Tyler Cowen, too, uses the "D" word. Neither of us has yet been tempted to prepend the "great" appellaton.
My reasoning for thinking of this as a depression, rather than a recession: roughly, that we don't understand how to get in or out of it. The recession of the early 1980s was very deep, but we knew pretty much what caused it, and hence how it would end. Even the 1970s slump had an obvious proximate cause in the oil shocks. This kind of perfect financial storm is a rarer bird, and no one has plausibly claimed to have mapped the way out yet.
Here's hoping I'm wrong . . .
Copyright © 2010 by The Atlantic Monthly Group. All rights reserved.
"Here's hoping I'm wrong . . . "
Well if history is any indication...
Well, I think there will be a BIG market in electronic security devices, from now on. You know, when person A has a giant flat-screen, and person B just happens to want it...
I just sat in a seminar in Europe in which an esteemed economist that has the ear of the European Union Commission said what is needed is the following:
-Lowering of EU interest rates (maybe this will be helpful)
-Shortening of the work week (huh!?)
-Increasing of unemployment benefits and other social payouts (reasoning is that "the people who spend" will get the money into the economy quickly -- I almost fell on my face at this point)
- And finally a small tax on derivative and other purely financial speculatory trading (not stocks) that would be designed to discouraged very short back and forth trades that tries to make a fortune speculating on commodities, currencies, etc in the very short term (daily and intra day). That last one may be useful, but since he suggested the other two methods it left me thinking this one must be wrong too for reasons I don't clearly grasp.
as an addendum to my previous comment it seems as if this is a very common formula on both sides of the issue in politics:
-contribute to a problem
-exploit the problem which you helped to create to get money/prestige/power
-make the problem worse
-insist that more must be done to prevent the problem from happening in the first place
-repeat step 1
Wow! "The world's tallest female econoblogger" actually wrote a short blog post on the economy! Well, back to the regularly scheduled blogging about house hunting, kitchen appliances, car troubles, etc....
Wouldn't want TheAtlantic.com to get their monies worth.
For what it is worth, we are not in a Depression yet. Read Alex Tabarrok here .
Nobody has yet suggested a plausible way for the USA to get out of this mess on its own; but nobody has produced a plausible case showing that the world as whole can't avoid a lasting depression. The only thing that seems 99% sure is that beggar-my-neighbor trade policies would sink us in the quicksand.
...we don't understand how to get in or out of it?
Please.
Want to get in a depression?
Let the government control the money supply, raise taxes, create massive social spending programs, and monkey with the market.
You want to get out of one?
Cut government spending, lower taxes, take back control of the money, get rid of the stupid social spending programs, and for christ's sake - get the idiots out of the way of businesses.
It couldn't be more simple.
I agree with Nick.
Nick,
I'm not sure what planet you come from, but here on Earth, there are idiots sprinkled throughout private industry as well. In fact, some of our finest government idiots started out, "thrived" in and will soon be returning to, private industry.
We aren't in a depression, as far as we know. We are in a recession with deflationary tendencies and in a liquidity trap. It is really too soon to know if we are in a bad recession or the beginning of a depression. It is really unclear to me what the difference is between a moderate, un-Great depression and a long, severe recession.
After all, the Great Depression lasted 10 years and 25% of the workforce was unemployed--and it took years to get there. We aren't there now but if we are headed there we are at the starting line of that particular descent.
As well as getting the idiots out of the way of business we should get them out OF business as well. But then someone will complain about the idiot unemployment rate.
Cut government spending, lower taxes, take back control of the money, get rid of the stupid social spending programs, and for christ's sake - get the idiots out of the way of businesses.
Where have you been the past eight years? It's been happening this whole time. The idiots have been out of the way of business and look what it has got us. What stupid social spending programs would you cut? Take back the control of money? One of your own Ayn Rand lackeys(Mr. Andrea Mitchell) was in control of the money supply for six of the last eight years. And what government spending would you cut? Defense?
"Cut government spending, lower taxes, take back control of the money, get rid of the stupid social spending programs"
This sounds awfully similar to what Hoover did. Then again, for some people there's never a problem cutting taxes and the social safety net isn't the answer for.
Wile E. Quixote:
Correct you are.
Jeremy:
And they never mention that BushCo was the best friend to corporate America that one could have, and yet we are still running down the road to ruin. One couldn't get out of the way of business any faster than BushCo did.
You mean.....Obama doesn't have a plan!?!
What!?! Hope and change aren't going to solve this problem?!?
Boy, the next two election cycles are going to be fun to watch.........
I also agree with Nick.
Jeremy, you are correct that there are plenty of idiots everywhere, not just in government. The difference is, the idiots in government get away with doing idiot things and rarely do any consequences come back to them, while in the private sector their businesses fail or they get fired or someone just does a better job. Yay competition! Of course, that's how it's supposed to work, in a world without government bailouts and corporate welfare.
"while in the private sector their businesses fail or they get fired or someone just does a better job."
Some in the private sector get paid exorbitant sums, even while they are wrecking shareholder value and driving their company toward failure.
This [Cut government spending, lower taxes, take back control of the money, get rid of the stupid social spending programs] sounds awfully similar to what Hoover did.
No, it doesn't. It doesn't sound anything close to what Hoover did. Smoot-Hawley Tariff Act, Revenue Act of 1932, Federal Home Loan Bank Act, Reconstruction Finance Corporation...do any of these terms ring a bell?
Virtually every prediction I read says GDP is likely to start growing this year, or by early 2010 at the latest. The unemployment forecasts generally have the rate in the US peaking at 9.x% -- it was nearly 11% in late 1982.
We may be in the midst of a fairly severe rigorous recession with deflationary tendencies -- and the financial sector has undergone a pretty serious contraction -- but conditions don't seem anywhere near what I've read they were in the 1930s. Frankly conditions don't even seem as bad as they were in 1982.
Why does it need a cause beyond simple business cycles? Recessions are inevitable, and serve some valuable functions.
We've had a long period of unprecedented prosperity, with no major recessions in 26 years. This recession will probably be followed by an even longer period of even greater prosperity, following the historical pattern.
Some in the private sector get paid exorbitant sums, even while they are wrecking shareholder value and driving their company toward failure.
Shrug. Players and coaches on the Detroit Lions get paid millions too. All competitive markets have losers as well as winners.
Is it just possible that the 80s through today, was all a bubble that coincided with the baby boomers.
1980. The boomer turned 30ish, bought houses and cars and computers and stuff. And more stuff, and more stuff, plunging the savings rate. As savings dropped, about the same time Consumption as % of GDP ("PCE") moved from 65 to 70%. And stayed there.
2008. The boomer turned 60ish, and in a flurry of "oh shit," realized he'd overpaid for the house, undersaved for the future, and in doing so, bubbled the housing industry. In a twist of luck the bubble that burst cratered his 401(k) AND his house--the only 2 assets of value in the boomer's portfolio.
Consumption dropped because of 401(k) declines + house declines + futile effort to save for the golden year + the general malise of being 60 and a realization that retirement's looking grim.
PCE craters, and possibly for the long term.
What's to replace Consumption? Exports? No, the world's in the same demographic challenged mess. Investment by business? No way. Who do they expect to sell to? Government stimulus? Impossible, it's just not big enough.
I'm not to the point to run out and buy gold, ammo and food, but assuming we've been on a PCE binge for 25 years and the boomers are searching for their inner-thrifty-saver I don't see how the trillion dollar man and his plan can possibly either i) replace PCE with government spending or ii) encourage the tired boomer to spend like it's 1994.
Time cures all, even this R(D)cession. Maybe the same thing was true in the 1930s. The New Deal and WWII didn't stop the Depression but rather, gave the people something to do and talk about while time remedied the economies.
Amy,
I would wholeheartedly agree with you (and Nick) if businesses adhered to the basic tenets of competition. Namely, that positive results are the only factor in deciding who receives work (or money, or whatever the reward). But quite often, rewards are based on things like "who you know" rather than "how you perform."
Your assertion that poorly performing businesses and people within the private sector are swept away by a Darwinian atmosphere is, at best, an ideal model for a system that rarely (if ever) reaches that performance. Instead, poorly performing managers and executives are often rewarded or shifted around.
On the same topic - see -
http://missmarketcrash.blogspot.com/2009/01/it.html
Kind Regards,
Missmarketcrash reporting from London
I'll agree that competition in the private sector produces results that are far from perfect, if somebody will explain to me how central planning will work better.
Jeremy -
Yeah, and I've been witness to this. (I think it's done even more in government, but that's beside the point.)
If (assuming a free market, which we don't TRULY have) a company relies too much on politics/nepotism and not enough on the value they are creating for the customer, some bright-eyed, bushy-tailed young entrepreneur comes and puts them in their place by actually focusing on what makes business run well and what customers really want.
It's definitely not a perfect system, but it works much better than the government in a vast majority of areas.
Cut government spending, lower taxes, take back control of the money, get rid of the stupid social spending programs, and for christ's sake - get the idiots out of the way of businesses.
Except for the tax comment, this comment exhibits a noteworthy lack of education in basic macroeconomic theory.
If a reduction in government spending would stimulate a corresponding increase in the other components of GDP, namely consumption, then you'd have a point.
But it is obvious that at this moment, consumers aren't consuming and they lack the confidence and credit to allow them to consume, so you don't.
If consumers don't spend, businesses don't invest in capacity. If none of the components of GDP are increasing, then naturally, there will be no GDP growth.
The key to a successful government stimulus will be whether it is adequate enough to either spur industry to create capacity that provides employment that encourages spending and/or whether it stimulates enough consumer confidence and spending to encourage more consumption, which in turn causes businesses to invest.
An aimless cut in spending would be Hooverism without the tariffs. With this lovely taste of Ayn Rand economics in our mouths, you would think that people would learn from the experience, but I guess that economics-as-political-theology dies hard. It might help to remember that the woman was a novelist, not an economist.
RW - By assuming that a) Ayn Rand was an economist, and that b) capitalist/libertarian economics is a result of her novels only reveals your own ignorance on the subject. (Namely, the Austrian school of economics.)
Anyway, a big part of the idea of the cutting spending and lowering taxes is that with lower taxes, people once again have more money to spend and thus consume.
Finally, your ideas about Hooverism seem to be misguided: "[The New Deal] actually began under Hoover, who initiated new spending programs, jobs programs, and tried to inflate the money supply and bail out the banks. He was blasted by FDR for his big government policies, and FDR won the election." http://mises.org/story/3295
I'm familiar with the Austrian school of economics. It's my familiarity with it that causes me to dismiss it as more of a political cult than a legitimate, demonstrable source of sound economic theory.
Since the pupils of Osterreich seem unable to properly identify even the most basic causes of asset bubbles, I'm inclined to ditch that class entirely.
Greenspan was a Randian, and he was quite proud of his work. You're now enjoying the fruits of his theology. Doesn't taste very nice, does it?
Greenspan was "Randian" in his imagination only. His actions were far from free-market friendly... so that comment proved nothing.
I'd be much more inclined to listen what you had to say if you addressed Austrian economic theory directly instead of dismissing it as a "political cult" and tied it to Ayn Rand (who, though she was probably closest to libertarian than any other political party, hated libertarians).
Greenspan was "Randian" in his imagination only. His actions were far from free-market friendly.
It's interesting how everyone on the right is so quick to lob Greenspan under the bus once he has proven to be a failure. This eagerness was notably absent when things seemed to be going well...
Re: Even the 1970s slump had an obvious proximate cause in the oil shocks.
The 70s woes had several proximate causes: OPEC, LBJ's Guns and Butter, Nixon's policies etc. But just because people were somewhat aware what the cause of the trouble was (just as we more or less know the cause of our troubles today) doesn't mean they knew what the solution was. Three administrations flailed about during the 70s with useless or worse-than-useless solutions. Stagflation simply wasn't in the textbooks at the time. Volcker's stratospheric interest rates may seem obvious in retrospect but at the time they provoked furious opposition (because of their effect on employment) and there were more than a few predictions of a new Great Depression.
No I was pretty pissed at Greenspan for constantly tinkering with the interest rates back in the dot com bubble era. If you remember they kept gradually ticking the rate upwards throughout the late 90s and once the economy was in a recession they said "oh shit, gotta drop the rate" and next think you know we've basically been trending downward to pretty much 0% ever since.
He intervened too much. He was overconfident just like the traders he accused of irrational exuberance. How much can you devalue the dollar continually over the course of a decade and expect it not to have an impact on world commodities that are valued in dollars?
The key to a successful government stimulus will be whether it is adequate enough to either spur industry to create capacity that provides employment that encourages spending and/or whether it stimulates enough consumer confidence and spending to encourage more consumption, which in turn causes businesses to invest.
It's all illusory stimulus, though. The government can't create jobs, it only shifts them from the private sector to the public sector. As taxes are raised to provide for government jobs the private sector shrinks, compensating for any stimulus on the government's part. They could print money, but what is currency devaluation but a tax?
Look at Japan. If all this stimulus nonsense actually worked they wouldn't have spent the last 20 years in the doldrums. They now owe 180% of GDP with nothing to show for it but a bunch of infrastructure they can't afford to maintain.
The real problem is there was too much productivity. Industry created capacity and jobs based on unsustainable credit-inflated consumption. The government may be able to ease the trip down by inflating the bubble up a bit, but they'll do it at the cost of prolonging the recession.
Re: The government can't create jobs, it only shifts them from the private sector to the public sector.
Huh? If the government were to start poaching people who are employed in the private sector that would be true, but if the people being hired are unemplpyed then that is decidedly not true. And why is the govrenment any less legitimate than a private employer? No one frets if someone who is hired at Microsoft would otherwise being working for Google. why should it matter if the government hires someone who might otherwise have gone to work for Walmart?
Re: The government can't create jobs, it only shifts them from the private sector to the public sector.
Huh? If the government were to start poaching people who are employed in the private sector that would be true, but if the people being hired are unemplpyed then that is decidedly not true. And why is the govrenment any less legitimate than a private employer? No one frets if someone who is hired at Microsoft would otherwise being working for Google. why should it matter if the government hires someone who might otherwise have gone to work for Walmart?
No one frets if someone who is hired at Microsoft would otherwise being working for Google.
That's because both of those companies produce something people are willing to pay for voluntarily.
In principle, government employment could be just as productive for the economy as private sector (no fundamental reason the government couldn't make and sell good cars for low prices) , but on average, it isn't.
And why is the govrenment any less legitimate than a private employer?
Because the government is paying that employee with money taken from somewhere in the private economy. By taking money out of the hands of businesses and consumers it leaves them with less money to create jobs through consumption. And the private sector tends to allocate that money more efficiently than the government.
Stimulus is politically popular, of course, because it's easy to see new government jobs and not so easy to see the private sector jobs which didn't get created as a result of shifting resources to the public sector.
If we can just create jobs by fiat, why stop at a trillion or two? Why not simply have the government hire everyone who doesn't have a job and wants one? Why have a private sector at all?
Don't forget reason #9 .
"The real problem is there was too much productivity. Industry created capacity and jobs based on unsustainable credit-inflated consumption." No, sir or ma'am, not too much productivity, except insofar as increased productivity contributed to the problem of the real estate bubble (mostly a land price bubble).
Henry George explained the basics back in 1879, and modern Georgists like Professors Mason Gaffney and Fred Foldvary have refined the model. (Try Googling!) Prosperity leads to more wealth going to landowners in the form of ground rent, so land prices rise to reflect expected future ground rent. Then, with land prices rising, land looks like a good buy: they aren't making any more of it, so get yours now!
Land prices come to be a self-sustaining bubble, not justified by actual ground rents. This can't go on forever, so the bubble finally bursts, and then financial instruments, etc., based on high land prices (usually referred to in polite company as real estate or even housing prices) become valueless. So there's a chain reaction of bankruptcies, inability to buy what manufacturers have for sale, and other troubles.
The solution is to tax land rents, so the selling price of land is kept low. Then the whole boom and bust cycle has its major fuel removed.
Re: That's because both of those companies produce something people are willing to pay for voluntarily.
Irrelevant. You are treating the government as if it were external to the economy, a supernatural visitant, or an alien from outer space. It isn't. It's as much an economic actor as anything or anyone else. And in principle the decisions the government makes reopeesent the decisions of the people en masse (in somewhat the same manner that the decisions of Microsoft represent the decisions of its stockholders en masse)
Re: Because the government is paying that employee with money taken from somewhere in the private economy.
???
All money circulating in our economy came from someone else's hands before it came through your hands. This is even more incoherent thnan the point above (though it betrays the same attitude that somehow the government is not part of the economy).
I don't think JonF has a good grasp of what "money" is, nor of the concepts of "added value" or "wealth creation."
The government typically does not create wealth or added value. There are a few exceptions such as the TVA, etc., which are government entities.
Whereas the money that a company or an employed person spends comes from wealth creation, the money that government spends comes from taxing the private entities who create wealth.
So that is what is meant by "the government is paying that employee with money taken from somewhere in the private economy."
To a lot of us, the government is like a leach, sucking the life blood out of us and giving us very little in return. For instance, conceptually, most of us agree that we should provide some sort of social welfare safety net for those who cannot support themselves. We object to providing a soft down mattress rather than a safety net, and we object to providing support to those who can support themselves but choose not to.
So when we attach social programs, don't ever believe for a minute that we want to eliminate social safety nets--we just want them to be at a lower level than they are. We firmly believe that people who want a higher standard of living should work their asses off the same way we have, and not depend (or insist) on taking our hard earned money to ease their lives.
JonF-
While the government is indeed an economic actor in the sense that it participates in the economy, there are still some very important distinctions. Namely, that when the government spends money in the economy, it first had to forcibly take that money from private entities in the economy -- as opposed to private companies, who have to earn the money by producing something that people are willing to pay for.
The reason this distinction is so important is that the things the government spends its money on could be fundamentally valueless. For example, if the government hires 100 workers to dig a ditch and then fill it up again, no value has been created. If a private entity did the same thing, they would go out of business because no one would pay for a ditch to be dug and then filled. And what's really important to note about this scenario is that while you can see the immediate benefit that those 100 workers get from being hired by the government, what you don't see are all the lost opportunities. What would those workers have done if they weren't hired to dig a ditch? They may have eventually found jobs that built valuable skills that other people had need of. They may have found long term opportunities instead of the short term temporary ditch digging. Even more, the money wouldn't have been forcibly removed from private entities in the first place, which means they would have spent their money on other things, that would then create jobs that were producing value that people actually want (not digging ditches). Even if they saved their money, the banks would then be able to lend it out to entrepreneurs, who could go about creating more value.
This is not to say that the government can never create something with value, but because of the costs involved with the exchange and the inherent lack of immediate consequences from choosing the wrong thing to spend money on, money spent by the government is many many times less likely to create something with as much value as money left in the market.
This is not to say that the government can never create something with value, but because of the costs involved with the exchange and the inherent lack of immediate consequences from choosing the wrong thing to spend money on, money spent by the government is many many times less likely to create something with as much value as money left in the market.
Private sector actors such as AIG not only didn't create value, but they proactively destroyed it. Unfortunately, their actions did not occur in a vacuum, and it has cost millions of Americans trillions of dollars in terms of lost asset value and future tax burden. To claim that the private sector can't engage in moral hazard is clearly false, given recent events.
JonF,
Microsoft and Google take something worth almost nothing--blank CDs, for instance--and turn them into valuable products that people want. Similarly, Toyota takes raw steel and turns it into cars worth many times what the steel is worth.
That is how wealth is created: transforming low-value inputs into high-value outputs.
The government rarely does such a thing (although it might on occasion). For the most part, it simply demands that Toyota, or you, turn over part of the value created for the government's use.
The use of money disguises it, but what is really happening is no different than if the government were to demand that Toyota produce a few tanks every year for free (and make up the difference with increasedprices on cars), or demand that I do a stint a the USPTO every March and April for no pay (and earn enough the rest of the year to cover it), or demand that a farmer turn over food to government workers for free, and the like.
That is what is meant by the government being a "leech" on the private economy. Taxes don't take money, they take goods and services which might have been used for other purposes, and for the most part, it does not turn these goods and services into something more valuable. Government employees consume a share of the economy without having to produce a corresponding share like the rest of us.
This is not to say that government is unnecessary, or that it isn't a net benefit, but it is to say that government spending and employment are qualitatively different than private spending and employment.
Private sector actors such as AIG not only didn't create value, but they proactively destroyed it. Unfortunately, their actions did not occur in a vacuum, and it has cost millions of Americans trillions of dollars in terms of lost asset value and future tax burden. To claim that the private sector can't engage in moral hazard is clearly false, given recent events.
Nobody is claiming the private sector always allocates resources responsibly. Just that it's more likely to do so than the government. I would like to point out as well part of the reason the credit bubble got so large was the government policy of forcing banks to relax lending standards.
The financial industry is kind of an odd bird, neither fish nor fowl. Banks and insurance companies do things, like create money, that would get you or I arrested. They're so heavily regulated it's not clear to me who is actually making the decisions - shareholders or Congress. I'm thinking a bank, left to its own devices, will never lend a strawberry picker $700,000 to buy a house.