Moving beyond conventional energy: in the aftermath of the great recession, entrepreneurial companies are exploring new, cleaner energy sources to lessen their reliance on foreign oil, and they're doing so through an increasing number of public-private partnerships.

AuthorJanszen, Eric
PositionCOVER STORY

The great recession, like the Great Depression, is a two-act play. Act I is the actual recession, the period of negative GDP growth when output declines and the economy contracts. During the Depression, Act I covered three years--from 1930-33--as the United States economy shrank by more than a quarter. Economic output in 1933 sputtered along approximately 30 percent below potential.

Act II is the output gap, the difference between the depressed output of the recession-ravaged economy and potential output, the level of growth that the economy would have achieved if not for a financial collapse or other crisis trigger.

Act II of the Depression did not end with the economy recovering to full potential for another seven years after the end of Act I, a year into WWII. During the war, U.S. gross domestic product not only caught up to its former normal growth rate, but soared above it as the economies of the combatant nations were battered by war.

No one knows how or if the American output gap would have closed in 1940 without the stimulus of war production. In fact, Act II was interrupted by a second recession in 1938, the year after a portion of New Deal economic stimulus was withdrawn in election year political wrangling over excessive government spending in 1937.

As for the recent recession, the first act lasted less than two years, from the end of 2007 through the middle of 2009. It set up a far smaller output gap for Act II. At $1.1 trillion, the gap was only 8 percent of GDP. Still, it translated into an unemployment rate of more than 10 percent.

Currently, the U.S. is only 15 months into Act II and no one knows for sure how long it will go on. Most economists expect several more years of sub-par performance. Unemployment remains stubbornly high, lingering around 9 percent. If the economy grows only as fast as it did in 2010--at a rate of 3.2 percent per year--it will not reach its potential and close the output gap until 2019. If that turns out to be the case, the two acts of this great recession will have lasted two years longer than the Great Depression.

Meanwhile, that 1937-style political wrangling over government spending is being repeated. The fear that ongoing fiscal deficits imperil the nation's public credit competes with the worry that the economy is not yet ready to have stimulus withdrawn, that it will fall back into recession--essentially, a second Act I--as occurred in 1938 (under similar conditions) in the U.S., in 1996 in Japan and in the final quarter of 2010 in England.

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So far, the decisions of Congress on the stimulus or austerity policy...

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