by Kirk Shinkle

Struggling back -- and facing new realities -- after a crisis

The Great Recession is subsiding, but there's no doubt that today's economy is a much-damaged version of its formerly robust, bubbly self. Near-term worries (double-digit unemployment, to start) dominate headlines, but a host of other seismic shifts caused by the housing and credit crises will be with us for years. Economists are already touting the "new normal": a generally unpleasant mix of trends, including a long stretch of slower growth, higher taxes, and increased uncertainty in everything from interest rates to the value of the dollar.

The Recovery So Far: Lackluster

Good news! The official recession is most likely over. Too bad it still doesn't feel like it. Charting hopeful signs of a quick or sustainable rebound is still very much an exercise in pointing out trees and missing the forest. Some bright spots -- early-year upticks in manufacturing or a substantial rally in stocks from last year's lows -- make the situation look less bad. But intractable problems in areas that spawned the crisis, namely housing and credit, continue.

At the core of all these economic woes are lost jobs -- nearly 8 million of them since the recession started. Household unemployment remains at 10 percent, the highest level since the 1982 recession. And while optimists see job losses ending soon, a hoped-for return to sturdy employment growth is already taking longer than many expected, thanks to enduring tightness in credit markets and fears of a double-dip recession.

Meanwhile, the housing bust may have slowed, but it has not stopped. Nearly 1 in 4 U.S. homes is worth less than its mortgage, a stunning figure that helps explain why surveys show that home builders remain deeply worried. Also, the unwinding of the subprime mortgage mess continues this year, with tens of billions of dollars' worth of adjustable mortgages getting ready to reset at higher rates for strapped borrowers.

As if that weren't bad enough, other shoes could drop. It wasn't just home mortgages that sent yield-hungry Wall Streeters into a buying frenzy during the boom years, though that's where most of the attention is being paid. During the housing run-up, two smaller boomlets were spawned in commercial real estate and sovereign debt. Those are still unwinding in unpredictable ways. Just look at last year's fire-sale price for a well-known Manhattan hotel or what amounted to a whole-country bailout for debt-laden Dubai.

At the same time, investors are still scared, flocking to bond funds even as stocks posted a hefty rebound from last March's lows. Where the market goes next is anybody's guess, but a loud contingent on Wall Street sees conditions ripe for a correction.

Thrift and consequences

Americans now save. That may not sound revelatory, given ubiquitous stories of belt-tightening that veer from helpful ("Tips for Cheap Meals at Home") to frightening ("Record Use of Food Stamps"), but a shift to thrift from spendthrift is possibly the most meaningful change spawned by the crisis. The personal savings rate has risen from less than 1 percent in 2008 to 4.7 percent in November.

The change marks the death of the U.S. superconsumer, who, flush with borrowed cash from ever increasing home prices, went on a spending binge that became by far our largest source of national economic growth. It's unlikely that anything in today's economy will be able to replace the size and scope of that unsustainable 2½-decade shopping spree. Between 1982 and 2006, personal spending continually outpaced annual income growth by about half a percentage point annually, according to Ethan Harris, North America economist at Bank of America Merrill Lynch. Now, he predicts spending to trail incomes by a similar amount. "The U.S. consumer's whole psychology has shifted," Harris says. "There's a long rehab going on. People have been wounded."

Those wounds can run deep, especially for young Americans. Research published by the National Bureau of Economic Research analyzed recessions from 1963 to 2006 and found that young people who live through downturns feel less secure in their careers. Other studies show that investors buffeted by poor returns in the market over a period of many years (think of the Lost Decade for the stock market) are loath to take risks over the long term.

Global Competition Is On The Rise

The rest of the world, meanwhile, had a less terrible 2009, thanks in part to the long-anticipated emergence of a consumer class in Brazil, Russia, India, and China.

The Chinese economy, admittedly with some flaws of its own, continues to ascend. Take your pick of examples: For the first time last year, more cars were sold in China than in the United States, and real growth in gross domestic product in East Asia slowed far less during this downturn than in the 1997-98 crisis, according to the World Bank. China recently overtook Germany as the world's largest exporter, and it could soon pass Japan to become the world's second-largest economy.

Nomura Securities notes that Brazil, Russia, India, and China are set to grow more than 7 percent this year and next. Developed nations, including the United States? Less than 2 percent. Obviously, GDP alone isn't the be-all and end-all of global competition, but emerging middle classes in China and India weathered the downturn with surprising strength. Increasingly, the battle for scarce resources, jobs, and growth is becoming more heated.

The Dollar's long slide

Since the close of World War II, the U.S. dollar has really been the world's currency. Almost everyone expects it to stay that way, but the greenback's role on the global stage has undoubtedly been tarnished by this crisis. Cracks began to show when China called for the creation of a new global reserve currency last year. In all likelihood, the dollar's reign is far from over, but the benefits of its sterling reputation -- a cushion of lower interest rates and easy borrowing from foreign lenders -- will be less certain.

In truth, the dollar's decline is not so much a story of the crisis -- the currency's value actually spiked during the worst of it as global investors fled to safe investments like U.S. treasuries. The inescapable fact is that the dollar has lost more than a fifth of its value since 2002, coinciding largely with the huge rise in all kinds of debt. "The U.S. balance sheet has deteriorated, and on the other hand other countries have put [policies] in place that make their currencies appear safer. The U.S. will still be a safe haven, but every time the pendulum swings back in favor of the U.S. dollar, over time it may swing back less," says Axel Merk, president and chief investment officer at Merk Mutual Funds.

Paying The Piper: Higher Taxes

If there's a single corner of the economy where certainty is not in short supply, it's taxes. They're going up. It's not exactly clear how or when, but a still-unreformed healthcare system mixed with frighteningly large state and national deficits made worse by the downturn means that budgetary concerns will loom large in the coming years. It's clear that the Obama administration wants to raise taxes on families making over $250,000 a year, but despite the troubled economy, paying future bills will be impossible without raising taxes on a larger swath of Americans.

"Higher taxes at some point are inevitable if you look at the trends for spending in the U.S. Assuming we continue Medicare and Medicaid, there's no way we can continue without raising more revenue," says Leonard Burman, a tax policy expert at Syracuse University. "At some point, middle-income people will have to pay more in taxes as well." Worse, even if that happens, experts say it won't be enough to dent long-term deficits. Recent research from the Tax Policy Center shows that even if politically feasible tax increases -- an end to the Bush-era tax cuts, a halt to "patching" the alternative minimum tax -- in the current tax structure are implemented, that won't be enough to bring the federal deficit down to a manageable size.

Available at Amazon.com:

The Next Hundred Million: America in 2050

What the Economic Bust Left Behind | Kirk Shinkle