The Shape of Your Recession

David Wessel uses his column today to outline potential shapes of the recession and recovery. There's V and L (sharp recovery and no recovery, respectively), and then D, which isn't a shape but instead stands for Depression. Why not just use I? Who knows. Noam Scheiber comments:

I've worried before about whether Congress is capable of responding to a financial or economic crisis. The concern is that, partly because the issues involved are so tough to explain, voters will assume any proposed fix is a waste of money (or, worse, a reward to corrupt fat-cats--which, you know, could be true in some cases).

But Wessel's right: At least a palpable crisis focuses the mind and provides a rationale for aggressive action (albeit one voters and legislators may reject). The stagnation scenario doesn't even give you a compelling rationale. Things are never so bad at any moment that action seems absolutely necessary. Then, the next thing you know, you've frittered away a decade.

Personally, I don't buy it. I think we either get the V (or the U version), or the I. What the complacency argument glosses over is that an L recession involves an unemployment rate hanging around 10% for an extended period of time. That's not as scary as an economy that continues to weaken, but it's pretty darn uncomfortable. If we have really seen no sign of improvement, at all, in labor markets by next spring, Congress will be in serious trouble, and it will be falling over itself to try and avoid it. And don't forget about the Fed which is unlikely to sit on its hands and do nothing for the next twelve months.

So I think a V, or at least a U is the most likely outcome. Second most likely would be a situation in which something else goes badly wrong, sending us on a new downward trajectory. But I don't think growth around 0% is a stable equilibrium.

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