Posts Tagged ‘great depression’

Raise the damn debt ceiling already

12 April 2011

As if the new agreement between the president and Congressional Republicans — to cut $38 billion in spending while the economy is still in a near-depression — weren’t bad enough, now the word is that the Republicans say they won’t vote to raise the debt ceiling, at least not without extracting several pounds of flesh first. Worse still, the overwhelming majority of the public opposes raising the debt ceiling.

I’ve blogged about this topic before. Not raising the debt ceiling would be like pushing the economy off a cliff. With a deficit of $1.5 trillion (and GDP of about $14 trillion), Congress would have to cut spending or raise taxes (or some combination thereof) by more than 10% of GDP. You don’t get that money back. That would be a depression of titanic proportions.  It would be ruinous under virtually any circumstances, but all the more so now, at a time of high unemployment. Herbert Hoover’s and FDR’s budget-balancing blunders during the Great Depression would be trivial by comparison. And Congress probably couldn’t come up with $1.5 trillion or anything close to that anyway. Normally we pay off our Treasury bonds as they come due by selling more bonds, which we would not be able to do anymore if the ceiling is kept constant. So we would default on all the maturing debt, and our new bonds would lose their AAA status, instantly and permanently, and we’d have to pay higher interest rates on our new bonds. With enough defaults our bonds would quickly be junk bonds, paying sky-high interest rates. This would add to the federal deficit and debt, possibly a lot.  So much for looking out for future generations.

If the Republicans pull the same game of brinkmanship that they did last week in nearly shutting down the government, by convincingly threatening to not to raise the debt ceiling and then raising it at the last minute, the bond market will still go oink (as one of my grad school professors used to say), and interest rates on Treasury bonds will still shoot up, meaning higher interest payments and a higher burden of paying them off. Bond investors hate uncertainty, and if default even looks possible, they will no longer regard Treasuries as riskless.

All of this opposition to raising the debt ceiling is a combination of cynicism, ignorance, and self-sabotage. We do have a long-term debt problem that needs to be addressed, but blowing up the economy is the most idiotic and counterproductive solution imaginable. Threatening to blow up the economy is not much better. As long as the economy is in a slump, the optimal amount of spending cuts is $0 (if continued stimulus is out of the question), not $1.5 trillion. And it would be even more optimal to have no more debt ceiling.

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Stabilizing or flatlining?

14 August 2009

Among the latest signs of recovery are positive GDP growth rates for Germany and France in the second quarter of this year.  The media, apparently tired of reporting bad news, are trumpeting this as sensational news, which it really isn’t.

Both of those countries saw real GDP growth of 0.3% (or about 1.2% annualized), which is better than negative, but less than half of what normal GDP growth looks like. (The average for the last 30 years is 2.9% per year.) And in a real, robust recovery the economy is supposed to grow faster than normal; it has to, to get back to its potential. If GDP in those two countries had fallen by 0.1%, they would still be considered to be in recession — should so much importance be attached to a difference of 0.4% in a three-month period?

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Deflation

17 June 2009

For all the talking heads’ bloviating about the massive inflation to come from current Fed policies and the spending stimulus, as well as the media’s eagerness to pronounce the recession over, you can be forgiven for not noticing that deflation has not exactly gone away.  The Bureau of Labor Statistics announced yesterday that over the past 12 months wholesale prices dropped 5 percent and today that over the same span consumer prices dropped 1.3%; the respective declines were the largest since 1949 and 1950.

I said a few months ago that I was not particularly worried about deflation, and I’m still not, as it seems mild by historical standards and because expansionary Fed policies are making sure that money-stock growth is strong.  But an awful lot of people have assumed away the recession and are now wringing their hands about the threat of inflation, and these data suggest both impulses are premature.*

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Yikes

8 June 2009

G.D. vs now

From Barry Eichengreen & Kevin H. O'Rourke (h/t: Andrew Sullivan)

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:

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A dead economist for our time

16 February 2009

The new Economist has a great piece on Irving Fisher, the great American monetary economist who articulated the destructive aspects of deflation better than anyone before him.  Fisher was a weird dude — eugenics and Prohibition were among his passions — but his “Debt-Deflation Theory of Depressions” (the lead article in the first issue of Econometrica in 1933)  lives on.  Virtually every monetary economist since, from Milton Friedman to Ben Bernanke, has absorbed Fisher’s lessons.  So has the Federal Reserve.  Nobody tries to defend deflation anymore.

A fine piece in the new Forbes, “The Real Lesson of the New Deal,” by ex (in more ways than one) Reaganite Bruce Bartlett, complements it nicely.  Bartlett sketches the devastating effects of deflation in the early 1930s and throws in some sensible points about policy in the Great Depression.  (Hat tip: Jeff Sachse.)

11 million unemployed, 21 million out of work

9 January 2009

People it’s bad.  And the December 2008 unemployment report was worse.

11.1 million unemployed.  But only if you go by the traditional definition.  Add in the 8 million involuntary part-time workers (who say they’d be working full time if full-time work were available) and the 1.9 million discouraged job-seekers (who say they didn’t look for work in the past month because it looked hopeless), and you get an astonishing 21 million people wanting but not having full-time work.

This measure, sometimes called “underemployment” or “U-6 unemployment,” corresponds to a U-6 unemployment rate of 13.5%. That’s the highest in the short time the Bureau of Labor Statistics (BLS) has been keeping track of that statistic (1994-).

It gets worse.  Back to regular (U-3) unemployment, today’s news articles have said the 2.6 million jobs lost in 2008 were the most in a year since 1945, when the economy shedded 2.8 million jobs.  But but but — most of those 1945 jobs must have been in the active military, as World War II ended that summer and the BLS says civilian employment fell by only 1.1 million that year.  (And, as economic historian Robert Higgs has eloquently pointed out in numerous papers, overall U.S. economic well being was much higher after the war, despite the end of “full employment.”  The returning veterans surely preferred being victorious but temporarily out of work to continued combat.)  So you’d have to go back even farther to find a year with as much U.S. job loss as in 2008.  How far?

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Fiscal policy in the oughts

22 December 2008

Everyone’s expecting some fairly big fiscal stimulus bill to emerge early next year from Congress and to be signed by President Obama, but let’s not forget about what’s happening right now at the state level.  Most states are constitutionally required either to pass a balanced budget or to have their governor submit one, so right now the talk in the statehouses, notably here in New York State where I live, is all austerity all the time.

Austerity budgets — draconian spending cuts, tax increases, or some combination thereof — are the last thing any economy needs during a recession.  The backfiring “Hoover” tax increase of 1932 is forever held up as one of the Lessons From the Great Depression.  Another lesson, familiar to economic historians though not so much the general public, is that the overall fiscal stimulus during the 1930s was actually quite small, as the New Deal deficits (which were actually not that huge in relation to the economy, as Paul Krugman reminds us) were largely offset by budget-balancing efforts at the state and local level.  (The classic reference is E. Cary Brown’s “Fiscal Policy in the Thirties,” American Economic Review, 1956.)

This point about the government’s overall fiscal thrust might be even more important now than in the 1930s, when much if not most of the (partial) recovery of 1933-41 came from monetary expansion, mostly in the form of gold inflows from Europe.  (Christina Romer, the incoming Chair of the Council of Economic Advisers, has an article about this, “What Ended the Great Depression?”, in The Journal of Economic History.)  Right now, by contrast, the Fed is trying everything and then some, and doesn’t seem to be able to get the economy going again.  So it may be up to fiscal policy.

Right now it seems to be mostly talk at the federal and state levels.  The White House and Congress are in lame-duck mode, so nothing very concrete is being proposed.  State legislatures are home for the holidays, and in states like mine where the governor has to submit a balanced budget but the state doesn’t have to pass one, there’s even less certainty.  My take is that the federal stimulus package should not skimp on aid to state and local governments.  For all the dysfunction of some state governments (like my own), their budgets reflect the needs and priorities of their people to at least some degree, and ignoring them just seems like bad policy.  (I remember, when Clinton was getting started in 1993 and talking about an economic stimulus plan, hearing David Gergen deride the new president’s planned aid to state and local governments as “walking-around money for mayors.”  I’m sure those kinds of dismissals will be common in the halls of Congress in 2009.)

My nightmare is that Congress passes a “Washington Knows Best” stimulus package that mostly stiffs the states and instead puts the funds into projects of its own choosing.  Thousands of Bridges to Nowhere, and fifty state governments in distress.  If that happens, the recession could be a long one, and could feel like a depression for anyone who works for a state or municipal government.