Friday, December 5, 2008

It’s Not the 1930s: Time to Retire Talk of Depression

I respect Robert Reich, the former Clinton administration Labor Secretary who is presently a professor of public policy at UC Berkeley.

he's stretching reason in making the case that the current economic downturn should rightly be called a "depression":
When FDR took office in 1933, one out of four American workers was jobless. We're not there yet, but we're trending in that direction.
Read the whole thing for Reich's argument in context.

I've written numerous times to reject the comparison between now and the 1930s (see "
War Mobilization Ended the Great Depression"). Times are tough today, sure, and they will get tougher, but there's a fundamental incommensurability here: I seriously doubt the country will ever have as deep a crisis as we saw in America after the stock market crash of 1929. As Daniel Gross recently pointed out:
All this historically inaccurate nostalgia can occasionally make you want to clock somebody with one of the three volumes of Arthur M. Schlesinger Jr.'s New Deal history. The Credit Debacle of 2008 and the Great Depression may have similar origins: both got going when financial crisis led to a reduction in consumer demand. But the two phenomena differ substantially. Instead of workers with 5 o'clock shadows asking, "Brother, can you spare a dime?" we have clean-shaven financial-services executives asking congressmen if they can spare $100 billion. More substantively, the economic trauma the nation suffered in the 1930s makes today's woes look like flesh wounds.

"By the afternoon of March 3, scarcely a bank in the country was open to do business," FDR said in his March 12, 1933, fireside chat (now available on a very cool podcast at the Federal Deposit Insurance Corporation's Web site). In 1933 some 4,000 commercial banks failed, causing depositors to take huge losses. (There was no FDIC back then.) The recession that started in August 1929 lasted for a grinding 43 months, during which unemployment soared to 25 percent and national income was cut in half. By contrast, through mid-November of this year, only 19 banks had failed. The Federal Reserve last week said it expects unemployment to top out at 7.6 percent in 2009. Economists surveyed by the Philadelphia Federal Reserve Bank believe the recession, which started in April 2008, will be over by next summer. (Of course, the same guys back in January forecast that the economy would grow nicely in 2008 and 2009.) But don't take it from me. Take it from this year's Nobel laureate in economics. "The world economy is not in depression," Paul Krugman writes in his just-reissued book "The Return of Depression Economics." "It probably won't fall into depression, despite the magnitude of the current crisis (although I wish I was completely sure about that)."
It's time to retire the notion of an economic "depression."

Since the 1930s the U.S. has had cyclical economic recessions of varying depth and duration. I recall walking door-to-door in 1992 (for just two days, as a canvasser for CalPIRG, which I hated) asking people for political contributions. People wanted to give, but they were hurting economically, and many said it felt like "a depression." Santa Barbara at the time was going through the trauma of the post-Cold War defense conversion, and I recall tons of shuttered retail stores up and down Santa Barbara's normally-upscale State Street. In Fresno, where I lived while finishing up my undergraduate work until July, I met people who were leaving the state to start fresh in the Rocky Mountain states and other points east. I worked at Chevron station at the time, and folks came in to fill-up with all of their belongings loaded up on pick-up trucks, towing U-Hauls behind 'em. It was a difficult time.

More recently, I'm reminded of how bad the economy was during the 1970s, when the U.S. struggled through two oil shocks and "stagflation" stumped Keynesian economists. President Carter was reduced to announcing the country's "malaise." We had gas lines and rationing, and interest rates hit 20 percent by the early 1980s. It was another very difficult time.

I'll eat my words if unemployment hits 25 percent in the months ahead, but I'm confident that we'll see things bottom out in 2009. We'll have a continuing deflation in housing for some time, probably over the next couple of years. But the Obama administration will restore some confidence to markets and consumers with an aggressive stimulus program seeking to put people to work, stabilize employment, and build infrastructure and "green" industries.

Meanwhile, today we're seeing oil prices tumbling, and some economists are predicting that
gas may be as cheap $1 a gallon early next year. Reduced energy prices will boost all sectors of the economy, from consumer spending to shipping and transportation, to air travel and industrial production. People will start taking longer vacations next year, and home heating costs will decline. Cheaper energy costs will act as a Keynesian stimulus, and consumers will increase demand of goods and services as the expansionary multiplier of cheap fuel provides a stimulus that no government "rebate" check could match.

Again, this could be all wrong. Three months ago folks thought $700 billion would stablize the financial system; now analysts are suggesting a $1 trillion dollar spending package will be needed for effective pump-priming.

Still, leftists might as well hang up the discourse of the "depression." No matter what, the U.S. under Barack Obama will see one of the biggest expansions of state power and domestic policy since the Johnson administration of the 1960s.

But the black-and-white desolation of soups kitchens and Dorothea Lange-imagery is long ago, and the United States today is a post-industrial service economy with higher technology and more flexible labor markets than ever before. We have a better regulatory structure and we are a wealthier people as a whole, with a quality of life - in cars, computers, and the comforts of home - that would make Depression-era citizens gasp at the scale of everyday luxuries.

As Roosevelt himself might say, "we have nothing to fear but itself," so leftist can lay off their economic fear-mongering.


JR said...

Dwight D. Eisenhower Tax Cuts

Laura Lee - Grace Explosion said...
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Laura Lee - Grace Explosion said...
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Anonymous said...

Wow, suddenly the Professor seems relatively well informed about economic issues.

Of course, it's a pretty safe prediction that this recession will not be as bad as the Great Depression. However, it's clearly factually inaccurate to claim that nihilist Stalinist anti-American crypto-Muslim moral-relativist liberals are disproportionately over represented among professional economists who are fearful about the state of the economy. You're standing up against a strawman of your own creation, as you are wont to do.

Personally, I'm dubious about the massive fiscal intervention, but macro is not really my thing. I do respect the opinions of my intellectual superiors. To hear words like this from the likes of Mankiw gives me pause.

Righty64 said...

There were several depressions in the 1800s and the federal government did little if any interference and the economy recovered quite well. Until 1929. Then, President Hoover went ape and did everything wrong and the market led to the depression. And to Franklin Delano Roosevelt and a worsening of the depression. We are in a recession and it may be a bad one. But no where near a depression. Remember, there were not the kinds of safeguards that we have now. I am with you. Retire the depression talk!

AmPowerBlog said...

David: I was never uninformed, you freak. You attacked me like a pig before because you disagreed with me, and wanted to find some way to show me up.

Whether you agree or disagree here is immaterial, as you've already shown your true incivility.

I know what I'm taking about, and it's not just neoconservative ideology.

Anonymous said...

Your response reminds me of the old joke about the guy who graduates cum laude from the PhD program of the School of Quick Wit and Retort.