Why don’t all recessions seem to teeter on the brink of turning into a “lost decade” as President Obama described, accurately, our current predicament?
In a standard recession, some people (or firms or governments) cut back on their spending. But others either maintain their spending or actually buy more. A recession is typically a good time to invest in relationships and buy longer-lasting assets; for example, it’s a good time for private universities (with endowments) to hire faculty, build labs, and acquire the land for new buildings. Anyone with a long time horizon, deep pockets, and access to cash ordinarily thinks in these terms.
But instead of this kind of countercyclical private sector investment behavior, Drew Faust, the President of Harvard this week sent a downbeat message to her stakeholders,
[W]hat has become clear is that we are living through much more than a bump in the road. Our economic landscape has fundamentally changed.
President Faust goes on to say that the endowment has lost value and cuts need to be made. I’m not questioning the judgment of President Faust or the idea that some parts of the university sector overexpanded during the boom – in fact, similiar messages are being communicated, one way or another, at many other schools.
On the contrary, there are few organizations that cannot take at least 3-5% out of their nonpersonnel costs after a long boom – we all get sloppy about our spending when times are good for a long while. This, of course, is part of why we face a recession.
What worries me much more is when organizations with long horizons and a strong balance sheet (e.g., anyone with an endowment, venture capital, private equity, people who own property without an onerous mortgage, etc) decide that the only prudent thing to do is cut spending dramatically. And universities are likely relatively sheltered, e.g., people still go to college even in a prolonged downturn, and applications to some professional schools typically go up. I mention them here only as example that shows the depth of our problem.
The rest of the world economy looks bad and likely to get worse. If you know of any bright spots (i.e., anyone, other than the US government, buying more than last year), post the details here or otherwise spread the word. I talk to a lot of people with information and ideas from many places; good news is scarce and official forecasts (which still contain an imminent recovery) seem greatly exaggerated.
If the global situation is really as gloomy as this suggests, surely the G20 leadership will finally get serious with recovery measures in time for the London Summit on April 2nd? If the global economy loses a decade, they are responsible. Tell them this, early and often.