Why the US Economy will Continue in Recession

Normally within a year or two after a large market event like the bursting of the housing bubble the market will have recovered most of its losses and the economy will be picking up steam again.  Indeed, the market recovered nicely in 2009 and it looked like most other recessions, this too would be forgotten.  There were many commentators comparing events to the Great Depression, even going so far as to call it the Great Recession, but with inflation picking up, issues with credit and the housing market, and trouble brewing in the Middle East, it actually looked a lot more like the 1970’s.

Sadly, we are staring to make the same mistakes that were made in the 1930’s that caused the recession to turn into a depression.  It therefore looks like we are in for a long and miserable ride.  The latest evidence is the Hostess shutdown where a union was unwilling to budge and an owner was perfectly willing to shut down the business rather than continue to operate at a loss until all the assets of the company were gone.

You see, President Roosevelt was very popular (reelected two times) because he was perceived as helping dull the impact of the depression and looking out for the working class.  Many of the things he did, however, made it expensive to hire workers and therefore made things drag out longer.  He put into place regulations that required high minimum wages for workers and made it very difficult to fire workers.  This meant that if you had a job, things were great, but if you didn’t it was very difficult to find one because little additional money, if anything, was made by hiring more workers and if business declined the owner might need to close its doors.

The trouble is that the higher the cost of employees are, the more value they need to bring to the company.  Why (and how) could you continue to pay employees $60 per hour in wages and benefits if you are only making $50 per hour from their work?  If costs of business are high, only the most productive employees who bring the biggest value to the company will be hired.  There is no reason to grow and hire less productive employees since doing so will reduce the revenue you are making.

In the 1930’s it was primarily price controls and wage controls that caused things to linger.  Then, as now, the government was making up for the shortfall in jobs.  At least at that time some productive work was provided in exchange for benefits, and through the Work Progress Administration many things were built that we still enjoy today.  Today it is thought easier to just send a check.

There are other factors, however, that are making this recession drag on that were not present in the 1930’s.  These are:

The New Healthcare Bill:  Requirements and costs of the new healthcare bill are just starting to be known.  Employers are needing to cover a lot of things they didn’t in the past, making heath insurance costs rise dramatically.  EMployers are deciding whether to lay off employees, reduce work hours since the law doesn’t count employees working less than 30 hours per week, or drop coverage entirely since they cannot make a profit and meet the demands of the legislation in many cases.

CO2 Taxes:  Taxes on CO2 emissions are starting to appear.  California has begun to tax emissions, with much of the money going into the general fund rather than to fight global warming as was advertised.  It is expected that regulations will appear nationally since the EPA has been given the green light to begin regulating CO2 as a pollutant.  Because all businesses use energy, they will be forced to raise prices or cut costs (read, reduce staff) if the cost of energy gets too high.  Some businesses, such as mining, may not be feasible at all.

Government Venture Capitalism:  It is difficult to compete in a market where Uncle Sam can give your competitor $500 million to open up a new factory next door.  This type of activity leads to unpredictability, which in turn makes people less eager to invest and slows economic growth.

It appears that four more years of stagnant growth and outright economic contraction is the path that has been chosen.  As an investor the best path is to diversify, store up cash and invest as things become cheap, plan to hold onto gains for a long time and wait for better capital gains tax rates, and wait for better days.

Please contact me via vtsioriginal@yahoo.com or leave a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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