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May 2, 2003

Will This Recession Make Us Any Wiser?

Read the life stories of successful people, and a dominant theme quickly emerges.  Most of them had at least one major failure or setback that served as a lesson on their way to prosperity and fame.  Now that the story of the world's most successful economy -- the U.S. economy of the 1990's -- has been updated to include the humbling experience of the recession of 2001, a similar question comes to mind.  That is, what lessons has this economic downturn taught us that we might use to our betterment in the future?

More than a few of us thought we had the whole economic game figured out just a few years ago.  The economy roared along in the latter half of the last decade, creating millions of new jobs as well as trillions of dollars of paper wealth in the stock market. There was talk of a 36,000 point Dow and of a high tech, "new economy," where recessions and business cycles would become relics of a bygone era.

Of course, that's the most basic lesson that this recession has taught us all. Even with Alan Greenspan at the helm of the Federal Reserve, even with the end of the cold war, and even in the presence of the Internet, we are still vulnerable to economic downturns and recessions.  It is sobering to know, but valuable to remember, that our bold pronouncements of "new rules" for the economy stand like crepe paper when the ill winds of declining investor and consumer confidence start to blow. 

That's an old lesson we've forgotten in the past, and likely will forget again in the future.  But this recession has had some new wrinkles as well, serving up new lessons that we'd be wise to absorb and learn from.

We've learned from this recession that the economy has a new, volatile, sector that has tremendous influence on our collective well-being.  That is, for lack of a better phrase, the technology sector -- the agglomeration of electronic equipment, software, and information services providers that exploded onto the scene during the last fifteen years. 

Some said that unending growth in tech side of the economy would protect us from recessions.  Instead, its meteoric rise ultimately produced an equally swift decline that cut off what had been the longest economic expansion in modern history.  The cycle in the technology sector was so pronounced that even as the more familiar sources of economic volatility, housing and autos, kept surging ahead, the overall economy plunged into recession in the spring of 2001.

That same pattern of events taught us a lesson about the Indiana economy as well.  The next time that someone tells you how important the auto industry is in our state, remember this.  The recession year of 2001, when we lost tens of thousands of jobs and saw budget deficits first balloon, was the second-best year ever for motor vehicle sales.

The bottom line is that as important as the auto industry is to prosperity inIndiana -- and it is very important, mind you -- spending by all types of businesses on plant and equipment is even more so.  Strong consumer spending throughout the recession wasn't enough to keep our economic ship afloat, not with double-digit investment spending declines producing empty order books for countless businesses across the state.

We've also learned that ignorance is not bliss when it comes to state tax receipts.  States like Indiana didn't fully understand why revenues ran so strong in the 1990's, but were happy to spend or return to taxpayers the proceeds of this good fortune.  That cheerful situation turned ugly a few years later when it was the forecasts, not actual revenues, that were overshooting the mark, producing rivers of red ink in more than 40 states.

Most of us are still too engaged in short term damage control in the aftermath of the recession to spend much time pondering the meaning of these and other lessons our recent experiences have taught us.  If we're to avoid repeating these mistakes in the future, however, we'll have to do better than that.

Link to this commentary: https://commentaries.cberdata.org/372/will-this-recession-make-us-any-wiser

Tags: recession


About the Author

Pat Barkey none@example.com

Patrick Barkey is director of the University of Montana Bureau of Business and Economic Research. He served previously as Director of the Bureau of Business Research (now the Center for Business and Economic Research) at Ball State University, overseeing and participating in a wide variety of projects in labor market research and state and regional economic policy issues. Note: The views expressed here are solely those of the author, and do not represent those of funders, associations, any entity of Ball State University, or its governing body.

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