Quote of the Day - 01.07.09
| Wed Jan. 7, 2009 9:31 AM PST
QUOTE OF THE DAY....From Megan McArdle:
I recently realized that over the past few weeks, without really noticing, I've slipped quite naturally into referring to the current crisis as "the Depression". I also realized that no one I've spoken to has challenged that description.
It's sort of stunning to step back from the daily minutiae once in a while and realize just how bad this economic crisis is. As near as I can tell, the underlying shock really is as intense as the one that kicked off the Great Depression, and the only thing preventing soup lines these days is that we've learned a helluva lot since the 1930s. Retirees all continue to have purchasing power and healthcare thanks to Social Security and Medicare. The unemployed are receiving unemployment insurance. Deposit insurance is preventing bank runs. The Fed has lowered interest rates to zero and is prepared to intervene massively to prop up the money supply. Barack Obama is readying a massive federal spending stimulus package. The Treasury is pumping capital into the banking system to prevent a complete collapse of the credit markets. Aside from tinkering around the edges, most countries have agreed (so far!) not to ratchet up protectionist tariffs and trade barriers. We aren't hobbled by reliance on the gold standard.
Take that stuff away today and unemployment might already be in double digits and still heading up. Put this stuff in place in 1929 and we probably never would have had the original Depression (or World War II). So thanks, FDR! Thanks, modern mixed economy! Thanks, countercyclical policy measures! I sure hope it's enough.
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Comments
One of the differences is strictly temporal, we remember the Great Depression, by its time of maximum intensity, we have yet to experience that part of this one yet. It is true, that we have better knowledge at the policymaking levels about what to do, and we are fortunate to have democrats in power much earlier on this go around. Still, we have significant political forces, that have not learned the lessons of GD1, and want to repeat Hooverite policies. I think they will have some effect limiting the response.
In any case, this is what I fear for GD2:
GD2 if McCain had won unemployment peaks at 20%.
GD2 under Obama, unemployment peaks at 10%.
But, ten percent still looks very bad compared to the 5%ish that the electorate thinks is normal. And we don't have a parallel earth to compare against, so the argument that Obama and the Dems made it much much less bad than was otherwise in the cards could easily fail.
Those who are dealt a very bad hand, and play it well, are rarely remembered fondly.
While I do appreciate all we've learned since the New Deal, I think all of this depression talk says more about our habits of dramatization than it does the economic situation. The same mentality that turns a snow flurry into a "winter weather event" (!!!) turns a bad economic downturn into THE NEXT GREAT DEPRESSION (OMFG !!1!1!!1!!!1!!).
In a world that has thankfully grown more boring (less war, famine and pestilence than 99% of human history) we react by turning everything into the Greatest/Worst Thing Ever. It makes us feel more alive.
Because while it's early days yet, so far things aren't even as bad as 1981-82, much less the 1930s.
Submitted by Linkmeister (not verified) on Wed Jan. 7, 2009 10:15 AM PST.
Only some of the unemployed are receiving unemployment benefits. For the long-term unemployed those may have long since run out. And for the self-employed sole proprietors, there never have been UI benefits, even when their businesses dry up.
Put this stuff in place in 1929 and we probably never would have had the original Depression (or World War II).
How could this have prevented World War II? I know my history sucks, but I don't get it. Unless our Depression is what brought down Germany's economy which in turn aided Hitler's rise to power? Would Japan not have gone to war without Hitler?
Echoing linkmeister, contractors also don't qualify for unemployment, which is a problem since they're easy to let go and don't get much in the way of severance. (This, in fact, happened to me after I moved from a salaried job to a contract role with a small business.) I've since lined up a bunch of short-term project/contract work, but, yeah, wouldn't be eligible for unemployment after that either...
I do get Kevin's point, which is that we have an expanded safety network that saves a lot of people from poverty... but it's pretty insufficient.
hubcap: we react by turning everything into the Greatest/Worst Thing Ever
True, where I am every flurry gets turned into a "Winter Weather Warning" (warning: it's winter).
However, while I'm hopeful that this won't turn into GD2, the parallels aren't strictly alarmism. The 1981-82 recession was mostly caused by Volcker raising interest rates so high to fight inflation (including the effects of the Reagan deficits). While I think Volcker went overboard, it was widely understood that easing off the interest rates could bring back the economy, and that's what happened.
This is different. It's causes are very similar to what caused GD1. We haven't seen bank problems of this magnitude since GD1. The numbers show that this is a blizzard (the S&L problem was a flurry).
If you really want to kill an economy, the banks are the key (which is why they were so heavily and successfully regulated for decades after GD1). Unfortunately we seem to be taking a "shovel more dirt over the bodies" Japanese approach, which helped lead to Japan's Lost Decade. I wish we were taking the Swedish approach instead. They insisted on auditing the banks and forcing them to write off bad loans. Not enough money left? Congratulations! Your long established banking icon is now in receivership. Tough.
Will Obama be much better? He hasn't shown any sign of it.
Take that stuff away today and unemployment might already be in double digits and still heading up.
C'mon, Kevin. You've been around long enough to know how the nutosphere will spin this: all that stuff isn't softening the recession, it's actually making the current economy worse!!
Like godoggo said, the soup lines happened after 1929.
I agree that the safety nets are helpings things and I agree that things right now are not that bad.
BUT
This is the start. C'mon Kevin, add in your peak oil stuff and your climate change stuff and stir it together. Sheesh, you're the one who helped me realize all this stuff. Now put it together. Connect the dots.
We are not in a depression, we are entering a depression. Get some perspective here.
Enough for what? The only threats for a wider war are Russia, China and the US and China is more concerned with internal unrest.
Besides, WW2 levels of apocalyptic spending are what got us out of the depression before, that and also the massive death and destruction. Lots of stuff needed buildings, and with lots of people dead there was far less competition for jobs or food.
Submitted by Legacy on Wed Jan. 7, 2009 12:05 PM PST.
It's true that we don't know how bad this is going to get. Maybe we'll end up with 25% unemployment by 2010. But I doubt it. And the reason I doubt it is because of all the fiscal/monetary mechanisms we have in place today, not because the underlying shock is any smaller than the one in 1929. As near as I can tell, it's every bit as big and global, which is truly amazing. This is unlike any recession we've had since WWII.
Tripp: Peak oil and climate change are longer term issues. They aren't likely to have any impact on the immediate course of the current recession.
Submitted by Rick B (not verified) on Wed Jan. 7, 2009 12:16 PM PST.
I agree with Joe (1:49 PM). The Great Depression was a fallout (not completely inevitable but likely) in large part from the financial cost of WW I which bankrupted England, France and Germany and converted the US into the World's creditor nation because they loaned the allies the money to fight with rather than giving it. The timing of the Depression was in many ways a direct result of the financially punitive Versailles Treaty and of Germany's effort to recover from the war while being forced to pay reparations and being partly occupied. All of that hit Germany first with the hyperinflation of 1923.
The extreme heights of the US stock market were largely caused by money flowing from England and France as it looked for places to invest. Then Europe hit a bad economic patch and stopped sending their investable money to the US. That was the cause of the Crash in 1929.
After 1923 the US banks had been lending heavily to Germany to fund German recovery in the 20's. It was necessary for them to pay reparations. But with the collapse of the stock market, the U.S. quite lending to Germany, sending Germany back into recession.
The high financial leverages of banks today are not unique. They existed then also. The loss of European funds and the stock market crash pulled capital out of American banks. Without FDIC we got bank runs that killed many of them. A sizable percentage (20% to 30% I think) of existing banks disappeared and the multiplier effect of fractional reserve banking worked in reverse, badly reducing the money supply (if you can trust Milton Friedman's research, and on this I do.) After that there was no agency large enough to stimulate the economy besides the government, and Hoover refused.
That's a broad outline of the start of the Depression as a direct result of WW I. And no professional economist would write this because so many details are lacking. But it'll help a layperson understand the relationship of the Depression to WW I.
It's hard to accept the idea that the Depression is not in many ways a direct result of the total destruction of the European economy slightly over a decade earlier.
WW I and the 1923 hyperinflation, together with the continued economic problems after led the Germans to think everyone was out the get them (not far wrong), and only regaining their military strength could save them. as the Depression spread from America into Europe, the Nazis gained power.
But ultimately, the Depression was only one element in a long chain of events that flowed directly out of the financial and economic effects of WW I and the Versailles Treaty reparations.
The war was the cause of the Depression, and the treaty was the mechanism that caused most of the after effects that resulted in WW II. Most importantly, it prevented the German economy from recovering after the war at the rate France and England did. While major, the Depression was only one of the after effects that led to WW II.
Could WW II have been avoided without the Depression to reinvigorate the political strength of the Nazis in the 1930's? Maybe, but I doubt it.
With as little was known about macro economics at that time, a severe shock like the one that set off the depression was inevitable given the massive flows of money (for that time) moving around the world uncontrolled. That led the Nazis into power over a fragmented German opposition.
Kevin,
Oh my God. You finally talked to me! Wow. (this is not sarcasm)
Now if you could only get the Vikings to win the Superbowl I will be completely happy.
I agree that climate change is long term, but our response to it will be soon, and most likely it will put a damper on the global economy.
Peak oil is already here. Yeah, I know, $1.50 a gallon for gas right now but I figure the oil floor to be about $100/barrel and rising once the global economy gets moving again. And it will get moving again, no doubt about that.
So global economy frozen, rising fuel prices, and carbon taxes. It seems to me these are three pretty big things coming together.
Rick B
I very much like what you wrote. I would very much like to hear what you think is coming down the pike in the next ten years.
Submitted by Rick B (not verified) on Wed Jan. 7, 2009 3:58 PM PST.
Thanks Tripp. I don't usually do three rewrites before posting a comment, but I did on that one. (I'm still not satisfied, but when it's time to quit improving, it's time.)
I think that the Recession will continue to get worse all this year. The reason I think that is that all the major indicators (particularly unemployment, and the housing prices haven't approached what is justified by rental rates) are still getting worse, with no indication that there is any floor yet. Not only is the floor not apparent, there seem to me to be no indicators that one will develop soon. That's in addition to the fact that any successful stimulus is going to have a relatively long lag time before we know it has worked. Entirely my opinion, of course, and I am not a professional economist or finance person. After that? I have no real clue where 2010 is going.
A lot of the answer to the longer term future is political rather than purely economic. The free market fundamentalists have a lot of room to screw us over further, and the Republicans seem to have the motivation to do it.
As for the Great Depression (now GD I?), J. K. Galbraith 1950's book on that is still very good. You won't find a better summary. It's also short and readable. He wrote extremely well.
Then, for a more technical and more current (but still generally readable) discussion, Brad DeLong has a section of references on his website that includes a section linking to the writings of modern economists trying to explain the Depression. I'd guess that he taught a course on the Depression and that was the reading list. I haven't been there for over a year because I printed them all out and put them into a binder like any good grad student should.
Read Galbraith first. The articles are harder to understand without the overall view he provides.
