Planning for “The Third Depression”

Nobel Prize laureate Paul Krugman has a very important column in today's New York Times. His title "The Third Depression," along with the thoughtful analysis that he presents, communicate a clear warning to law firms that depend heavily on clients in the United States and Europe.

His main point is that it is too early to celebrate an economic recovery.  He writes:

We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression [of the years following the Panic of 1873] than the much more severe Great Depression [of the 1930s]. But the cost - to the world economy and, above all, to the millions of lives blighted by the absence of jobs - will nonetheless be immense.

Krugman warns us not to take too much comfort from signs of "recovery."

...future historians will tell us that this wasn't the end of the third depression, just as the business upturn that began in 1933 wasn't the end of the Great Depression. After all, unemployment - especially long-term unemployment - remains at levels that would have been considered catastrophic not long ago, and shows no sign of coming down rapidly. And both the United States and Europe are well on their way toward Japan-style deflationary traps.

What does this mean for law firms?

I think that there are at least three important admonitions implicit in Krugman's views:

  1. Take a long view when planning strategy. We need to think ahead beyond the end of this year or even next year. Do not base optimistic strategic plans only on economic improvements over the past six months.  Instead, law firm partners should ask, "What do we need to do in the next 12-18 months to support survival and sustainable business performance over the next five to ten years?" Taking the long view usually involves questions such as succession planning and improved productivity of internal operations, which are often overlooked in shorter-range strategic planning exercises.
  2. Consider alternative economic scenarios. Strategic objectives must be supported and managed by reliable, relatively simple performance measurements. Because law firm revenue is often a lagging economic indicator, the strategic management of a law firm must include an increased alertness to economic and geopolitical events. Some law firms are now planning for a set of contingent scenarios. In other words, what will be the early signs of the next economic crisis and what should we do if they appear?
  3. Do not count on policy makers to do the right thing.  Krugman has some very blunt criticism of the response of politicians and economic policy makers in the United States and Europe. He characterizes current government policy in both economies as:

...the victory of an orthodoxy that has little to do with rational analysis, whose main tenet is that imposing suffering on other people is how you show leadership in tough times.

And who will pay the price for this triumph of orthodoxy? The answer is, tens of millions of unemployed workers, many of whom will go jobless for years, and some of whom will never work again.

This blog has previously communicated our firm's concern that future financial crises, equal to or worse than the crisis of 2008-2009, are almost certain; because economic policy makers have failed miserably to address the underlying structural defects that caused the recent crisis and that remain relatively untouched.

In the United States, those basic structural weaknesses include:

  • An alarming widening of the gap between rich and poor in the United States
  • The continued submersion of formerly middle-class people into the ranks of the "working poor"
  • "Permanent unemployment" for millions of otherwise able and willing workers
  • A Federal taxation system that has collapsed under its own political weight
  • The corrupting influence of wealth on the U.S. legislative and regulatory process

I want to be clear about one thing.  I think that the Obama administration has prevented things from getting worse than they could have been. But the weak foundations remain as weak as ever.

Fortunately, the world is no longer as dependent on the United States economy as in the past; but the failure of U.S. policy makers to address any of these basic issues in any rational way will continue to have worldwide effects.

And these effects will continue to be felt by law firms.

Law firms in many parts of the world - and their clients - have just come through very difficult economic times. Paul Krugman reminds us that the conditions that produced the recent economic crisis are still there; and wise law firm partners and managers need to plan for the next episodes in what is likely to be an extended period of economic uncertainty.

Read more at the Walker Clark Worldview Blog.