In the course of selling his New Deal to the impoverished American public, president Franklin Delano Roosevelt pitched his reforms by stating: "It is common sense to take a method and try it. If it fails, admit it frankly and try another, but above all try something. The millions who are in want will not stand by silently forever while the things to satisfy their needs are within easy reach."
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's why reform has to start at a local level. Solutions that work brilliantly in Massachusetts have no guarantee of succeeding in Mississippi. Whatever ends up working broadly should be adopted by the federal government. Perhaps they could provide a block grant to each of the states to experiment with reforms and study the effects.
Lots of things probably won't work very well at the state level, but might nationally. Consider what could happen if just a single state offered universal basic income, for instance.
That's a good point. I find it hard to imagine the system not straining after a while within a single state. Perhaps as a reach I could offer Massachusetts and its model health care system as an example. It's a high tax state with a great health care system right next to an extremely low tax state (New Hampshire). Many people who live in MA travel to NH to shop without sales tax, but very few who work in MA live in NH. So if MA instituted basic income, it might have the effect of bringing people to the state to live off the dole, but things are expensive there and some might find it easier to either work to have a higher standard of living than one with the basic dignities of food and shelter, or some people will commute from neighboring states.
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.
"Consider what could happen if just a single state offered universal basic income, for instance."
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.
I know I'm contradicting my previous point, but a federal program would inhibit tax-paying citizens and corporations from moving to the most convenient nearby location to do the same business but for cheap.
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.
They also spend their time and money in Portland because Vancouver is a hole. And I used to live in St. Johns (AKA Tweakville) so I know whereof I speak.
Single nations and even single cities in the EU are adopting universal income as we speak. I'm sure they found a credible (though perhaps not not guaranteed) way to make it work. In any case, we can learn from their experience.
I think it is more that this time round, economics as a "school" is quite a bit more entrenched.
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).
Maybe the answer is somewhere in between all these failed, xenophobic systems. It always frustrates me when I see good ideas shot down in the public discourse because they sound too much like Communism or Socialism. There is a middle ground that we can't ever get to as long as politics are so polarized.
I think it's more in the increasing centralization of power. The central power is bigger and thus harder to move by sheer inertia, more risk-averse, and also more able to simply implement whatever it likes regardless of what anybody else thinks because it is isolate from the trenches.
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.
I doubt that shifting power to the states will solve many problems; after all it's the states that want to force Christianity on students, ban the teaching of science, deny healthcare to those most in need of it, lower standards for students so many HS grads are still illiterate, defund universities, and hand monopolies to oil, mineral, and telecom companies.
As with my other reply... do you somehow imagine that all Federal agencies are wonderfully and wisely managed? By what mental gymnastics are you maintaining that belief? Have you ever been critical of Homeland Security? Ever thought our government was too responsive to concerns about terrorists? Ever thought they were responding to climate change incorrectly? Think Obamacare is not everything it should be?
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.
What on Earth do you think the Federal government is, exactly? By what magic is a government over ten million people to be distrusted, but by aggregating 325 million people's government all of which are also ruled over by these presumably nontrustworthy states, are magically transformed into bastions of sense and sensibility? Where's the line, exactly? It's all the same people!
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.
No, some states actually do a good job at some things while other states completely fail at those things. When you mix the good states with the bad states and form a federal government, you reduce the badness in the bad states.
If diversity is real, then the things that are broken can't be solved by the central authority practically.
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".
There's needs to be core set of laws which must remain at the federal level. States should be able to pass their own laws to suit diversity to a point. If they go beyond that point then the federal government needs to put things right.
Shouldn't the federal government's legislative reforms move at a snail's pace? I agree that the ideas you've mentioned are worth exploring, but what makes you think that they'll try the good ideas?
State and local levels are the only places where there can be any real experimental reform. Just look at Colorado and the other states that have legalized marijuana by referendum. Direct democracy isn't necessarily better than elected representation, but politicians are motivated by the necessity of power, and so whoever controls the politicians controls the political process. People shouldn't be left up to decide everything, but they should have the power to question the decisions of their representatives and put an issue which garners enough support to a popular vote.
And businesses in the now legal marijuana business in Colorado are having problems getting into the federalized banking system because marijuana is illegal federally and banking powers have been centralized.
Growing pains. Problems aside it does show that there is a sizable market and the health effects have not panned out to rot the state from the inside out, as drug scaremongers have sworn would happen for decades and decades.
Hoover started out doing austerity and raising taxes to balance budgets for the first couple of years, then turned around after that didn't work and started programs very similar to the new deal in his last year in office.
Ironically, FDR's economic policy amounted to "we'll try every kind of beating until morale improves". Completely incoherent market interventions aren't good for markets.
People that want to buy and sell will do that, unless someone is interferring with price or threatening profits.
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.
In my opinion, the most frustrating part is that despite our hyperconnectedness, people still believe the propaganda that we're not in a depression or that our leaders got us out of the recession. Future economists will call the decade the "longest depression" not out of 20/20 hindsight, but simply because there will no longer be a need to make things seem rosy.
The terms "depression" and "recession" aren't just catch alls, they have actual definitions. And "we" (depending on the country, i'm assuming USA) are not in either.
Depends. If you look at the bottom 90% and their economy - we are in depression. Or extremely deep recession. The top 10% are both capturing the lion's share of new growth and siphoning wealth from the rest.
Put another way: the proposition is that the current definitions of those words might not be as useful as they once were because assumptions implicit in them have changed.
If anything the story of communication has been one of ever greater methods to spread disinformation. Russians are swarmed on social media with paid shills for the government, and it makes it almost impossible to discern a genuine opinion or paid propaganda. I doubt there is a single person who is truly immune to misinformation, except perhaps the Beatles' "Fool on the Hill."
Fortifying myself against propaganda is one of my perpetual personal development projects... the internet is probably the most difficult information media for this task.
> people still believe the propaganda that we're not in a depression
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 housing costs alone in high growth cities like San Francisco, Portland, Seattle, and so on should be enough to show that for many people, things are just fine. At least, for them. The longer things work out for you financially, the less of a problem you see around you. That's the difference between seeing a homeless person and thinking "how unfortunate that the vulnerable fall through the cracks in such a rich society and have to fend for themselves to survive" and "get a job, you bum!"
That's what is interesting to me: Most of the people I hear complain about it are in those cities, and they are doing just fine. But someone can be doing OK, and still believe the country is not.
What is the basis for everyone you know believing this? "Depression" has an objective definition that objectively doesn't currently hold. Do they not believe the reported numbers of the GDP, or are they using their own incorrect definition of the term?
Disclaimer: I am not an economist. Some of their discussions go well above my head, so it's possible I'm mis-understanding\mis-interpreting what they say. This is also why I'm curious as to a source.
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!"
The standard head-in-the-sand HN response to pointing out the disastrous LPR is "old people are retiring".
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.
I'm very willing to accept the idea that the economy's performance is uneven, with legitimate hardships in some areas/industries/demographics/etc. If what people observe is that there aren't any jobs near them, I wish they would say that, and not describe any economic trouble as a "depression".
There's room for debate in the different numbers that are used to measure employment rates, and you could argue which measure is most important changes over time. But as I understand it, unemployment is a frequent result of an economic depression and not part of its definition, so whether or not there's a depression does not depend on what number is used. Of course, macro measurements don't put bread on the table and obviously jobs matter, and there not being opportunities available in a particular place/time sucks. I'm not denying that. I'm just advocating that people say what they mean and use the correct words to describe their observations.
The propaganda is the statement that we are in a depression. We are NOT in a depression, nor a recession and have not been for several years. So, in fact, historians will not at all call this period a depression.
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.
Does no one remember how negative everyone was at the height of the boom in 2007? We look back on that period as a time of incredible prosperity, but I remember it was basically the same as today: everyone complaining about everything.
It's not common sense to freely experiment with policy unless you're trying to sell a controversial progressive agenda (like, FDR in 1933). And I say this as a progressive who supports much of what he did. Applying sweeping changes is difficult and costly, and undoing them is even harder. For example, farm subsidies, which are generally unpopular, were put into place by FDR and just can't seem to go away.
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.
FDR was dealing with a far worse situation than we are used to. People where starving and huge tent city's where showing up, that's a recipe for revolution. Don't forget the communist party was gaining significant momentum. So, waiting was no longer a realistic option.
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.
Yeah, but we can grow corn and can't grow sugar. It a classic protectionist policy. Since HFCS and sugar are basically perfect substitutes, and the price of HFCS is so low it hardly seems to matter to consumers.
Sugar is just a single example. Similar policies exist for milk, for instance.
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.
> Yeah, but we can grow corn and can't grow sugar.
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).
Yeah, but we can grow corn and can't grow sugar. It a classic protectionist policy. Since HFCS and sugar are basically perfect substitutes, and the price of HFCS is so low it hardly seems to matter to consumers.
FDR tried lots of thing that had the opposite of the intended effect.
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?
This is the most detailed rebuke I have seen yet. Thank you for adding this to the conversation.
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?
> The common conclusion is that the only real cure for the Great Depression was World War II
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.
OK, but Europe was at war starting in 1939, and was trying to buy all kinds of stuff from the US. That's still WWII kickstarting the US economy, even though the US wasn't in the war yet.
The very same table I linked showed that story doesn't make sense. Look at the exports column. Nothing to write home about until after 1945. Definitely not an impact remotely comparable to the huge increase in government spending.
Look at an economic chart pre and post New Deal. Not only did FDR's policies help the US recover from the depression, it set the framework for the strongest economic growth of the US' history (pre-1930s growth was much slower than it has been post 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.
But post 1945, Europe had been bombed nearly to destruction, as had Japan. Even Russia had been devastated. The US was exporting to the whole world as everybody else tried to rebuild. You can't take 1945-1970 US economic growth as a measure of the quality of FDR's economic policies.
That's a common narrative, but it doesn't make sense when you look at the facts on the ground. And putting some thought into it, bombed-out economies are not good customers.
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.
OK, but what about imports? I'd bet that the US didn't import much until 1970 or so - at least, not in the form of finished goods (and apart from imports from Canada).
The graph shows both. They track pretty closely until the 1980s, with the exception being that brief couple year export spike which was not matched by imports.
Why does everyone overlook that Roosevelt invoked the "Trading with the Enemy Act of 1917" in order to declare taxpayers (the people) to be enemies of the state that they must conduct trade with?
Why does everyone overlook the ramifications of this action?
This reads like revisionist history. people had called the great depression of 1873 - 1896 the "Great Depression" yet here it was happening again just worse in 30 years. And in those 30 'good' years you had the first world war. Banks where and still are considered a major cause of economic downturns and even today we stress test banks on a regular basis.
The problem is that the situation is bad, but not so bad that it can't be made much worse. It's not enough to "try something" - you have to try something that at least will not hurt. If you don't know which way your thing will go, at an absolute minimum be willing and ready to bail on it very quickly if it works out badly.
> 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. The long-run trend of economic growth, I would say, was barely affected by short-run business cycle disturbances. There would always be short-run bubbles and panics and inflations and recessions. They would press production and employment away from its long-run trend -- perhaps by as much as 5 percent. But they would be transitory.
Wait, how do you know this isn't the long-term trend now?
This has bugged me for a while, too. People look at the trend from 2000-2008, and think that it was the long-term trend. But we were blowing a bubble then; why does anyone think that that growth rate was sustainable?
Just curious, what do you think any of this has to do with Solow? Brad Delong was mistaken about certain shocks within the framework of the 'Keynesian' model - the Solow model is about how investment, capital and productivity (enabled by technology) sets long-run output.
> 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. The long-run trend of economic growth, I would say, was barely affected by short-run business cycle disturbances.
it was a stupid flip comment based on that, probably best it was downvoted
I can take more evidence than has been accumulated over the last 5 years to turn him around, but once he changes his mind, he's usually pretty up-front about it and giving credit where it is due. You are right - it's a nice feature of his character.
Sounds like goalpost moving, where slightly mediocre growth becomes a 'depression'
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.
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:
It's the decade(s) where it took a really long time for us to figure out we just can't have our cake and eat it too.
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.
First off, that prime age employment graph is a problem. The best way to lie with a graph is to fuck with the scale, so unless your intentionally misrepresenting data, your graphs should start at 0.
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.
Decade recession, maybe, depression no. Depression is when few who want to work have jobs and many dont have money for necessities. 80 years since the last one. People may not be getting ahead like they used to, but few are actually suffering.
This is a terrible article. It strikes me as too technical to do anything but anger the casual reader (see the article's comment section for examples) and too vague to say anything meaningful to the informed reader.
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?! W...
> 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.
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?
I'm 23. Do I think paying 50% of our budget on medicare and social security is sustainable? No. Personally, I believe it to be completely unsustainable given the lower birthrates, higher medical costs, higher levels of chronic disease and obesity, much higher life expectancies.
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...
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[ 87.3 ms ] story [ 256 ms ] threadThere are some interesting parallels to the current time - that was the era of the robber barons, for instance.
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?
https://en.wikipedia.org/wiki/Recession_of_1937–38
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).
Its also a stupid policy.
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?
[1] https://mises.org/library/how-fdr-made-depression-worse
[2] https://mises.org/library/forgotten-depression-1920
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
Wait, how do you know this isn't the long-term trend now?
it was a stupid flip comment based on that, probably best it was downvoted
That's an statement that you don't see frequently. Huge respect to professor DeLong.
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.
Argument fallacy alert: https://en.wikipedia.org/wiki/List_of_fallacies
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.
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.
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?! W...
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...