I have lived in the same area of the country, the Northwest, during and since then and the following is a quick look at the similarities and differences in the two downturns as they affected our region.

Back then, timber was King. The entire region was dependent on the timber industry. Substantially worse than our present downturn, beginning in 1980 housing starts plummeted. The demand for lumber virtually ceased. It never really recovered as the subsidized old growth timber from the local Federal forests were for the most part already cleared and the timber industry was just beginning its labor saving modernization and move into the world market. The term "Cut and Run" was a reality around these parts as timber corporations, fattened by over 100 years of federal subsidies headed for greener pastures offshore.

The working class economy that was so much a part of this region was devastated. Unemployment figures reached as high as 13% but many more were not working. The layoff had occurred over several years and the statistics conveniently hide those who are considered "no longer looking for work".

On the up side, local small businesses were everywhere. Commercial and residential rents were extremely low and start up costs were virtually nonexistent. Vacant storefronts were slowly filled with small shops and restaurants. Some survived and some didn't but the atmosphere was exciting.

The Northwest region was said to have been hit the hardest of any area in the country. Because of this, local leaders back then began a concerted effort to "diversify" the economy. It seems to have worked, as the current recession finds us as one of the areas impacted the least. On the downside, we now look a lot like everywhere else, corporate warehouse offices, big box retailers and the other trappings of a "modern" economy.

The rents are there too. A small business startup requires a huge investment and success is thwarted by corporate competition. I guess "Mom and Pop" are pretty much retired around here although the area still is one of the leaders in quantity of small businesses per capita. The rapid growth of the "micro-brew" industry has certainly augmented the small business climate in the region as we have more small breweries than any area in the world! This really helps smooth out recessions also; nothing like a good beer to diminish financial problems!

Analysts have facts and statistics to jumble and mumble about, but the simplest way to determine the depth of an economic slowdown is land value. Land value is the thermometer of the economy. The inflationary factors manifest themselves in the higher values and land is most often the most seriously deflated sector of the economy in the downtimes.

The early eighties were no exception. We were hit hard and land could be had for as little as a third of what it was at the end of the seventies. Correspondingly, houses had dropped up to fifty percent from their peak values just a few years prior. In fact, most blocks in our city neighborhoods had vacant properties; people had just picked up and left. The migration into the Northwest was now migrating back out.

The timing for first time homebuyers was impeccable. Fed chairman Paul Volker had jacked interest rates up into the stratosphere to fight the beast of inflation that had been hounding the economy since oil began its upward climb in the mid seventies. A bank loan was out of the question at 15-20% but owners were carrying their own contracts [land sales contracts they were called] with a small down and short [10-15 year] time span. With rents at about the same level as an average house payment, some people began to take advantage of the situation and purchase these vacant houses.

In contrast, the present "economic crisis" has lowered local housing prices about 17% from their 2006 peak. To put this in perspective, a house that would have sold for about $35,000 in the recession of the early eighties can be had now for the bargain basement credit crunch, default swapped, collateral backed price of @ $300,000! That would be virtually the same house on the same street in the same town!

Now there was some work to be had back in those tough times and a carpenter like myself might have brought in $12.50 per hour. If I were at the same skill level today [I hope I may have learned a thing or two and my labor has become more valuable, but who's to say!] I could easily obtain @ $20 an hour or so. Without digging out the calculator, I think this wage comparison and the housing price comparison in the preceding paragraph pretty much sums up the real economic problem we are facing today. Even with the current deflation, the bottom of the barrel artificial interest rates that we have today, the numbers just don't pan out!

Another major difference between the two downturns is the genuine "affordability" of the first slump. Rent, food, clothing, basically all the necessities of life were much more in line with the ability to pay of the average consumer in the early eighties. A six dollar restaurant meal, inexpensive groceries, $300 house rent; losing your job was tough but a small savings could keep you going for quite awhile. No need to investigate the greatly inflated pricing structure that is with us today. A couple months with no income now can require a small fortune merely to afford the everyday items necessary to survive.

And what seems like a contradiction but at heart really isn't, with all the cries of "depression" we hear, we are still surrounded by amazing displays of wealth. Massive tinted windowed SUVs that could house a family of homeless people have replaced the small gas sipping Japanese compacts and old Ford trucks of the early eighties. Four thousand square foot McMansions have superceded the comfortable but relatively small ranch houses. A basic requirement for subsistence seems to be a few thousand dollars worth of electronic gadgetry, many of them seeming to do the same thing in a minutely different way. We are surrounded by almost immeasurable material wealth, yet we fear poverty as if it waits just outside our door. We seem to be physically rich but possess poor minds. And we are in big debt!

Even the root causes of the two recessions say much of our constitution. The early eighties recession was deeply rooted in our manufacturing base; our ability to produce. The seventies had framed the end of cheap energy. The price of oil began its steep upward climb and we were a country built on manufacturing accompanied by the use and overuse of cheap energy. Ever segment of industry was hit hard and many believe this was the beginning of the end for American manufacturing. We were so dependent on bargain energy that we just couldn't stave off the inflationary tendencies caused by expensive oil until Volker's celestial Fed rates starved the beast in the mid eighties. We were a country of hard working people frustrated that the willingness and desire to work could do little to change the dismal situation we found ourselves in.

In contrast, the current recession finds us at the mercy of a financial system dependent on artificial and always large paper profit. It matters not what lies behind their business moves, it is quick profit that weighs most mightily. Addicted to endless injections of new liquidity by the Federal Reserve, the top heavy system lost its balance and began questioning its own values. The common sense that ever increasing numbers on voluminous spread sheets did not really constitute a product itself, finally seeped into the busy and perhaps somewhat dense minds of our corporate leaders. The drop back down was much quicker than the ascent.

The nineties had spawned the belief that the mere passage of time, along with a piece of paper showing our ownership no matter the amount of equity actually owned, would produce wealth for us without the bother of work. The more leverage the better and the quicker we consumed that which we borrowed the better. It was a sort of a perpetual motion money machine. We were simply following the lead of our financial sector; style took precedence over substance, consumption over production.

The two downturns seem to contain more differences than similarities. The earlier was caused by a real drop in manufacturing and production that reflected a real and steep rise in energy costs. The recent reflected a return to reality of artificial asset prices caused by overproduction of paper currency and resultant over speculation. The late seventies forecast the beginning of the diminishing earning capacity of the working class while the nineties highlighted the almost obscene profit taking of the financial sector. The first recession found most of us satisfied in our "middle class" comfort while this one finds us needy and wanting in our indebted opulence. We were just leaving behind a "hapless" but good carpenter democrat in the oval office and getting used to a republican relishing his new "acting" role. Now, we have left behind a "mean spirited" war loving republican and are hoping the first multi racial and best basketball playing leader can fix the mess.

If there can be "preferences" for recessions, I liked the first one! Perhaps it was more painful, that certainly might be the case in our region. But, we weren't overburdened with sob stories of people and corporations who deal in a world most of us can only imagine. Where lives of poor people all over the world are shaped by decisions they make in mahogany boardrooms after a finely prepared steak lunch. We don't need to be saddened by news that a company with an asset sheet larger than the country of Peru lost 200 million last year. Our hearts broken because the owners of sports franchise teams have lost 30% of their net worth in the depressed stock market and player's salaries might have to be cut a bit next year. Bench players averaging 4 points a game in the NBA may only pull in 3 mill next year, sad news! Corporations too big to fail receiving 100 of billions of dollars, lining up for handouts that are big enough to keep entire states running for a year. Bloated government agencies reacting to the hard times by growing even larger and demanding even higher taxes.

And maybe the biggest difference, neither Carter nor Reagan had a clue as to how to fix things and they both, hidden behind their political posturing, admitted as much. This time government has acted swiftly and thunderously, as fast and as big as possible. And, our leaders are saying they know what to do, it is just a matter of time, and we are taking these actions for the good of all. You know, I just don't buy it!

Other Related Articles:

Non-Socialized Responsible Non-Investing

Mortgage Backed Securities, Whose Fault?

Fakete's Capital Erosion and the Economic Crisis

The Stimulus Package Could Work.

Theories of Value and the Recent Downturn

Root of Financial Blunder

Deflation the Great Wealth Builder

Dwell In This!

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©2009 Gene DeNardo, all rights reserved. You must have written permission from the author in order to republish this work.
Published: Saturday, March 28, 2009
Last modified: Saturday, March 28, 2009

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