Posts Tagged ‘depression’

Cliff note

2 December 2012

Recently I was asked to write a blurb about the omnipresent “fiscal cliff,” and here it is:

“Fiscal cliff” is a good metaphor. Like a real cliff, it’s something you shouldn’t jump off and really shouldn’t even be standing near. Austerity policies like big tax increases and spending cuts would only make a weak economy worse. While we do need to reduce our deficit and debt relative to the size of the economy, this is a long-term problem that needs to be tackled when the economy is back to normal.* In the short term, the goal should be to avoid pushing the economy back into recession. Similarly, we should avoid needlessly rattling financial markets by threatening to jump off fiscal cliffs, shut down the government, or not raise the debt ceiling. Some say the fiscal-cliff threat is needed to prod Congress into reaching a long-term, balanced deficit-reduction deal; but it’s a dangerous game, especially if the deficit cutting starts too soon, like now.

* OK, I’d amend that to say that it’s fine and dandy for Congress to tackle our long-term fiscal shortfall now, as long as they can agree that to start chopping after, not during, the long slump we’re in now. It would be lovely if the House, Senate, and President could agree on a Grand Bargain of sensible tax increases, meaningful reductions in medical costs (the biggest driver of spending increases), and various spending cuts, to take effect once the unemployment rate is back down to 6% or so, but it just ain’t gonna happen, not with a Congress that just came off its most unproductive session in decades.

The logic of the fiscal-cliff threat was that Congress won’t act on the deficit unless the alternative is calamity. While I tend to agree with that, it’s not logical when Congress is threatening itself with calamity. It’s an empty threat, like saying that if I can’t lose thirty pounds by diet and exercise then I’ll amputate my own limbs. When the time comes, we’ll both realize it was just a stupid bluff. I’ll put down my axe and Congress will punt the decision into a later month or year. Remember, that’s how we got to the current fiscal-cliff deadline, after the debt-ceiling debacle of summer 2011.

I honestly don’t expect Congress to take serious action on the debt until and unless the bond market’s longtime love for US Treasury bonds turns to hate, a la Greece. I could be wrong — it looked pretty hopeless in the early 1990s, too, and yet we ended the decade with the budget in surplus. But both the budget and the economy are in bigger holes now.

After the binge, the purge

18 July 2010

The always excellent Roger Lowenstein has a piece in today’s NYT Magazine about the recent reluctance of the American consumer to spend.

He makes a point that I’d been making and fleshes it out rather well:

American households are rational to cut back on their spending right now, especially while so many of them are deeply in debt and face uncertain job and income prospects in the months, perhaps even years, ahead.

But while individually rational, it makes for a severe economic slump, since consumer spending (or, put differently, goods and services produced for consumers) is two-thirds of GDP.  Unless a new bubble comes along to delude consumers into thinking that their wealth in stocks/housing/other is rising so fast that it’s OK to spend more than their income, then we may not have found the bottom yet.

Consider:  At the peak of the bubble, in 2008, household debt was 136% of income.  After two years of retrenchment, it now stands at . . . 126% of income.  Lowenstein quotes an economist as saying that there is no clear-cut correct debt/income ratio, but it seems fair to say that over 100% is not sustainable.  Lowenstein notes that just getting it back to where it was in the year 2000, at plausible rates of “deleveraging” (paying down debt), would take about five years.  And he might have noted that 2000 was the height of the dot-com bubble; household debt in 2000 was nearly as high as household after-tax income.  People like to pass on something to their children and grandchildren, so the normal debt/income ratio would presumably be well under 100%.  You’d probably have to go back at least 15 years to find a normal, sustainable debt/income ratio.

Lowenstein quotes another economist as saying “deleveraging cycles” typically last about five to seven years.  And today’s debt/income ratio is not typical but is one of the highest on record.

I said before, we’re in a depression.  Still hoping to be proved wrong.

Oh well, at least we’re not in debt to the company store:

History lesson: Recessions are modern

8 May 2010

Interesting just in its own right, this paragraph from Paul Krugman:

“… the 19th-century economy had much more flexible prices and wages than later came to be the case — not, primarily, because of different institutions, but because it was still largely an economy of small, self-employed farmers. More than half of US workers were in agriculture up until the 1880s. Peter Temin has told me — I can’t find it in a quick search — that the United States didn’t start having modern recessions, with large declines in real GDP, until the Panic of 1873; Britain started having them much earlier, because it became an industrial economy earlier.”

Or possibly not even until the Panic of 1893, which at the time was known as the Great Depression.  Some economic history research that I have not seen, but which is cited confidently in this compelling column by Charles R. Morris, concludes that the 1870s contraction was actually quite mild.

Which is not to see that genuine and widely felt “hard times” never occurred in our pre-industrial, pre-1870 economy.  Financial panics and deflations were common, and any big drop in farm price surely hurt the real incomes of many farmers, as long as their prices fell more than other prices and farmers had nominally denominated debts.  Many economic historians have even said that a “depression” in the early 1770s helped set the stage for the American Revolution.  But it does seem we need to have a better understanding of what those early “hard times” were like for the people who experienced them.

Turn on the news

6 November 2009

This morning brings the news that unemployment has reached double digits for the first time since 1983, rising from 9.8% to 10.2%.  And the U.S. economy has had a net loss of jobs for 22 straight months, the longest on record, dating back 70 years (to, yes, the end of the Great Depression).  There are 15.7 million unemployed, including a record 5.6 million who have been unemployed for six months or more. Since the recession officially began in December 2007, the number of unemployed has more than doubled, by 8.2 million.

The U-6 unemployment rate – which also counts discouraged and marginally attached job-seekers and involuntary part-timers – is now at an alarming 17.5%.  That’s the highest in the fifteen years that the government has been keeping track of that alternative measure.


Just words

29 October 2009

This week’s news from the Commerce Department is that real GDP grew at a 3.5% annualized rate in the 3rd quarter of 2009, which is the best quarterly growth rate in two years.  And some economists, including the National Bureau of Economic Research’s (NBER’s) Jeffrey Frankel, are saying the recession probably ended sometime this summer.  Meanwhile, a poll of MSNBC readers finds that 82% think the recession is still raging, 9% think the economists are right, and 9% don’t know.  (Yes, online polls are unscientific, but earlier, professional surveys I’ve seen of the public also found them to be more pessimistic about the economy than the experts.)

Are the economists that obtuse, or is the public that dumb?  Even if one’s preferred is answer is “Both,” I think the split is due to two different definitions of “recession.”  The NBER and the economics profession define a recession as a general period of economic decline, whereas I bet most people define it as a weaker-than-usual economy.  I would argue for throwing the word out altogether when discussing the economy.

  • Use “contraction” to denote a period of actual decline, just as the 1929-33 collapse was called the Great Contraction.
  • Use “depression” to denote a period of economic weakness, just as 1929-early 1941 was the Great Depression.  I argued in March that we were in a depression, but if “depression” sounds too harsh because people associate it with the Great Depression, then say “slump.”

Right now, the different professional and public definitions of “recession” (just as with “money” and “investment”) just makes economists seem that much more out of touch.

Down for U is up

9 August 2009

For the first time since the recession officially began in December 2007, the unemployment rate fell last month, from 9.5% to 9.4%. Professional optimists had already been declaring the recession over, and this welcome news added fuel to their fire. How good is this news, anyway?

As always, the first place is to look is the original report from the Bureau of Labor Statistics (BLS).   First, a few important component numbers:

  • -155,000 = change in total employment from June to July
  • -267,000 = change in total unemployment “
  • +637,000 = change in total number of people not in the labor force “

The first two numbers look good: the decline in employment is much smaller than in previous months, and the ranks of the unemployed fell by more than a quarter million. But the last number is the largest and strongly suggests that hundreds of thousands of people have simply given up looking for work. Small wonder, when there are 5.0 million Americans who have been unemployed for six months or more.  (That’s more than the total number of unemployed just a few years ago, I believe.)


Another sign that we’re in a depression

16 March 2009

great_depression_2008Industrial capacity utilization is at its lowest level since 1982 (when we had double-digit unemployment), and down 11% from a year ago (when we were already in a recession).

Calculated Risk has the story; data are from the Federal Reserve.

It’s a depression. You heard it here first.

7 March 2009

I’m not being alarmist.  It’s worth noting that before the 1930s “depression” was the standard term for a substantial economic contraction, what would now be called a recession.  The 1930s depression was termed “great” because it was indeed the worst ever, so bad that it became a proper noun, the Great Depression.  Some are calling today’s slump the Great Recession, which is a waste of keystrokes.

I remember my father calling the 1982 recession a depression, and I think he was right:  the worst slump since World War II, 10% unemployment (peaking at 10.8%), including the permanent loss of millions of industrial jobs.

Now consider the evidence for the current one:


Counterparty confidence

7 March 2009

Seen on a church sign in Clay, NY: