Great Depression II

Recent economic news convinces me that we are not in just another recession, but the early days of what could be a significant and extremely painful depression.    Historians may call this era “Great Depression II” and analyze the causes and impacts the same way we look at the 1930s.   If so things may get much worse before they get better.

The other day I posted four charts that illustrate the problems we face.   We have gone into deep debt — both government and the private sector, — have less than 10% of the population involved in manufacturing, and hyper-consume foreign goods, running up massive current account deficits.   This has been going on for thirty years, including unconscionable deficit spending during economic booms in the 1980s and early 2000s.    Private citizens have been if anything as bad if not worse than the government, the US lived on debt, stopped savings, and believed in the bubbles that popped one by one.    It’s not just the government’s fault, we citizens have done this to ourselves.

It’s a depression because there is no quick way out of it.   In a recession rebalancing can be painful, but happens quickly.   It’s caused by short term economic factors usually led by inflation.    Since inflation rates were so low during the thirty year period we engaged in building high debt and overconsumption/under-production, the economy did not have any “natural” way to rebalance.   The imbalances grew, and as long as the short term outlook seemed good, people decided they could live with debt.  Economists even made excuses for the current account deficit, arguing that if it’s private sector driven that’s no problem.   The loss of manufacturing?   No problem, the US was making up for it with the service sector, especially stocks and banking.  The idea was our financial system provides a global service and thus we do not need to produce.  That was an illusion.

In retrospect the question would be why people didn’t see this coming — or why those who did were ignored.  How could people really believe thirty years of growing government and private debt with hyper-consumption and little production work?   But if a delusion is enjoyable, it’s easy to grasp for as long as possible.   Now the last bubble has burst.

Here’s the deal: since the imbalance is debt driven, it cannot be fixed until that debt is paid down.   Let’s set aside government spending for a moment, since that debt might have to rise if we are to fix this.   What is really problematic is the high levels of private debt.   Savings rates remain low, equity in homes is at historic lows, and credit card and other personal debt remains high.     To rebalance we have to simply repay debt and get back into a structurally sound condition.

You might think that this also means cutting government spending, and we do have to do that.   But it’s tricky.   There is no guarantee that this will right itself quickly, we could be looking at long term malaise, even if the public pays down the debt over time.   The government has to cut wasteful and unnecessary spending, diminish commitments abroad (military spending should be cut dramatically) and focus spending on a mix of infrastructure improvements and direct benefits to people starting businesses or working to build productive capacity.

The problem, as I noted earlier, is that we have been consuming beyond our ability to produce.  To repay debt and maintain an enjoyable level of consumption (but not insane as in the mid-2000s), we have to increase production in goods and services that have global demand.   Here is the problem with the two favorite “fixes” from the political parties:

a) GOP — cut taxes and people will invest.    The problem is, if you cut taxes people will consume.   That used to indirectly cause production since you have to produce first what is consumed, but now that the economy is global tax cuts benefits may be exported.   The rich will consume more foreign goods, but the domestic economy will continue to falter, and there won’t be investment in new productive enteprises.

b) Democrats — stimulate the economy.   In a normal recession this is even better than tax cuts because it directly stimulates the economy in focused areas, rather than simply providing tax cuts.   It also is more likely to get money directly to those most hurt by the recession.   However, if not spent right, it will have the same impact as a tax cut — rewarding consumption without promoting production.   In fact, that seems to have happened with the first stimulus, as some of it was geared towards investment, but much was to bail out states and create jobs.

If I were President I’d give a national speech to talk about the depression.   I’d use the D-word, it’s too late to worry about “talking down” the economy.  It’s down and talked down as much as it can be.   I’d mix a list of spending cuts — significant ones, ones that hurt interests on both sides of the aisles, with a set of incentives for investment plus targeted infrastructure improvements.    We also can’t give in to the temptation to cut spending on our future — education, early childhood programs, and help for families in need.   The President should also call for an effort of national renewal, perhaps tying receipt of government assistance to having people “give back” in some way.

The problem is that whether rich and earning big off the stock market, or poor and surviving with food checks and welfare, a something for nothing attitude permeates our culture.    Perhaps prosperity spoiled us, perhaps we simply got too fond of our delusions.   The President needs to make clear that we have to work together to revive our economy and live up to our national values.     The problem can’t be fixed by the government, and no one can expect magic from President Obama.    It took thirty years to get into this mess, we’re now mired in what still could be the early days of a depression, and unless we boldly come together and start making hard choices, giving up our something for nothing attitude, things could get much worse.    If we act wisely, we can turn it around.   President Obama, the country needs your leadership.   Now is the moment — this is what you were elected for, stop playing it safe and focus intently on the economy and bringing the country together.

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  1. #1 by K on September 7, 2010 - 15:57

    • #2 by K on September 7, 2010 - 15:58

      satire. Spell check sucks.

  2. #3 by mike lovell on September 8, 2010 - 15:58

    I heard recently about a study (but I cannot find it on google- google hates me, I think) that stated something to the effect that kids in early education schooling did not show much advantage over those who didn’t attend a pre-school. Now clearly there are some advantages, such as increased exposure to socialization, but academic-wise not much difference was found.

    So in our investment phases for the educational department, maybe we should be targeting specific localities where it may pose greater results as opposed to broad brush financial throwaways like we seem to do with everything these days?

    And you are right in it is ‘how we spend it’ that is very important to using these federal stimulus programs if we are to use them at all. Unfortunately, we have seen very little of that in practice, often bypassing those most in need, and giving to those who already have it all so they can recoup THEIR losses while holding everyone else accountable still.

    It is definitely a tightrope balancing act when figuring out where to tax, where to spend and where to cut either. I fear however, that ideology will rule the day and override the more commonsensical ideas out there.

  3. #4 by renaissanceguy on September 12, 2010 - 13:27

    Mike, I remember that study. The result was that for kids in lower socio-economic brackets there was an advantage to early education programs. For other kids there was no notable difference.

    • #5 by Scott Erb on September 12, 2010 - 14:41

      I was thinking of kids in lower socio-economic brackets. I think that’s a more effective way to stop condemning children of the poor to a life of being poor or on welfare — help them get a better education. That’s more efficient than giving their family more money.

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