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Musings Report 2023-36 9-2-23 Comparing Recessions 1981 and 2023: The Differences Few See
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Comparing Recessions 1981 and 2023: The Differences Few See
Many observers, including myself, reckon a "real recession," i.e. one that clears the economy of rampant speculation (a.k.a. mal-investment), unpayable debts and "zombie companies" that exist solely by rolling over their stupendous debts into lower interest loans, is overdue.
The last "real recession" occurred in 1981-82, roughly 40 years ago. The slowdown in 1991-92 was modest, largely the result of the oil price spike triggered by the first Gulf War. Every recession / slowdown after that (the 2000-02 dot-com bubble pop, the 2008-09 Global Financial Meltdown and the 2020 pandemic panic) was met with unprecedented policy responses (lowering interest rates and flooding the financial system with stimulus), each of which reached new extremes.
It is not a natural market phenomenon for interest rates to fall to near-zero. That was engineered by the Federal Reserve conjuring $8 trillion out of this air to buy Treasury bonds and mortgage-backed securities.
Additional trillions were distributed to households, businesses and fraudsters in the 2020-2023 tsunami of federal stimulus, much of it borrowed, a policy response that has pushed federal debt far above the nation's GDP, a "red line" that typically generates systemic problems such as inflation and stagflation.
Inflation and stagflation are very much in the news, along with debates about what should be done to insure a "soft landing," i.e. the eradication of inflation and stagflation without causing a recession.
In effect, the implicit goal everyone seems to agree upon is that there should never again be any pain administered via the credit cycle or business cycle: debts should never be written off, assets foreclosed, lenders and zombies bankrupted, and so on, all of which reflect human psychology: credit gets easier and cheaper, people borrow and spend more and speculate wildly, and then losses have to be taken and credit, spending and speculation all recede to pre-mania levels. Balance sheets and savings are slowly rebuilt and the cycle begins anew.
This is now forbidden, and the obvious fear post-2008 is that the system can no longer survive even a modest retrenchment of debt/credit, spending and speculation.
There are many qualitative differences between the 1980s and the present era which rarely get noted, much less analyzed. This is of course a matter of time: only those of us over 60 years of age experienced the early 1980s recession as workers, borrowers, consumers, employees and employers. Everyone younger is relying on narratives that are largely lifeless economic data: inflation was high, interest rates went to 18% to snuff out inflation, the result was 40 years of glorious growth, etc.
This simplistic narrative leaves out the many qualitative differences between then and now that I see as poorly understood even as they will become increasingly consequential.
Longtime readers know I focus on system-level dynamics such as buffers, redundancy and other measures of resilience: if something goes awry, what systemic resources can the system bring to bear to right the ship?
The more things cost when measured in hours of labor, the less resilient the system.
Official inflation is not a trustworthy metric, as the measuring is skewed by many factors (hedonics, overweighting housing and underweighting healthcare, etc.). I prefer to measure everything by a very straightforward measure of purchasing power: how much can an hour's labor, a week's labor and a year's labor buy?
How much of this labor is devoted to paying taxes and non-discretionary expenses such as shelter, utilities, transportation, food at home, etc.? How much will what's left--our discretionary income-- buy?
Back in the 1980s, $10 an hour was a fairly conventional wage. That converts to $20,000 a year. Today, the average full-time worker earns about $54,000, and the median household income is around $60,000.
This aligns pretty well with official inflation, as measured by the Bureau of Labor Statistics (BLS), which reports that $10 in 1983 is worth $31 in today's dollars.
Back then, conventional healthcare insurance for a single young male was $50 a month--five hours of labor. Now it's more like $300. If the conventional wage is now $20 / hour, that's 15 hours of labor, triple the cost when measured in hours of labor.
The same can be said of shelter, tuition and used cars. We built many modest homes for less than $40,000 in the 1980s, and empty lots were less than $20,000. So three years pay could buy a house. How many homes are available for three years pay now that are livable and in an area near jobs? few, if any.
Rent for a one-bedroom apartment in a major city was $500 to $550, or 55 hours of labor. Today it's $1700 at the bottom end, 85 hours. In many cities, it's more like 100-150 hours, double or triple the cost in hours worked 35 years ago.
Decent used cars could be had for $2,500, or 250 hours of work. What does 250 hours of work buy today in decent used cars? Nothing.
This is remarkable given the narrative that inflation has been low because the emergence of China and other low-cost manufacturing hubs in the 1990s dramatically lowered the cost of consumer goods.
As I've outlined many times, the problem is the quality of these goods has declined dramatically. Appliances that once routinely lasted 30 years now fail in three years, ten years if you're lucky.
That means we have to buy three or four new appliances instead of one over 30 years. How is this "cheaper"? It's obviously far more costly once we calculate lifetime costs rather than sticker prices.
Measured in hours worked, almost everything is dramatically more expensive now: public transport, camping fees, auto dealer repairs, building permits, bicycles, you name it.
If we have to tighten our belts in a recession, there's not much of a buffer of discretionary income left.
Being able to borrow money to get through a rough patch is another buffer.
In the 1980s, debt levels were much lower, even when converted to "real rates" / adjusted for inflation. Debts levels of households, businesses and government were fractions of today's totals.
In effect, the "glorious growth" of the past 40 years is an artifact of expanding debt and reducing the interest due on that expanding debt. This is financialization.
In sum, debt loads are much higher and interest rates are rising for systemic reasons: as I've explained, risk is rising and capital now demands a real return. China is no longer lowering costs, as its own costs and stagnation are weighing on the global economy. Tailwinds have become headwinds. The global economy won't go back to "the good old days."
Debt loads are already so high that few can borrow freely without their interest payments rising, squeezing spending. The risks of default are rising as a result of high debt loads and higher interest payments.
The buffer of credit has been thinned to the point that borrowing ever greater sums is no longer viable as a solution, as the costs and consequences can no longer be pushed forward.
Another qualitative difference is that a great many things could be fixed or maintained by households in the 1980s. Vehicles were not yet rolling electronic controller boards prone to failure, and appliances were not yet steel boxes on their way to the landfill / recycling due to failed controller boards, each of which costs 50% of the price of a new appliance.
Technology was less demanding even 20 years ago. Product cycles have been spun up faster, devices fail faster, and the requirements to stay current (and legal) have increased slowly (the boiled frog analogy) but over time, quite dramatically. Of the hundreds of examples, one of my favorites is the legal requirement for my blog to constantly be undated with new disclosures issued by the European Union and the state of California, even though I don't live in either jurisdiction.
A nightmarish cloud of complexity has descended on everything we're required to do, such as filing taxes, obtaining permits, upgrading software, changing the oil in one's car, and so on. Twenty years ago, you unscrewed the oil plug, drained the oil, and so on. Now there are three flimsy shields to remove to reach the oil plug, each with a different set of connectors. (This is a Honda Civic, a "basic" car.)
In the 1980s, as a contractor I was issued a building permit for a conventional starter house in a day. I dropped the plans off in the morning, went to lunch with my sister on her lunch break, ran some errands and then swung by to pick up the stamped building permit in the afternoon. Now this is a 6 to 12-month process for the same house. Software upgrades intended to "digitize the process" have slowed it to a strangling crawl.
Globalization has generated an array of pernicious trends, the most consequential of which is our dependence on long, intrinsically fragile supply chains. The devices everyone depends on (smart phones, for example), are immensely complex assemblies of parts manufactured literally around the world. A scarcity of any one component seizes up production.
The net result is we are increasingly helpless to remedy breakdowns, outages and shortages. If any one component is out of stock, the entire system is frozen. Even the simplest, non-digital machine, a bicycle, is now hostage to the whims of overseas parts manufacture and delivery.
That we cannot even get basic parts to fix a bicycle would have struck us in the 1980s as outlandish. Now it's "the new normal."
As complexity has increased, our cultural impetus to learn how to do things ourselves has diminished.
There was still a cultural memory and impetus to learn how to do things ourselves, a memory and impetus that's eroded or been lost, or run aground on the impossibility of repair. The dependence on fast food and meals prepared by others was not yet dominant. People knew how to cook and sew and tend a vegetable garden, and if belt-tightening was necessary, they could replace costly services with their own labor. This buffer of skills, know-how and self-reliance has thinned.
The complexity of starting and operating a small business or side-hustle was also lower. It was easier and required less money and expertise to start a legitimate enterprise. The much heavier burdens of today have raised the stakes, effectively funneling those with entrepreneurial drive into Uber, DoorDash, etc., where the profits flow to corporations, not the individuals doing the work. In other words, it's much harder to truly own your own work.
In a broad cultural sense, we have come to rely on borrowing more money as the "solution" to every problem. The idea of a cost-benefit analysis has disappeared: it's always easier to borrow and throw money at the problem than to change the system or our response to the system.
The ease of borrowing and throwing money at a problem has incentivized the expansion of friction, waste, inefficiency, policy extremes and speculative mania, all of which weaken the system and erode its buffers. The quality of goods and services has eroded, along with the user experience. Complexity has increased without generating efficiencies or advances that outweigh the higher costs of complexity..
How do we measure dependency, helplessness and the loss of buffers? We can't really quantify these with any precision, but we intuit that our systemic buffers have thinned and our systemic dependency and helplessness have increased. This doesn't bode well for how the next recession plays out.
The systemic consequences of these trends are easy to forecast: breakdowns and outages will become likelier, reliability will suffer, buffers and whatever depends on them will give way, costs will continue consuming more income and borrowing will no longer be the painless "solution" to all problems.
We'll finally have to re-learn cost-benefit analysis and be willing to re-order systems and our response to them.
Highlights of the Blog
September 1, 2025: Fed Reaches Inflation Target, Cheese Sandwich Costs $120 9/1/23
STVR/Airbnb Has Destroyed America's Resort Towns 8/30/23
Neither Comply Nor Resist 8/28/23
Best Thing That Happened To Me This Week
Made poha (gooseberry) jam for the first time, from our two poha bushes. I used only 20% of the normal sugar and substituted pectin. The jam retains a bit of the pleasant tartness of the raw fruit.
From Left Field
NOTE TO NEW READERS: This list is not comprised of articles I agree with or that I judge to be correct or of the highest quality. It is representative of the content I find interesting as reflections of the current zeitgeist. The list is intended to be perused with an open, critical, occasionally amused mind.
Many links are behind paywalls. Most paywalled sites allow a few free articles per month if you register. It's the New Normal.
Making Sense Of The China Meltdown Story
Xi’s Age of Stagnation
The End of China’s Economic Miracle
Digestion issues could be warning sign of Parkinson’s disease, research suggests.
Dementia risk study finds 11 key factors behind condition.
A cook from Okinawa, Japan — where many live to be over the age of 100 — explains the healing powers of 7 traditional foods
Americans Are Bailing on Their Home Insurance: Some homeowners who are skipping coverage say they can no longer afford rising premiums
’Pleading for money’: Chinese economy in trouble as Xi Jinping’s leadership falters
There’s a Vast Source of Clean Energy Beneath Our Feet. And a Race to Tap It. -- the only truly "renewable" energy source, geothermal....
The Scientist Who Foresaw China’s Stagnation
"There will come a time when it isn't 'They're spying on me through my phone' anymore. Eventually, it will be 'My phone is spying on me'." Philip K. Dick
Thanks for reading--
charles |
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