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Recession Reality

Submitted by chemjeff on Tue, 01/27/2009 - 18:15
in

We now live in a climate gripped with fear.  It's the worst economic times since the Great Depression, we are told.  Government must act swiftly, boldly, and decisively if we are going to survive the coming maelstrom.  We have Depression countdown clocks and the like.

But, is the fearmongering justified?  Here are a few facts to illuminate the discussion.

Let's look at unemployment.  The most recent statistics from December 2008 reveal that the national unemployment rate is 7.2%.  That's bad, but is it the worst it's been since the Great Depression?  Hardly.  It is worse than the 2001 recession, but we are still below the peak of 7.8% set in June 1992 for the most recent recession since then.  We are still far below the peak of 10.8% experienced during the 1980-82 recession.  In fact the unemployment rate was at or above 7.2% all the way from December 1974 to March 1977.  They were bad times, sure, but definitely not a Second Great Depression.  Did you know that the unemployment rate was above 7.2% for most of 1958?  You normally don't think of the 1950's as a time of great economic peril.  So, to put in perspective: The unemployment rate is high, but not even as high as it was in the 1980-82 recession, and definitely not approaching Great Depression levels of 15-25%.

Let's look at GDP.  The data for 4th quarter of 2008 isn't out yet but one group has forecasted that it will fall at an annual rate of 2.9%.  But, that was way back in November.  A more recent forecast is that it will fall at an annual rate of 6.0%.  Six percent!  That's huge, right?  Well, yes and no.  The last time GDP fell by this magnitude was in 2nd quarter 1980, and then in 1st quarter 1982, when GDP fell by 7.8% and 6.4%, respectively.  But, suppose the forecast is wrong - suppose GDP falls by more?  Well, from 1930-32 GDP fell by 8.6%, 6.4%, and 13.0%, respectively.  But this was because we were in a deflationary spiral (see below), and things could only get as bad as the Great Depression if GDP were to fall by similarly large amounts for three consecutive years.  If this were to happen, the Democrats' economic stimulus wouldn't do a damn thing about it anyway.  To put it in perspective: Right now the US GDP is about $14.5T.  If it were to fall by the same amounts as it did from 1930-32, by time we were done, the GDP would be at $10.8T, or a loss of $3.7 trillion dollars.  So based on $800B of spending, you'd need a Keynesian multiplier of about 4.5 in order to generate economic activity of that magnitude.  So quibbling over multipliers of 1.2's and 1.3's would thus be ridiculous.

Finally, inflation.  Are we in, or on the verge of, a deflationary spiral?  Deflation is caused when there is a simultaneous contraction of the money supply and expansion of the supply of goods.  Because there's less money around, the price of goods falls, and the deflationary spiral starts when the price is lowered below a company's profitability margin.  The result?  Disaster, as companies cannot afford to stay in business, leading to bank failures as the companies cannot repay their loans... and the spiral begins.  But in order to have a deflationary spiral, there's gotta be a contraction in the money supply.  One perusal of this graph should convince you that there isn't.  The money supply has increased beyond all historical precedent.  What we have to fear most is devaluation of the currency via inflation, rather than a deflationary spiral.

So, to sum up:  Things aren't as bad as the fearmongers would have us believe.  Our most recent historical precedent for when things were this bad was the 1980-82 recession.  And, did we need massive economic stimulus to get out of that one?  No, I think this man had other ideas.

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Comments

Good Points All

Submitted by Cahnman on Tue, 01/27/2009 - 18:26.

Always good to remind ourselves what the data says.

Look at the slope of the curve

Submitted by NextRightNando on Tue, 01/27/2009 - 18:47.

Look at the slope of the curve for the unemployment rate. We'll be in double digits by the end of the year. Parts of the country, from Michigan to the Rio Grande Valley are already there.

As far as GDP, your argument is just incomprehensible. -6% is a huge number, but don't worry, it might actually be huger?

As for it being 1980 all over again: here is what Martin Feldstein, chairman of President Ronald Reagan’s Council of Economic Advisors has to say:

The case for fiscal stimulus

Governments around the world are now developing massive fiscal stimulus packages that will cause unprecedented peacetime budget deficits. The fiscal deficit in the United States this year is likely to exceed 10% of GDP. A substantial part of the increased deficit will be due to a wide range of new government spending.

Under normal circumstances, I would oppose this rise in the budget deficit and the higher level of government spending. When an economy is closer to full employment, government borrowing to finance budget deficits can crowd out private investment that would raise productivity and the standard of living. Budget deficits automatically increase government debt, requiring higher future taxes to pay the interest on that debt. The resulting higher tax rates distort economic incentives and thus weaken future economic performance.

Of course, some government spending is desirable or necessary. But an increase in government outlays often means wasteful spending that produces less value than consumers would get from those same dollars.

Now, however, increased government spending and the resulting rise in the fiscal deficit are being justified as necessary to deal with the economic downturn — a sharp change from the reliance on monetary policy that was used to deal with previous recessions. Countercyclical fiscal policy had been largely discredited because of the delays involved in implementing fiscal changes and households’ weak response to temporary tax cuts. By contrast, the central bank could lower interest rates rapidly, which worked to raise household and business spending through a variety of channels.

Nevertheless, I support the use of fiscal stimulus in the US, because the current recession is much deeper than and different from previous downturns. Even with successful countercyclical policy, this recession is likely to last longer and be more damaging than any since the depression of the 1930’s.

The 40% decline in the US stock market and the dramatic fall in house prices have reduced American households’ wealth by more than $10 trillion, which is likely to reduce annual consumer spending by more than $400 billion. And the collapse of housing starts has lowered construction spending by another $200 billion. This $600 billion fall in demand is more than 3% of GDP. If not reversed, it will cause further cuts in production, employment, and earnings, leading to further reductions in consumer spending.

The usual monetary-policy response of lowering interest rates is unable to reverse this sharp drop in demand. The dysfunctional credit markets caused by the uncertain value of asset-backed securities means that banks and other financial institutions are unable to raise funds and are unwilling to lend. As a result, the central bank’s lower interest rates do not translate into increased spending on interest-sensitive investment and consumption.

So there is no alternative to fiscal policy if we want to reverse the current downturn. The resulting increase in the national debt is the price that we and future generations will pay for the mistakes that created the current economic situation. Those mistakes led to an underpricing of risk and the resulting increase in excessive leverage.

There are many reasons for the underpricing of risk and the rise in leverage. The exceptionally easy monetary policy at the start of the decade contributed to financial investors’ willingness to buy low-quality financial assets in order to get higher yield and to an explosive rise in house prices. The rating agencies miscalculated the value of asset-backed securities.

The increase in leverage was driven in part by government policies aimed at expanding home ownership among lower-income groups that have proven unable to afford that life style. Banking supervisors did not deal with many institutions’ low levels of capital and poor asset quality. A major challenge for the future is to fix the institutional policies that led to these problems.

The new Obama administration and the Congress are still working out the structure of the fiscal stimulus for the US. Although I support the need for a large fiscal package, I disagree with many of the specific features of the plans now under consideration.

Regardless of what is done to provide a fiscal stimulus, governments around the world must act to fix dysfunctional credit markets. Otherwise, credit will not flow and growth will not resume. In the US, reviving the credit markets requires stopping the mortgage defaults driven by negative equity. The US Treasury Department wasted valuable time in 2008 by not using the funds provided by Congress to deal with those housing-market problems. There is hope that the Congress and the new administration will now address that issue.

When the recession is over, the US and virtually every other country will have substantially higher debt-to-GDP ratios. At that point, it will be important to develop policies to reduce gradually the relative level of government spending in order to shift to fiscal surpluses and reduce the debt burden.

 

fiscal stimulus

Submitted by chemjeff on Tue, 01/27/2009 - 19:06.

So is your secret plan that if you can find enough op-ed pieces from economists that you agree with that have the word Reagan on their resumes, and repeat them often enough, that we the idiotic conservative masses will just follow along with Obama's plans like the unthinking zombies that you take us to be?

And if you read Mr. Feldstein's column carefully, you'll see that he says he favors fiscal stimulus.  He doesn't say he favors blowing a hole in the budget 10 miles wide and putting in every single pork barrel project that Congresscritters drool over and justifying it in the name of emergency.  One part that you didn't highlight: "Although I support the need for a large fiscal package, I disagree with many of the specific features of the plans now under consideration."  Heck I favor fiscal stimulus, as Mr. Feldstein defines it: using fiscal policy to boost economic activity.  The fiscal policy I favor are dramatic reductions in taxes, regulations and spending, focused towards small businesses and investors.  That's using fiscal policy to boost investment.  It's not the same as turning Uncle Sam into Santa Claus.

But if Mr. Feldstein really means that he wants Congress to spend, spend spend!, then I disagree with Mr. Feldstein.  I've explained why above.  You will now no doubt say "but I agree with the smart Mr. Feldstein and the rich Mr. Buffett and the intelligent Nate Silver and the Nobel laureate Dr. Krugman, all fine upstanding people, we should just do what they say, but ignore those terrible people over at the Heritage Foundation, they are just bought-and-paid-for right-wing shills.  These people don't deserve to be listened to.  But Feldstein?  He's an EXPERT so do what he says!!!!!!!"

My point on GDP is simple: In order to get Great Depression-era results, GDP would have to fall by more than what is currently being forecast for several consecutive years.  That is not even remotely likely.

Dittos

Submitted by Cahnman on Tue, 01/27/2009 - 19:29.

In order to get Great Depression-era results, GDP would have to fall by more than what is currently being forecast for several consecutive years.  That is not even remotely likely.

Exactly!!!

 

I realize it annoys you that Feldstein is advising Obama

Submitted by NextRightNando on Tue, 01/27/2009 - 20:09.

I realize it annoys you that Feldstein is backing Obama, but facts is facts.

Wall Street Journal

Martin Feldstein is an unlikely Democrats' darling.

The onetime presidential adviser to Ronald Reagan might even be considered the least likely advocate of government spending to boost the U.S. economy.

But given present circumstances, the Harvard University economist has changed his mind. Mr. Feldstein will be featured Wednesday at a Democratic economic forum, along with Robert Reich, former labor secretary and longtime liberal. Democratic leaders now mention Mr. Feldstein's support when they discuss their economic recovery plan, criticized by some as a pricey grab-bag of liberal goodies.

"We're down to fiscal policy, which pains me a bit, more than a bit, but I don't think we have a choice," said Mr. Feldstein.

Though a Republican, Mr. Feldstein, 69 years old, has longstanding ties to many of the economists tapped to serve in the Obama administration. His most famous student, Lawrence Summers, was named to head the Obama White House's National Economic Council.

From 1982 to 1984, Mr. Feldstein served as chairman of the Council of Economic Advisers under Mr. Reagan, taking with him a young Mr. Summers as one of his senior aides. It was a period of economic crisis, as another of the aides, Princeton University's Paul Krugman once wrote, giving Mr. Feldstein "the freedom to bring in a politically incorrect team of whiz-kids."

Mr. Feldstein was the long-time head of the National Bureau of Economic Research, building it into the country's most important research network for academic economists by the time he stepped down last year. He named Christina Romer, who will head the Council of Economic Advisers, and her husband, economist David Romer, to lead the NBER's Monetary Economics Program after Federal Reserve Chairman Ben Bernanke stepped down to join the Fed.

Douglas Elmendorf, new head of the Congressional Budget Office, was another of Mr. Feldstein's students. The Obama stimulus plan is directed toward health, energy, education, infrastructure and support for the poor. Although Mr. Feldstein doesn't oppose increased spending in those areas, he says he believes the government should also direct increased spending on defense, the intelligence community and the FBI, as well as on research.

 

So that is your purpose?

Submitted by chemjeff on Tue, 01/27/2009 - 20:24.

So that is your purpose? To annoy us? I've been wondering about this lately, Nando.  Why do you bother coming here?  It can't be to actually learn something about conservatism, or to engage in reflective, honest discussions, otherwise you wouldn't be spouting off such ridiculous conservative stereotypes that you do.  And you post frequently and voluminously.  Really, don't you have anything better to do?

slope of the curve

Submitted by chemjeff on Tue, 01/27/2009 - 19:07.

If you examine the slope of the curve for unemployment in 1981, we should be at 2,000% by now.

Chemjeff..... You have

Submitted by In between on Tue, 01/27/2009 - 20:05.

Chemjeff.....

You have brought up your laissez-faire approach to solving problems. Just as we have seen under Bush. Just do nothing.

So let us go back a few years.

Bush travels around the country campaigning before groups and kept saying for 3 years that "we are winning the war on terrorism" when in fact we were losing the war. I kept wondering when he was going to do something. And only when we had the Iraq Study Group, Bob Gates, General Petraeus, and Ambassador Crocker come up with an answer did we see results. People died needlessly.

We waited for about three days for a response from Bush and as people were screaming and as I watch during all this time, the response was that "Brownie, your doing a heck of a job." Again people died needlessly.

Five years ago we saw the deficits and debt pile up, and I wondered when he was going to do something about it. And he never did. 

Six months ago, we saw the country doing worse and Bush was traveling around the world. Oblivious to what was going on at home. And so things are still getting worse. The news around the world is worse. All westernized countries have had some sort of stimulus. 

Michigan has over 10% unemployment. Ohio is getting close. You lost the election due to the economy. Look at the electoral map and you lost the Midwest. That is where the manufacturing is at. That is where you left the middle class. It really is that simple. In every case when republicans lose elections, it is because they abandon the middle class. 

Bush has talked of "free trade" and he said it was good and he was oblivious to the factories closing and the loss of jobs. You not only have loss of jobs, but even those that are saved, it meant less in wages, healthcare coverage, and pensions. Cities and states are struggling as we battle globalization.

I don't like a lot of the pork in the stimulus package. I would like to hear more long term solutions. I can even agree to cut spending, but that is always easier said than done. We know one thing, Bush was never concerned on spending. And in fact, Cheney said "deficits did not matter."

One area we may cut spending is getting out of Iraq. While I do not want us to pull out too soon, one can hope that we no longer have to take care of 25 million people as Colin Powell once described. But we have that other war to contend with that was neglected for so long.

GDP, really I don't know what it means. I know that the rich got their tax cuts and a lot of jobs went overseas. We know their is a huge disparity between the rich and the middle class. So the GDP means different things to different people. Does it make sense to talk about GDP when you drive through black sections of cities, through Indian reservations, or through what was once manufacturing towns?

Well, we are certainly pumping up the money supply, and so far it has no effects on the economy. So maybe all this isn't doing what it is supposed to do. The fed can do no more.I do believe if the economy ever picks up, we will see this inflation.

We have had 8 years of tax cuts and we are back into a recession. So even the tax cuts could not save us. And now more tax cuts are becoming more ineffective.

So the last resort is the government. And that is where we and other countries stand with stimulus packages. But as I have said so many times, there need to be long term goals. We cannot keep ignoring globalization. We have to attack it head on. We do not allow a CEO to do nothing. When CEO's see a problem, he attacks it. And our country has done very little. 

But we do what what we do best. That is wars, tax cuts from borrowed money, the neglect of the infrastructure, cities and states going broke, factories closing, people losing jobs, all parts of our government needs fixing, abusing the constitution, interference with religion, stopping science, bailouts, and the list goes on. So when we go through the cycle we just borrow some more and that solves all problems. Oh, I forgot. Tax cuts and laissez-faire solves all problems. Or so the republicans say. 

I forgot to add this.

Submitted by In between on Tue, 01/27/2009 - 20:39.

I forgot to add this. According to ABC news tonight 27 Jan 09. To stimulate the economy it was decided to have both a tax cut and government spending. The return for every dollar for spending is $1.50, the return of a tax cut for every dollar is 75 cents. 

I see a balanced approach as best

Submitted by Paleo-Skeptic on Tue, 01/27/2009 - 21:20.

A prudent program of government spending could be beneficial.  From the view of stimulus, the money should be spent in the next 6 to 9 months.  Infrastructure and other projects with a high Keynesian multiplier should be targeted.  The GOP should set as a goal that 50% of all new spending should be paid for by reductions in existing programs.

The tax rebate didn't work because personal debt load is high.  It still is.  MEWs won't fuel the economy any more.

Business investment is down due to a crisis of confidence.  Once things start to pick up just a little, businesses will begin to invest again, and the pickings will be good.  Tax credits directed to small businesses or businesses that compete with imported product would provide significant impact as stimulus.

Increased gov't spending will be realized as inflation later.  For the time being, the effect would be to reduce deflationary pressure during the period of deleveraging.

Also, the rapid fall of oil prices will have some effect on GDP; just as the rapid run-up of prices did.