The U.S. recession is proving to be so stubborn because it is a product not only of cyclical forces but also of domestic structural and global forces.
We are quite probably at the point in the global economy where it is no longer sufficient for the Federal Reserve to ease, though it may well have to continue on such a course.
We also need easing around the rest of the world, where domestic sectors may be more responsive than ours, to spark a U.S. economic recovery that is being held back by homegrown structural weaknesses.
Fed Can't Do It Alone
It will be very difficult for the Federal Reserve, all by itself, to stimulate a satisfactory recovery.
I do not, incidentally, consider the so-called credit crunch a major structural problem that's holding back the economy.
Given the excesses of the 1980s, banks have no doubt tightened lending standards, as they should. The resulting negative effect of tightened credit on the economy can be offset to a large degree by lower interest rates. Better rates would make additional borrowers eligible under the stricter bank standards and would also make the open market more attractive.
Credit Costs Not the Issue
The domestic structural problems I have in mind are those that are making borrowers less willing to seek credit and less responsive to lower credit costs.
A clear example is in the area of nonresidential construction, especially for office buildings, shopping malls, and such.
Because of the wild overbuilding in the 1980s, the passage of time (and a lot of time in this case) will be a much more effective stimulant to new spending than lower interest rates.
People Aren't Buying
This is not an argument against lower interest rates, of course. It is an argument that their effect will be smaller than in recent decades, and that substantial cuts may be needed to achieve any significant effect in this and other areas.
Consumer spending is another sector where there is a structural problem not so much from the side of credit supply but from the demand side.
Because of the relatively low personal saving rate, which affects the amount of disposable income available, we cannot really count on consumers to be a very significant independent force in bringing the country out of recession, as they were in the early part of the 1980s.
Probably the best that can be expected of consumer spending is that it will rise along with income.
Another way to put it is that consumers are hesitant to take on very much additional debt after the debt buildup of the previous decade.
A Brake on Recovery
Unfortunately, there is also a chance that if savings rates rise substantially, the lack of spending could slow an economic recovery.
If consumers continue their reluctance to spend, and particularly if the stock market continues to drop, such a rise in the saving rate may be more likely than not.
It is very difficult to stimulate an economy if the private sectors have become less responsive to interest rate declines and the public sectors are also attempting to restrain their borrowing.
Many of these problems were clear at the onset of the recession. Most observers concluded that the recovery would be subpar. Instead, the recession has dragged on.
Probably what was underestimated was the global scope of the slowdown.
The industrialized world had some hope that strength in one part would beget strength in another through increased trade and exports.
Exports are perhaps the most dynamic sector of the U.S. economy and the one where earlier structural weaknesses have been overcome. Now, however, there is a real danger that weakness is begetting weakness among the major countries.