This is especially striking on a global level. In 2009, nearly every country experienced a significant decline in productivity as measured by GDP. In 2010, a number of countries experienced strong GDP growth: notably China, India, Turkey, and Brazil. So our problems in 2010 were about us, not about the world generally. Further, while much corporate profit was generated by business abroad, it did not translate into significant job growth here.
So what is likely to happen in 2011? Let me suggest the happy story, the disaster story, and the muddle story. My money is on muddle, but we'll see. All of these exclude the possibility of a catastriphic event or major disruptive event. For example, if a pandemic wipes out 1 billion people in China and India, this would have significant economic impact, as would an invention of a cheap room temperature superconductor.
The Happy Story: In the happy story, businesses decide to expand domestic hiring for a number of reasons. First, they are sitting on huge stockpiles of cash that are not generating much income at today's interest rates.
Second, companies now have "regulatory certainty" to the extent that was ever a factor in financial plans. That is to say, no one expects any new significant regulatory expansion in 2011 beyond what was enabled by the Financial Reform law. no one expects any significant tax reform. No one expects any significant antitrust activity -- except possibly against Google. While there is still likely to be a significant level of activity, it will be entirely incremental, containable, controllable and predictable. So companies that were holding back investment because they were not confident in the regulatory landscape (for better or worse) now have certainty to make their plans and -- if those economists and business leaders who claim regulatory uncertainty has been a factor deterring investment are right -- these businesses will begin to invest again and develop jobs.
Third, the extension of unemployment benefits for a full year and the payroll tax holiday will provide an uptick to a broad segment of the population that will modestly stimulate retail purchase and, ideally, manufacture.
Fourth, the true impacts of the 2009 stimulus will begin to be felt. A significant (but by no means the majority) of the 2009 stimulus went to grant programs that are distributed over time and that have long-term impact on the economy as a whole. For example, much of the $7 billion broadband stimulus and $7 billion for high speed rail was only awarded in 2010, and will be spent in 2011 and 2012. More importantly, these projects -- along with projects in sustainable energy and electronic medical records -- will have increasingly important transformative effects that may begin to be felt in 2011.
Fifth, the residential real estate market begins to recover value, although I still don't have a plausible theory why. Still, I see a lot of people predicting it so I include it in my possible happy story. A rise in value would restore equity to existing "underwater" homeowners and may allow a larger number of refinancing/mortgage work outs.
OK, that's the happy story. Now the disaster story.
The Disaster Story: In the disaster story, a major disruption of some kind pushes us back over the edge. There are a number of leading candidates. For example, if the Republicans refuse to raise the debt ceiling this spring for an extended period, it would have a strong impact on state budgets as well as federal budgets and may be enough to cause the U.S. Treasury Bonds to lose their Triple A rating. This could have a massive impact by laying off large number of individuals at state and federal level and leaving key suppliers unpaid. (If Hospitals do not get Medicare/Medicaid reimbursements, they do not pay their suppliers.)
Disastrous consequences did not happen when Republicans shut down the government in 1995/96. But we were enjoying a very healthy economy then and state budgets were not nearly as dependent on federal aid. In 2011, a lot of businesses, states and localities do not have the kind of reserves to whether a long-term shut down that they had in 1995.
Alternatively, a massive cut back in federal discretionary funding may likewise trigger a retrenchment. Again, this is because the federal government provides significant aid to states for everything from highway funds to teacher salaries to hospitals through various federal aid programs. Deep cuts in these will impose unexpected cuts at the state and local level.
A third disaster scenario is the collapse of the commercial real estate market and a second round collapse of the residential real estate market. We saw a major collapse and long term slide in 2008 and 2009. A number of home owners and businesses have just managed to tread water in 2010. A moderate rise in costs, such as the increase in fuel costs, and the increase in telecommunications costs for small businesses, not offset by rises in revenue could cause a significant increase in the number of defaults. This could also be triggered by a significant rise in interest rates prompted by a belief in a turn around or by greater demand for money invested outside the United States.
The Muddle Scenario: In this scenario, the positives and the negatives essentially cancel each other out. We get enough new job creation and overall increases in worker pay to compensate for those who can't hold out and to cover the overall rise in certain costs -- interest rates for those with adjustable rate mortgages, energy, telecommunications, and medical related expenses being my favorite candidates for non-productive cost increases.
Be interesting to see. Curious if anyone else has any guesses.