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Has America Lost its Mojo?

Cambridge – You know that American self-confidence is shaken when even the President starts expressing fear that the financial crisis may turn out worse than the Great Depression of the 1930’s. George Bush is not alone in worrying that things might get a lot worse before they get better. A growing number of savvy business people are also starting to wonder whether the United States will be able to right its economy anytime soon.

Professional forecasters are considerably more sanguine, with the consensus forecast for US growth in 2009 at around -1.5%, after a similar contraction in the second half of 2008. This would be a painful recession, but far short of the 10-15% output drop normally associated with a full-blown depression. Of course, economic forecasters have generally been far too optimistic at every turn of late, so the public is understandably leery of their prognostications.

Consensus forecasts do still seem optimistic. With its financial system on life support, housing prices continuing to plummet, and unemployment rising, the US economy is looking more vulnerable than it has at any time since the 1970’s, and perhaps since World War II.

Still, it must be noted that negative output growth for more than two years is a relatively rare event, even in the aftermath of severe banking crises. Historical statistical relationships are perhaps cold comfort in a downturn that now seems so insidiously different from previous catastrophes. But they should not be dismissed. Japan may have taken what seemed like forever to recover from its 1990’s crisis, but it is an exception – the crisis occurred as the Japanese economy needed to restructure in the face of the huge challenges posed by China’s emergence.