Paying for the recession: rebalancing economic growth.

• Author: Barkey, Patrick M.

Economic downturns are emotionally charged events. The fireside chats of President Franklin Roosevelt during the Depression of the 1930s encouraging Americans to ward off the demons of fear and panic remain relevant today. But now more than a full year after the officially declared end of the 2007-09 recession, our fears have shifted to something a bit different: How we will pay the full cost of bringing this recession to a close?

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The concern is not just about how we will close the government deficits that ballooned as economic growth went into reverse. It's about reconfiguring and rebalancing everything from household budgets to international trade to adjust to what might be called a post-housing bubble reality. It's a reality where everything built on the assumption of faster growth fueled by booming construction and real estate needs to be reassessed, from household savings rates to government entitlement programs.

Four Challenges to Balanced Economic Growth

There has perhaps never been a time when growth in the U.S. economy has been in perfect balance. But by any standard, the number and the size of the imbalances that the economy faces today are daunting. They represent a challenge to policymakers and the private sector alike. Specifically, the list includes:

Housing price correction. During the past decade, housing price appreciation spiked up strongly from its long-term average, resulting in a destructive cycle of speculative investment financed by opaque financial instruments.

Low savings rates. U.S. households went on a borrowing binge during the bubble years before the recession, helped by rapidly rising home prices and inflows of investment capital from abroad. In the post-bubble recovery, savings must increase if households are to avoid drastic reductions in standards of living in retirement.

Global trade imbalances. As the global economy has expanded, so have the persistent surpluses and deficits in goods and service flows in some parts of the world, building pressures on exchange rates that are becoming increasingly more difficult to effectively manage.

Government budgets. Paying for the deficits that exploded at all levels of government during the recession will be tough, but not as tough as solving the longer-term structural issues the post-bubble recovery has revealed.

On the bright side, both market forces and policymakers are progressing in all of these areas. And for Montanans, certainly, some of...