Future Economists Will Probably Call This Decade the 'Longest Depression'
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The most frustrating part of this "longest depression" is that in our hyperconnected age, there more ideas than ever to at least try, from guaranteed income to subsidized apprenticeships, yet our elected representatives spend at least half of their time asking for money to run in their next election, and nothing at all gets done. For at least the United States, any substantial economic reform will require a corresponding reconstruction of how our representatives campaign and are elected and held responsible to the needs of their constituents, lest the economic engine be left to muster no more than a tired sputter.
That being said, I agree that this problem has its roots in corrupt politics.
UBI has been experimented with in many locations, from Canada to Namibia, and they often showed the same effect: some people dropped out of the labor force, others did so but to be homemakers, volunteers, and so on, and for many of the rest, their incomes improved because they had a reliable safety net and worked to increase their earnings so they could live better, as we all do.
We can consider till the cows come home, but people have put up with debate for too long. They need action.
Roughly the same thing as one country that offers universal basic income but doesn't control its borders, for the exact same reason?
Also, UBI isn't magic. If it would not work in a state individually, it does not become practical by banding 50 states it doesn't work in together. In fact, with the size of most US states, that's just generally true; it is not possible for something to not work in a state due to resource contraints but suddenly become possible when 50 insufficiently-resourced states band together.
One example to look at would be the cities of Portland, Oregon, and Vancouver, Washington. A lot of people choose to live in Vancouver because Washington has no income tax and spend their time and money in Portland, which has no sales tax. So one could argue that the insufficient resources of a state are a function of the expected tax base exodus if it is cheaper to move and keep doing business than to stay and pay.
http://thf_media.s3.amazonaws.com/infographics/2014/12/CP-Fe...
The lowest quintile of households have a negative effective tax rate.http://krusekronicle.typepad.com/kruse_kronicle/images/2008/...
A UBI without preconditions would just compound existing spending.
Keep in mind that during the great depression you had fascists in Italy and Germany, and communists in Russia.
Now the fascists have gone underground, and the communists have imploded.
All this gives the current mainstream economic thinking an air of correctness that it didn't have back then, by "virtue" of being the last system standing.
Sadly what is happening now is the rearranging of deckchairs on a sinking ship.
The big names of economics are arguing about where, if at all, the "frictions" are to be found in their models.
This while basically ignoring that the world right now is in the biggest private debt hole since the great depression, because they think that debt and savings are one and the same (and therefore sum to zero).
I think one of the top-3 issues facing the US right now is we need a lot more power devolved back to the states... not out of a "state's rights" sense of the argument, but out of a sheer engineering argument that trying to run a large and diverse country from one city is not working in practice, and there's no theoretical reason why it should work. Diversity and central control are, if perhaps not necessarily "incompatible" in the strictest sense of the term, still at great odds with each other; the central authority is forever tempted to homogenize diversity to make central control easier.
Nobody really believes in the existence of this Federal government that you and nitrogen are hypothesizing for solely rhetorical reasons. It's just an argument picked up briefly to advocate for more government, then discarded in the next moment, because you're not willing to live by the rest of its implications (namely, that where you and the Federal government disagree, the Federal government must be correct; if you are not willing to say that clearly, this argument falls apart). It is not rational to compare real state governments to hypothetical federal governments.
Personally, I think it's just you can sort of imagine a state-sized government, but the Federal government is just inconceivably large so you end up modeling it by what you imagine it could conceivably be, rather than a model that resembles what it is. Other than the fact our Federal government is more interested in fighting Christianity than enforcing it, I could substantiate everything else you said for our Federal government, too. In fact, some of them are clearly more the responsibility of the Federal government right now.
The federal government is corrupt and needs to be reformed. We need campaign finance reform, and the ability to recall federally elected officials.
Is there not real diversity? Are there not legitimately different cultures in different parts of the country? Do these cultures not call for different solutions?
You really can't have both of a political culture of "celebrating diversity" and "one-size-fit-all from Washington DC solutions".
Also, why not start at the state or local level?
The Federal Reserve expanded credit to give us the Roaring 20s stock market. Eventually, there HAD to be a correction. Instead of letting things correct, government interferred and made it worse. And then kept repeating that.
And we've done the same thing with the housing bubble.
Is there a source for this? Everyone I know believes that we still are in a depression, so it's probably just my social circles. I'd be interested to see the stats behind that.
The one thing I hear a lot is: The statistics we are using to measure this are BS. One example: We don't account for people who are under-employed, which is important to note in long-term depressions such as this one. The other things I typically hear are quite anecdotal: "I have family in Rnowheresville, $some_state, and they have no jobs out there!"
They don't bother looking into the reality that retirements are being delayed and most underemployment or nonparticipation is within the prime working age demographic.
Point this out, and the response is downvoting. HN emphatically does not want to accept the possibility that the economy is anything but amazing, for reasons I cannot understand.
https://en.wikipedia.org/wiki/Long_Depression
unemployment stayed low, very slight deflation persisted, and over the 30 years GDP per capita and GDP of the US grew considerably.
More likely, they will look back and wonder why so many people thought things were bad when, by all objective measurements, things were actually quite good. Low inflation, low commodities prices, decent wage growth, cheap housing, strong stock growth, a huge surplus of investment capital.
These are not the case in California, where the opposite is unfortunately true.
Fundamental changes to our economic policy would probably last dozens or 100s of years, and could not easily be rolled back even if they hurt the economy.
The phrase 'Farm subsidies' doesn't quite do justice to what was put into place. The phrase sounds like just giving farmers money to grow stuff, which people might think is inefficient but probably not that big of a deal in the grand scheme of things. After all, these sorts of subsidies should increase supply and lower prices.
The reality is there's a tangled web of price controls, subsidies, import quotas, government purchases, etc. that in many cases have resulted in higher food prices, not lower food prices as simple subsidies might imply.
Take sugar, for instance. We have import quotas and tariffs on sugar resulting in higher sugar prices in the US than in the rest of the world despite having sugar growing regions in Mexico or the Caribbean on our doorstep. This is one of the reasons that we use high fructose corn syrup in everything instead of sugar. If we didn't have these laws, we'd have cheaper, more abundant sugar and probably less HFCS infused food.
Its also a stupid policy.
To add insult to injury we also have export subsidies for milk, so not only do we pay the price of higher milk at home we also pay for world prices to be lower.
Both Florida and Hawaii would like a word with you. For that matter, Utah, Idaho, and Colorado (at least) used to grow large amounts of sugar beets. That ended in the 1960s or 1970s (I wasn't old enough to know if government policy changes were responsible).
Invoking the Trading with the Enemy Act of 1917, Roosevelt declared that "all banking transactions shall be suspended." Banks were permitted to reopen only after case-by-case inspection and approval by the government, a procedure that dragged on for months. This action heightened the public's sense of crisis and allowed him to ignore traditional restraints on the power of the central government.
In their understanding of the Depression, Roosevelt and his economic advisers had cause and effect reversed. They did not recognize that prices had fallen because of the Depression. They believed that the Depression prevailed because prices had fallen. The obvious remedy, then, was to raise prices, which they decided to do by creating artificial shortages. Hence arose a collection of crackpot policies designed to cure the Depression by cutting back on production. The scheme was so patently self-defeating that it's hard to believe anyone seriously believed it would work.
-- snip --
Yet after all this, the grand promise of an end to the suffering was never fulfilled. As the state sector drained the private sector, controlling it in alarming detail, the economy continued to wallow in depression. The combined impact of Herbert Hoover's and Roosevelt's interventions meant that the market was never allowed to correct itself. Far from having gotten us out of the Depression, FDR prolonged and deepened it, and brought unnecessary suffering to millions.
What will be the ultimate result of the interventions you propose? How are we examining the long-term effects of government intervention in the economy and cutting back the government where it is harmful to prosperity?
What about the acute depression of 1920[2]? Are we learning any lessons from that?
My weasley counterpoint is to say that FDR ultimately made more right moves than wrong, and he did not become, as he feared, "the last president".
Economic manipulation aside, his public works initiatives like the Tennessee valley authority gave people good work when there was none, and strengthened our national infrastructure for the economy to use as it grew. The common conclusion is that the only real cure for the Great Depression was World War II, but from a Mars-eye view, wasn't that essentially an enormous public works program?
Probably the common conclusion, but I think 1946-1948 congressional action had quite a bit to do with the the baby boom years. Its an interesting era to read up on.
The New Deal had already kickstarted the economy by the time WWII rolled around - although obviously WWII served as an even larger public works and employment program. (The government did, however, have wage and price controls for many decades after the Great Depression.)
As you can see in the chart, GDP had already doubled by 1941, returning to pre-Depression levels, with New Deal programs beginning in 1933. You can see that WWII again nearly doubled GDP from 1941 to 1945.
Furthermore, your source is as partisan as they come. 'Austrian' economics exists pretty much only on the internet. Mainstream economics has progressed since 1930.
http://graphics8.nytimes.com/images/2012/11/19/opinion/11191...
As you can see, there was nothing more than a brief spike in the general upward trend in exports. The "Europe bought tons of stuff from us, fueling our economy" story is simply not true. Exports as a share of GDP briefly peaked at 8% and then rapidly returned to prewar levels by the early 1950s.
Why does everyone overlook the ramifications of this action?
Further, environmental devastation played a huge role in the Great Depression. https://en.wikipedia.org/wiki/Dust_Bowl
Secondly, his reasoning is, as he says,
"Back before 2008, I used to teach my students that during a disturbance in the business cycle, we'd be 40 percent of the way back to normal in a year."
Yet, this has never been the case after a major crash. Not in 2008, nor '99, '87, '78, etc. Compared to history, we are doing a bit better than previous recoveries.
Sounds like he's just pissed off that the US is the doing well despite not following his political beliefs regarding economic policy. It's like a preacher on the street corner talking about how we are all on the path to hell, despite all evidence to the contrary.
There are some interesting parallels to the current time - that was the era of the robber barons, for instance.
The 2008 recession, while deep and sudden, was narrow, only lasting about 16 months until growth picked up, where it has remained. Hardly a decade.
Also, the authors seem to be cherry picking the bad data (weak wage growth, China, shrinking labor force) and ignoring the good data such as exports, consumer spending, robust S&P 500 profits & earnings, technological innovation, stock market gains, etc.
Right now, we’re in a Goldilocks economy of modest growth, no stagnation, tame inflation, and no meaningful economic headwinds. Some pundits like Summers and Krugman bemoan how America’s economic growth is too anemic, especially compared to the 40′s and 50′s, and that its best days are behind it, but as I show here and in the graph below, US GDP growth has broken from the pack, since 2008 exceeding pretty much all g-20 nations. Yeah, 2-3% GDP growth ain’t great, but compared to pretty much everywhere else that has either no growth (Japan, UK, France) or high-inflation growth (Turkey, India, Brazil) – it’s pretty good.
source: http://greyenlightenment.com/america-is-not-in-decline-long-...
And that is especially impressive for an economy as large as America. We’re never going to get back to 40′s era growth, and that’s fine. Law of large numbers and diminishing returns. It’s harder to grow an economy that is 5x larger at the rate it was growing when it was 5x smaller.
Post-2008 GDP growth is pretty much back to the historical average, or at least back to where it was in the late 90′s and 2000′s. Not hyper-speed growth, but certainty not recessionary.
Recent real GDP (below) doesn’t differ too much from historical performance:
http://i.imgur.com/znVtqaH.jpg
Real US GDP growth is roughly back to where it was between 1997-2007, and no one was complaining about stagnation back then.
That's an statement that you don't see frequently. Huge respect to professor DeLong.
Wait, how do you know this isn't the long-term trend now?
If we want to continue with our economic preferences toward growth and capitalism, fine, but we also need to make sure the people at the bottom have enough to contribute meaningfully too, or we blunt the potential in all of that.
It really is like a field. Farmer grows some years of high yield, high drain on the soil crops. Good times, until they aren't.
Greed may see sucking it dry as a good thing, but the expectation of high profit at low investment just won't last. What happens when the bounty in a rich, fertile soil is gone?
Tepid returns, that's what. Increases in risks and costs too.
Edit: One could seek new, fresh ground, and repeat this. At some point, there is a lot of sour, drained ground with the winners all fighting over the ever shrinking fertile ground remaining, a clear case of diminishing returns at the macro level, despite many success stories suggesting otherwise.
On the other hand, either taking a little less, say by staggering crops or resting ground, or reinvesting some of what is gained to keep the ground healthy and fertile, act together and the bounty possible goes from an awesome peak to something less, still good, but sustainable longer term. Wealth can still be accumulated, but perhaps less liquid and larger amounts happen over longer periods of time.
In a very general sense, this all feels a lot like placing blame and shifting risks and costs around to avoid the more simple, direct and growing issue of how many of us just aren't able to participate in the economy in a growth meaningful way.
In this sense, disruption is like crack. Big gains are often had, and we like, want and need those, but it's all just buying more time, not actually getting at root causes. Because of that, many larger gains are offset by problem growth and tepid demand growth, neither of which do any of us longer term good.
And while each success appears to hint at an answer, we in a macro sense, just can't seem to string enough of them together to make sustainable gains.
GDP limps along, while we all chase bright spots... and for many, standard of living declines, despite some growth which should seemingly preserve at least parity.
The only new information presented here is the professor's (extremely late) admission that his strict adherence to a misguided school of theoretical economics that no longer applied in the face of structural changes and non-economic factors ("politics and ideology" as he repeats throughout the article) was wrong. Great - how much did they pay you to put your brand name behind this article in order to lend The World Post, the Huffington Post's new highbrow project, credence?
As for what the author says we should do:
What we need now is 1) debt relief to unwind the overhang and 2) much tighter financial regulation to prevent the growth of new fragilities. And if those prove inconsistent with full recovery, then we need massive government spending on infrastructure and other investments financed by money printing until full employment is reattained.
The second task will be one of political organization. For until politicians, finance ministry technocrats and central bankers feel under pressure to respond to and in fact internalize the diagnoses of Stiglitz, Eichengreen, Wolf and others, our problems will remain, as Stiglitz puts it, "not rooted in economics, but in politics and ideology."
And it is only after those ideological and political blockages have been removed that the tasks of economic policy -- and then of shifting policy to deal with the new problems that arise as consequences of fixing our current economic policies -- can be seriously begun.
1) debt relief to undwind the overhand
First of all, which debt is he referring to? Which overhang?
Bank mortgage debt caused by people taking out stupid loans on stupid housing projects, then walking away from that debt? That was already absolved and nationalized by in 2008.
Federal government debt? So we're going to ask everyone (including our own pension funds) who owns a treasury bond to forget that they have some claim that the US gov promised to repay? Or should we continue with QE and currency wars to try and devalue the dollar so that old debts become relatively less expensive, and long-term interest rates continue to fall?
Student loan debt that cannot be discharged through bankruptcy? This one is actually semi-reasonable, but would create a huge moral hazard for anyone looking to invest in education. We should probably stop creating that debt in the first place.
The debt that the captains of finance and industry owe to the average American for leading their companies and the country in an irresponsible and destructive fashion? Only one trader saw jail time post financial crisis - Kareem Serageldin, a senior trader at Credit Suisse who is serving 30 months. The rest have apparently absolved their debt through billions in fines paid out by the shareholders of the companies they managed. [1]
2) much tighter financial regulation
We established the Financial Stability Board, which adopted Basel III capital requirements, countercyclical capital buffers, surcharges for TBTF banks, stricter liquidity coverage ratios, minor decentralization of TBTF banks, enhancements to the terrible securitization model, etc. [2] What additional regulation is the author calling for, specifically?
Not to mention that financial regulation is causing the banks to be unable to lend out QE money! AKA restricting aggregate supply! So even if we were able to boost aggregate demand, it would be met with banks shrugging and saying - we need to keep more capital due to new regulation so we can't invest in your business or provide you with a loan, sorry.
3) massive government spending on infrastructure and other investments financed by money printing until full employment is reattained
Why would you return to Keynesian ideals when you've just admitted they were wrong?! We've already "printed" all the money we need through QE. We then gave it to the banks, who have subsequently parked it with the Federal Reserve, earning interest on it due to the LACK OF AGGREGATE DEMAND that the author describes in the first paragraph! It would make more sense for the Fed to enact a negative interest rate in order to spur the banks into loaning that money out!
As for spending on infrastructure - what budgets should we cut to get the funds? Social security and healthcare (~50% of budget [3])? Older voters would destroy any candidate who would even suggest such a thing, as they very well should. They contributed what the gov said was their fair share, they expect to be paid back in their old age.
Defense department (17%)? Good luck getting that past war lobbies and a public that's terrified of any mention of terrorism whether real or imagined. Other mandatory (12%)? It's mandatory. Interest (6%)? Can't change without renegging on bond contracts which would be terrifically destructive.
[1] http://www.theatlantic.com/magazine/archive/2015/09/how-wall...
[2] https://www.imf.org/external/pubs/ft/wp/2014/wp1446.pdf
[3] https://en.wikipedia.org/wiki/United_States_federal_budget#/...
So people have a moral ('fair' is a moral judgement word) right to unbounded medical services because some politician told them in the past that they could have things without paying for them? Would it be 'fair' for the youth of today to pay 50% of their earnings (plus all existing taxes) to the government to provide those services?
Can I empathize with someone who paid into these programs with years of hard work and is expecting the "fair" payout they were promised? Yes.
Am I making a value judgement of what is truly "fair"? No. That's completely subjective and can be argued in favor of either side.
> As for spending on infrastructure - what budgets should we cut to get the funds?
He wasn't proposing cutting budgets to get the funds. He was proposing running increasing deficits to get the funds. While I consider that to be insane, given how far in debt the government is, and while it seems to contradict his first proposal, we still should state his position correctly before pointing out where it's wrong...
Argument fallacy alert: https://en.wikipedia.org/wiki/List_of_fallacies
it was a stupid flip comment based on that, probably best it was downvoted