Brad DeLong’s five percent solution…
Brad DeLong thinks there is about a five percent chance we will see a second Great Depression and there is little or nothing which can be done to avoid it:
For 2 1/4 years now I have been saying that there is no chance of a repeat of the Great Depression or anything like it–that we know what to do and how to do it and will do it if things turn south.
I don’t think I can say that anymore. In my estimation the chances of another big downward shock to the U.S. economy–a shock that would carry us from the 1/3-of-a-Great-Depression we have now to 2/3 or more–are about 5%. And it now looks very much as if if such a shock hits the U.S. government will be unable to do a d—– thing about it.
The problem is the political, rather than the possible: First, deficit hawks in the Party of Washington do not want to add to the outrageous pace of public debt accumulation. Second, the bailout of Goldman Sachs and the rest of Wall Street has so broken popular support for Washington’s financial manipulations, “… that there is no coalition anywhere for a repeat or anything like a repeat of propping-up the banking system …”
The center cannot hold against both the market-oriented right, and the anti-corporate left, the rough beast slouches.
Without being able to incur still more debt, to expand phony make-work employment, and to throw at the banks to cover their bad bets, DeLong believes there is no way to prevent any additional “shock” to the system which may push it into a depression.
We think there is a problem with DeLong’s reasoning here. The problem is not with his pessimism that there is a lack of support for measures to avoid a depression; it is his belief that a depression can be avoided by increasing public debt in the first place – even under the best of circumstance and with strong public backing for the measures necessary.
In DeLong’s thinking, and the thinking of most economists, an economy slips into depression as a result of being hit by some external shock which destabilizes otherwise mostly stable economic activity. This is not say economies are not subject to their own transient internal problems – like avarice, scams, bubbles and income inequality, or such political problems as the lack of effective regulatory oversight – but the kind of unnatural shock that sends an economy spinning into a depression goes beyond these flaws to persistently reduce economic activity to some level below its normal growth path – causing it to stagnate for an extended period of time.
This time the alleged trigger to that kind of event was the collapse of the housing market, which produced a run on major banks and a string of failures of investment banking giants Bear Stearns and Lehman Brothers. Alleged tightly interconnected global financial markets transmitted these failures like some nasty virus to other economies in quick succession.
Ultimately, the collapse was stemmed when the Federal Reserve and the Treasury Department stepped in to backstop the entire global economy.
That’s a great story: lots of heroism, square-chinned American heroes, lots of excitement, and a thrilling ending as the heroine is saved in the nick of time from the careening global collapse Indiana Jones-style. The world almost came to an end, but our magnificent hero, Moneyman, enters in the last scene and foils the deadly plot of Doctor Depression.
We close with the final embrace between our hero and his fair swoon as the credits roll – and, wrap!
Fortunately, it is total bullshit – a Grimms’ fairy tale with just enough danger and excitement to entertain the unsophisticated rubes in Kansas.
Peter Dorman, who writes on Econospeak blog, has suggested (pdf) that this depression has been brewing at least since 1982 when the United States and the International Monetary Fund, “established a policy regime that permitted, and to some extent required, debtor nations in the developing world to transform themselves into export platforms for acquiring hard currencies. Central to this regime was an opening of consumer markets in the wealthy countries and the deregulation of cross-border production and finance.”
Nations like Mexico were converted into huge sweatshops, while Washington pushed through NAFTA and other agreements to open the US markets to inexpensive imports. Industrial jobs went overseas, and the era of Walmart was born. Eventually, says Dorman, China adopted this export-led development strategy and American companies had an orgasm as they anticipated the profit possible from a market with a seemingly bottomless reserve of cheap rural labor.
Brought into direct competition with the abysmally low Mexican and Chinese wages – which were necessary to offset superior American labor productivity – working families here suffered decades of stagnant wages. As American real wages fell, Washington and Wall Street provided easy credit at low interest rates funded, of all things, by recycling the torrent of money leaving the United States to purchase goods made in China, Mexico and other nations.
Even as the United States was being stripped of its industrial infrastructure, the ungodly profits being generated for Wall Street by producing in low wage countries and selling in the US was being lent to the very families being impoverished by this process in order to keep them spending.
What Delong calls a shock turns out to be the deliberate policy by Washington and Wall Street to starve American families. It crashed, and had to crash, not because it was a flawed strategy, but because it worked as planned.