BusinessWeek: U.S. Economy: Years of Hardship Ahead - by John Schmitt

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U.S. Economy: Years of Hardship Ahead - by John Schmitt

The U.S. economy is now almost certainly in the early stages of a long and deep recession. No, not a Great Depression. Economic policymaking has come a long way since the 1930s, and we now know how to avoid the worst mistakes. Nevertheless, we’re facing something akin to the severe recession of the early 1980s, when unemployment crossed 10%, rather than the relatively short, shallow recessions of the early 1990s and 2000s. The root cause of the recession is the $4 trillion decline in the value of U.S. homes, which may well total $8 trillion before prices hit bottom. Econometric evidence suggests that for every $1 decline in housing prices, homeowners cut back spending by about 6cent;. Using this formula, a $6 trillion drop in prices translates into a $360 billion annual decline in consumption—just under three percentage points of gross domestic product.Get ready for nasty, brutish, and long.