Recovery Lost: Why the U.S. and Europe Are Back at the Brink

How did the road out of recession lead into a cul-de-sac? And why, all of a sudden, is the world economy falling apart? The answer is all about growth and debt.

615 stop sign reuters.jpg

Is the stock runoff for real?

If you find yourself confused about the market meltdown, you've got company. Dow crashes, like Monday's 600 point plunge, are notorious black boxes. A few thousand investors acting on a hundred indicators rarely reveal a single, shining Truth. But this appears to be more than a one-time crash. The United States and Europe, twin engines of the global economy, are close to falling back into a recession.

What we're seeing is the confluence of two challenges that are both economic and political in nature. There is growth crisis in the United States. There is a debt crisis in Europe. And there isn't a single government that knows how to solve either.

Are we falling into another recession?

What the heck is going on, anyway?

Why didn't we reach escape velocity? Because the housing crisis never ended.

WHAT'S THE MATTER WITH THE U.S.? GROWTH.

The first thing to understand is that the past two weeks didn't tell us that the financial crisis is coming back. They told us that the crisis never ended.

If you can remember, July of 2010 was supposed to be the beginning of a "Recovery Summer." But when unemployment lingered above 9 percent for the next few months, we settled for "Jobless Recovery." For a year, that label stuck. Two weeks ago, we learned that gross domestic product grew less than 1% in the first six months of this year, and we downgraded to "Recoveryless Recovery." Now, after the first-ever credit downgrade and a historically terrible week in the stock market, we've all but dropped the word recovery. After Monday's carnage, all talk is of a possible double-dip recession.

wapo stocks.pngMONDAY'S CARNAGE; WASHINGTON POST GRAPHIC


What precipitated the sell-off? The answers are printed all over our front pages. Investors saw jobs growing slower than population. They saw yearly GDP growth revised down by two-thirds in a single report, from 2.5% to 0.8%. They saw multinationals and financial companies with record-high profits sitting on their cash, moving offices overseas, attracting foreign customers -- anything but hiring Americans. And most importantly, they saw a debt ceiling debate that seemed to take place in alternate universe to our growth crisis. A reasonable explanation for the market's collapse is that investors saw an economy too sick to grow and a government too dysfunctional to act on it.

The economy feels sick because we never extracted the poison of the recession. The housing bust still lives with us. The value of the typical home fell by nearly 50% in the last five years. In many cities, values are still falling. This has wiped out the most important source of net worth to most middle income families. We aren't building new homes -- housing starts are down nearly 75% from the peak -- and we're stuck in our old homes -- one fifth of mortgages are in negative equity.

This housing depression creates a negative feedback loop. Families stuck in negative equity homes close their wallets. Businesses react to low revenue by not hiring. High unemployment depresses wages. Low wages delay the purchase of more homes, which would reverse the pernicious cycle. Since pictures often beat words in economics, here's the broad story of our housing bust through graphs:


But wait. It gets worse. "We've run out of options from government," says Barry Bosworth from the Brookings Institution. "Interest rates are zero. Quantitative easing has had a limited impact on the recovery. There is no prospect of consensus about fiscal policy, which will probably become contractionary over the next year."

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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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