Wednesday, October 15, 2008

Another Great Depression. Not.

Do a Google search for the phrase "since the Great Depression" and you'll get about 33,605 hits just from news reports, and 2.5 million hits on Google overall. But there are some major differences between now and the 1930s including:

Updated (thank to Michael Gordon): The money supply was decreased by 1/3 during the 1930s (the "Great Contraction"); there was no FDIC, unemployment insurance or Social Security in the early 1930s; and Congress raised taxes and imposed tariffs so high that world trade basically stopped, just to name a few differences.

The charts below illustrate some other differences:

We're nowhere close to the number of bank failures of the 1930s, when banks were failing at an average rate of almost 1,000 per year:
We're nowhere close to the 17.1% average unemployment rate of the 1930s:
On a per capita basis, real GDP is 7.6 times higher today than in 1932.
Food, clothing and shelter consumed about half of disposable income in the 1930s, compared to only about 1/3 today:

16 Comments:

At 10/15/2008 10:45 AM, Blogger the buggy professor said...

Again, Mark, we're all indebted to your continuing efforts to combat extreme pessimism and -- at times -- outright bursts of hysterial worry about our economy.

.......

I would simply add to your list of big differences a few other things:

1) Social Security for the retired and handicapped . . . an innovation that came in 1936. With more and more Americans living longer, we have tens of millions who are older than 65 and are not about to go out in the streets begging or selling apples as their parents or grandparents had to in those dismal days of the Great Depression.


2) Unemployment insurance and benefits --- which can be adjusted upward if the current recession we're in (or heading into) turns out to last very long.


3) Deficit spending --- which the Republican party, among other things, has practiced for decades now since 1981 and through the 8 years of the Reagan administration, the 4 years of Bush Sr's, and 8 years of Bush Jr's . . . alas, not in countercyclical ways to combat recessions (save in 2001), but as a result of tax policies that did not --- unlike those in the Clinton years --- either reduce federal deficits or (as happened in 1998-1999-and 200) create the first surpluses in several decades.

.

The last thing we would need now --- a la Andrew Mellon (Hoover's very powerful Sec. of the Treasury) --- balanced budgets, higher taxes, and the working of the market until all the evils were purged and liquidated.

.

More specifically, in Mellon's unforgettable, publicly voiced formula,

“Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.” And even with a financial panic and large scale unemployment, not to worry.

Because . . . “It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people”.


....

4) And, not least --- contrary to the early 1930s high tariffs (initially practiced by the Hoover administration here) --- or competitive devaluations --- we have an era in which the giant advanced economies are all cooperating actively to deal with a global financial crisis and potential global depression.

And, back in the 1930s, remember, it was FDR and Congress that repealed high tariffs and called for free-trade and international cooperation . . . a call largely unheeded by other countries.

...

5) And finally --- unlike the Great Depression, when the money multiplier was halved despite some efforts by the Federal Reserve to increase the money supply (with no effect on the economy in the Hoover years) --- we have an active and globally coordinated effort to recapitalize the banks and compel them (note the term) to not hoard reserves as in the 1930s and get their balance sheets looking far better.

....

And extraordinarily --- wow! --- it is a Republican President whose Secretary of Treasury is trying to do what you, Mark, praised Canada for having: far, far fewer banks, a few giant national ones, and hence far more susceptibility to government monitoring and regulations.

........

6) Wait though. Don't forget a falling price of gasoline and some other energy prices, the use of better credit facilities (if a confidence crisis can be avoided), and maybe global growth in parts of Asia and elsewhere as customers for our exports (a big question-mark, mind you), and the result is fairly clear:

We will not have a Depression a la the 1930s, nor even of the sort in the 1870s and into the 1890s (for huge numbers of small farmers especially), but a recession. How long it will be is the key uncertainty.

....

7) Oh, a tag-on remark just popped to mind. To wit:

Fortunately, since the recession will probably hit certain regions of the US unevenly --- as it did in 1990-91 and 2001 --- unemployment benefits from Washington will offset some of the regional pain. (In the 1990-91 recession, almost all the US quickly recovered. A big exception, for instance, was Southern California . . . where the end of cold war defense spending led to a prolonged crisis in real estate markets. It was estimated that 40% of the 3-year downturn in Southern California was blunted by continued unemployment benefits from Washington D.C. and hence from the more prosperous regions of the US at the time.)

And since most posters here are likely to be Republican voters, I might remind them that good studies show that since 1933 (FDR's start as president and hence not in the Hoover years), the average stock market investor who placed $10,000 in the market in 1929 (in today's dollars) would find the following outcome if he or she was still in the market today:

1) Under Democratic presidencieds, a total of about $360,000 in today's dollars.

2) Under Republican presidencies since 1945, a total of $51,000 . . . minus the Hoover years 1929-1933. (Add in the Hoover years, a total of $11,000)

......

Michael Gordon, AKA, the buggy professor

 
At 10/15/2008 11:31 AM, Blogger bobdobalino said...

buggy,

The President writes no legislature. He either signs or vetoes.

So, maybe run that screen pertaining to stock market gains, and set it for Republican vs Democrat controlled legislature.

Tell us what you find, mate.

 
At 10/15/2008 11:45 AM, Blogger matt said...

Somebody needs to address the pessimism and negativity, and I thank you for trying, but it's not working for me. I guess Mark and Mike are both professors and I should just believe you, but I don't. I don't believe Bernanke, I don't believe Paulson, and I don't believe things are okay.

Failures. Look at the huge dollar amount represented in financial services companies (okay, a broader measure than just banks) that have already failed - Fannie, Freddie, AIG, IndyMac, WaMu. All 5 major investment banks have either evaporated or re-formed as commercial banks. Isn't that more telling than some empirical measurement of # of bank failures per year?

Unemployment: How many people have been removed from the labor pool by a technicality that they've stopped looking for?

I think it comes down to confidence. I don't have any confidence in anything right now, not in our government and not in people who tell me things are just fine. I thought the bailout was supposed to buy bad assets like mortgages, so why are we planning on buying bank stocks? I'm not an expert, but I'm not dumb enough to miss the implication there.

 
At 10/15/2008 11:57 AM, Anonymous Anonymous said...

The great depression took MANY years to play out, and for unemployment to skyrocket dude. You're acting as if at the exact moment of the market crash in '29 people were in breadlines.

I mean this reasoning is just comically bad.

 
At 10/15/2008 1:28 PM, Blogger matt said...

Why I don't believe anyone in a position of economic power reason #633:

Ben Bernanke on TV today - "Mortgage rates have fallen, helping homebuyers."

What a lying prick!

Mortgage Rate Graph

 
At 10/15/2008 2:37 PM, Anonymous Anonymous said...

Mark,

You are excellent. I recently found you and now you are on my daily read list.

Thanks,
David

P.S. Do I get a college credit after the first semester? :)

 
At 10/15/2008 2:55 PM, Blogger the buggy professor said...

Matt:

I can easily empathize with your worries, but believe me --- me, born in 1939, just as the Great Depression was winding down and WWII about to begin --- we aren't remotely facing economic and security challenges on that magnitude.

.....

Right now, I suspect, the stock market is responding since Monday to a combination of profit-taking by hedge-funds that bought early on Monday morning, and --- more generally --- the decline in retail sales and other bad news in the REAL economy.

No one can say for sure --- it will take weeks probably before we know --- but it does seem that the overall confidence-panic has been stemmed in globally by coordinated G-7 and EU-15 (eurozone) coordination with Britain (EU-16).

..........

A recession is unavoidable, sure. But what happened between 1929 and 1933 has --- thanks to the alacrity with which even a Republican administration, the Fed, and a variety of other governments and central banks --- a small probability at most of leading to a collapse of the money-multipler. That was a result of the public holding money being wary of depositing it in banks (before the FDR bank-holiday and federal deposit insurance) AND the reluctance of banks to use their excess reserves for lending purposes.

If need be --- it's in the Paulson bag of tricks, it seems --- the government, by taking equity shares in our banking system, will reorganize it along semi-Canadian lines (Mark recently and rightly praised the strength of the Canadian national-system based on 5 giant banks) and quite simply back bank loans to other banks as well, if need be, to force banks to lend to credit-worthy businesses and households.

Without such timely interventions, globally coordinated, I fear that a confidence-panic could have run rampant and ruined our financial system. Unless you're willing to try the Andrew Mellon tactic of liquidate, baby!; liquidate!

.............


Here, by the way, is a link to a little encouraging news posted at a very good econ-blog, Econbrowser. Just today.

http://www.econbrowser.com/archives/2008/10/some_encouragin.html

copy and paste it in your browser.

.......

Michael Gordon, AKA, the buggy professor

PS If you're under 40 years and are looking for long-term investments, the stock market is really more or less back to good, earth-based prices. Just ignore the short-term volatility.

And if you live on coastal California and can get a mortgage at a fixed rate you can pay, you will be blessed financially over the decades, trust me.

 
At 10/15/2008 4:52 PM, Blogger OBloodyHell said...

Another critical point which I have yet to see anyone observe:

The Great Depression took place as a part of the Industrial Economy, and, I'd argue, was at least partly related to the transition from the earlier Ag Economy to a fully implemented Industrial Economy. Among other things, the capacity for wealth creation in an Industrial Economy is limited and highly centralized. This heirarchical form of organization is inherent in an Industrial Economy.

The USA is well along the way through the transition to an IP and Services Economy. The natural organization of such an economy is a much more decentralized in nature. Similarly, the opportunities for wealth creation are much more highly distributed and decentralized. It is dependent not just on the imagination and business skills of a single person, but of a vast array of people. This leaves the opportunity for a much wider and quicker recovery from the current crisis. Barring a complete f***up of the economy by socialist idiots shoving sticks into the spokes trying to poke it into "better function", I will lay odds that it will recover far faster than the economy has in previously severe downturns. If McCain gets into office, I think it may be fully recovered within five years, if not sooner.

Granted, I'm not an economist, but I still see too many current economists who apparently think that there is no inherent difference between an Industrial Economy and an IP and Services one. I claim that even a small amount of consideration says that they are radically different in both inherent nature and operating principles. IP is very different from Manufactured Goods. All the costs are radically front-loaded towards creating that first item. After that, the costs are vastly decreased. This is not just a small difference, but a phase change.

 
At 10/15/2008 5:05 PM, Anonymous Anonymous said...

"Granted, I'm not an economist..."

Shut up then. This subject is more complicated than your layman skills can handle.

Turn on your web TV and let economists do the talking...

Why don't join a country music forum or something like that?
Maybe you should be playing bingo instead of farting at Economics.

 
At 10/15/2008 5:36 PM, Blogger OBloodyHell said...

> PS If you're under 40 years and are looking for long-term investments, the stock market is really more or less back to good, earth-based prices. Just ignore the short-term volatility.

I'd agree with that except I'd argue for waiting until after you (and Wall Street) know who is going to be the next PotUS. I certainly would expect the market to turn down substantially if Obama gets into office. Even if you favor him, the tendency in any case is for a downspike whenever a dem gets elected. You might lose out on some income if it upspikes if McCain gets elected, but are you looking to lose money at the start?

 
At 10/15/2008 5:39 PM, Blogger OBloodyHell said...

> And if you live on coastal California and can get a mortgage at a fixed rate you can pay, you will be blessed financially over the decades, trust me.

Well, unless it's on the side of the San Andreas which is going to fall into the ocean, that is...

(snicker)
8o9

 
At 10/15/2008 5:46 PM, Blogger the buggy professor said...

"The USA is well along the way through the transition to an IP and Services Economy. The natural organization of such an economy is a much more decentralized in nature." -- Obloodyhell


1) That's well put Obloody, and for once I'm happy to second your view.

......

2) More specifically, thanks to the Internet and world-wide buying possibilities for retail, wholesale, and industrial and big-service firms, inventory control is far more rigorous and prevents the pile-up of large numbers of unsold goods that leads to a multiplier plunge in business investment throughout the economy.

So, once retail sales pick up --- which may take months or even a year or so (as happens in recessions) --- business investment should immediately pick up . . . with a big boost to profits, eventually wages (unless it's like the last 6 years), and overall economic vigor.

.

* Pedantic sidebar observation: one of the most influential business-cycle theories was developed in 1923 by Joseph Kitchin, an American economist who focused on the problems of inventory volatility --- subject to multiplier effects up and down --- as a major cause of recessions.



......

3) Moreover, as you also rightly note, there are all sorts of ample opportunities for laid-off workers to start a one-person business, if need be, on Ebay or elsewhere . . . again, assuming the financial system hasn't bogged down in a credit-crunch --- something unlikely with the government role in it right now.

.....

4) Then, too ---the good side of a recession if it isn't prolonged and deep and hurts everyone --- it does purge failed or half-failed firms. Those who worry this won't happen to tottery banks, brokerage houses, and investment banks --- because of the government role --- don't, I believe, grasp what is now emerging from the Paulson-Bernanke bank-rescue program.

Namely?

A rationalization of the system, aiming US taxpayer funds at the larger, more vigorous, liquid banks (and their investment subsidiaries) that will lead to their buying up a large percentage of the 8000 or so small banks. The resulting system will look more like the much more stable Canadian banking system --- which also, despite its own credit-crunch in the 1930s, didn't collapse the way US small banks did between 1929 and 1933.

.......

5)A final word about pessimism and optimism.

Matt and others who are younger than us, Obloody --- I'm now 69 and lived through the end of the Great Depression, WWII, the Korean war, the Cuban missile crisis, the Jimmy Carter gloomy years, and on into the present --- don't realize fully that in the Great Depression you had no such opportunities if you lost work.

You sold apples on the street, begged, moved to Hoovervilles (crate-made housing) in California to work for less than a $1 a day in the agricultural fields. (That assumed the state-police didn't turn you back at the California border).

....

6) Millions marched and protested against all the misery and joblessness between 1929 and 1933 --- the Hoover liquidation era (in Andrew Mellon's terms) --- to no avail. The military was used to quell any protests.

I had an older friend who, daily --- on the docks in San Francisco --- would line up with hundreds of others hoping for a day's work for less than a $1.00. Some times he was lucky and could buy some food for his family. Most of the time he didn't; then he begged or went to a charity-run shelter with them for one meal a day.

.

That was life, folks, for over a quarter of our population.

Some regions like the Plains states and Mid-western ones were simply devastated, with farming families by the millions thrown out of their homes because they couldn't pay mortgages.

.

Want some graphic video replays of the era?

There's a marvelous film by Hal Ashby --- 1976, starring David Carradine --- who plays the life of Woodie Guthrie, the great songwriter, who left the dust bowl and sneaked by the California state police to end up in a Hooverville in California.

And --- less entertaining but on target --- is the Grape of Wrath by John Ford, with Henry Fonda in the lead role as the head of the destitute "Oakie" Joad family that trecked to California in the 1930s too. For that matter, the book by John Steinbeck is a masterpiece of literature.




.......

7) Back to the optimism that Obloody and Mark and I share.

We are --- as you and Mark have noted (me too) --- a remarkably flexible, high-productive economy, full of talent and hard-working people (the hardest working and less complaining than any other work force around). Sooner or later, its built-in vigor will be released again . . . and not, as in the Great Depression, over an entire decade in nature before our industrial machine returned full force in WWII, building not just tanks, but airplanes and war ships on an assembly line production that overwhelmed our Axis allies.

.

Want a head-spinning piece of evidence?

By the spring of 1945, the average Japanese soldier had 8 pounds of logistic support behind him. The average American Marine and soldier 4 tons of equipment! Even the huge sacrifices made by the Russian people --- who didn't fight for Communism, and who were responsible for killing 85% of German soldiers in combat --- were made in part possible by American Lend-Lease equipment. And a German general, watching the US armored divisions streaming over the half-ruined bridge at Remagen, Germany --- across the Rhine in March 1945: miles and miles of tanks, mobile artillery, truck-carrying soldiers, and hundreds of trucks full of ammunition, supplies, and gas; with air coverage 24 hours a day --- marveled and wrote in his diary: "Now we know what it's like to fight a war against a rich country.!"

My dad was in that war . . . a volunteer the day after Pearl Harbor, even though he was 5 years past the legal recruitment age. They laughed, put him in the medical corps, said he would be out of harm's way; became a Master Sargent, and was one of those meds on the beaches of Normandy ministering to the dying and mutilated.

Now and then --- when I get dejected about this or that --- I get out his medal and the photo of General Eisenhower awarding him a Bronze Star, and it makes me feel how lucky my own family has been not to have gone through what he experienced, along with several million other American men and women in that war.




......

8) On, for those worried right now about eventual inflation, my consoling message?

We came out of WWII with national debt 120% of GDP.

It is now, at the end of the Bush-W term, 70% of a huge, huge GDP ($15 trillion or so). The main problem is to kept a credit-crunch from occurring --- credit, the bloodline of our economy at all levels --- and use countercyclical deficit-spending intelligently. Such as in Obama's programs for infra-structure spending on bridges, roads, ports, airports, electrical systems, and the like . . . all the work on which will be done through private local businesses.

......

Consider this comparison:

If we can spend $12 billion a month to help Iraq recover economically and otherwise, we can spend that amount yearly for ourselves in the current system.

And please note.

Iraq's population is 25 million (roughly). Ours is about 300 million, or 12 times larger.

Hence, to give you an idea of what we're spending monthly in Iraq in US terms, that would be the equivalent of $144 billion a month --- or about $1.8 trillion a year in this country.

......

Again, I'm happy to underscore your points, Obloody.

.....

Michael Gordon, AKA, the buggy professor

 
At 10/15/2008 6:50 PM, Anonymous Anonymous said...

the tendency in any case is for a downspike whenever a dem gets elected.

Don't think so OBH. When it comes to the stock market, Democrat administrations are unequivocal winners

Of course, since Bush43 has made such a mess, it will be alot easier for Obama to continue the winning tradition.

 
At 10/16/2008 10:15 AM, Blogger the buggy professor said...

"The tendency in any case is for a downspike whenever a dem gets elected." -- Obloody

OBH:

Come on, you know from a previous thread where I posted the figures that market-investors have flourished markedly --- by a ratio of 7:1 --- under Democratic presidents since 1929 compared to Republican presidencies.

Specifically:

"And since most posters here are likely to be Republican voters, I might remind them that good studies show that since 1933 (FDR's start as president and hence not in the Hoover years), the average stock market investor who placed $10,000 in the market in 1929 (in today's dollars) would find the following outcome if he or she was still in the market today:

1) Under Democratic presidencieds, a total of about $360,000 in today's dollars.

2) Under Republican presidencies since 1945, a total of $51,000 . . . minus the Hoover years 1929-1933. (Add in the Hoover years, a total of $11,000)

.....

These figures are facts --- not ideology. What's more, I fully expect that an Obama-era will end far more happily than will be the case for the end of the Bush-W era.

......

Michael Gordon, AKA, the buggy professor

 
At 10/17/2008 2:30 PM, Blogger John_David_Galt said...

I'm not convinced.

Statistics of the raw number of bank failures merely reflect the fact that a few, very large banks now dominate the banking systems of both the US and the world. Show us that first chart again with the Y axis showing either the busted banks' fraction of all depositors or of all deposits, and it'll mean something.

The unemployment chart is even more meaningless. There is STILL no world standard for how to count the unemployed, and US figures have always stopped counting a job seeker as soon as he exhausts his UI benefits. They also don't count people who've been displaced from a good job to a much worse one.

GDP measures total production, not consumption, and includes lots of "products" such as the paper generated by state and federal bureaucrats, which is no use to anyone.

And for that last chart, I'd like to see your definition of "disposable" income (isn't that what's left AFTER necessities?) and some details of how that disposable income is distributed. It doesn't matter how much disposable income exists if it's all in the hands of a few.

 
At 10/19/2008 10:46 AM, Blogger Arman said...

It is the genius of Adam Smith's propaganda, that any information that conflicts with the indoctrinated pov is rendered invalid, while any wild supposition that supports the indoctrinated pov is latched onto and re-propagated. The brainwashing is so complete that, other than myself, I know of no one who has once held to Smith's tenets who can now rationally accept contrary indicators.

 

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