Posted February 28, 2009
States are relieved at least temporarily from the budget crisis by the federal stimulus package. There is not a lot of precedence for the strength of the current recession in this country but there is in Japan. The Japanese real estate bubble was caused by continued speculation and the need for housing the same as in this country. But it didn’t have the housing finance added problem caused by relaxed rules for creating investment bundling of home mortgages. And it didn’t have high gasoline prices to trigger the collapse of the economy. Yet it took eight stimulus packages and ten years to bring the Japanese recession to an end.

The Japanese recession was just that a Japanese recession but our current recession is world wide. That is why there is such a world wide effort to stop the side to the dreaded word “depression”. No, I don’t think we are headed for a depression precisely because in the thirties absolutely nothing was done in the way of a stimulus until the economy hit rock bottom. But I will say that this recession is going to impact some countries in an uneven manor. For example in Germany only 10% of its citizenry invest in the stock market and therefore the bulk of their population was not affected by the down turn in the stock markets. In the US there was a disaster in 401ks that were invested in the stock market that lost as much as 50% of their value. This in turn has caused the public to curtail spending at least for the time being. There is what I think is a short breather here caused by a stunned public before the stock market starts to rise again as investors gain confidence.

This recession will also impact states unevenly. States that primarily have an agriculture economy will recover sooner simply because people need food even in the worst economies. States that promote green economies allowing new industries to be developed like wind turbines will recover sooner.

But states that have dieing industries like the manufacture of the internal combustion engine may take years to recover. The internal combustion engine has succumbed to high gasoline prices and pollution. It will be replaced by electric cars with batteries not by the much touted fuel cell. The fuel cell engine does not have an infrastructure to support it and was a last ditch effort by automotive manufactures to prevent electric cars from taking over the market. The internal combustion engine however will be with us for a long time to come simply because gas prices will again be low enough to make it competitive but it will no longer dominate the market. The reason that electric cars are not wanted by auto manufactures is that the service facilities found in every dealership in the nation will no longer be needed. Tires and brakes and fender benders can be repaired in general repair shops and at Ky-mart. This is a disaster for small town America these dealerships also sell new cars, provide skilled jobs and the sales taxes run the local governments.

The Chinese are poised to sell millions of electric cars in the US. In India they are manufacturing an electric smart car knockoff that sells for less than $3,000. With the improvement in quality of these cars their sales will also increase in the US. If you don’t think this can happen consider that the second largest battery manufacturer in the world is in China and that company is now making electric cars. Warren Buffett’s Berkshire Hathaway has invested in the company which makes the BYD F6e electric car. You don’t need a lot of sales offices for these cars they can be ordered off the internet.

So what does all this mean? I don’t see any real recovery for possibly three years in most states. Some states will recover sooner but some could take years to recover. States like Michigan are going to have to consider a long term recovery. If General Motors and Chrysler survive they will be only a shell of their former selves. Detroit could become another rust belt just like when we lost the steel industry to Asia.

In the short term all states are going to get pounded by unemployment insurance and high Medicaid costs at a time of reduced revenues. So why not consider the government reform proposal I have made to reduce bureaucrats and save state education. You are going to need educational facilities for massive retraining for new jobs in green industries, health care and other areas.