Monday, February 01, 2010

It’s Not the 1930s Again --- It's Not Even Close

From Brian Wesbury and Robert Stein:

"Since the financial turmoil began, many analysts, investors and pundits have fretted about a repeat of the Great Depression. However, it’s important to put things in perspective. Real GDP fell for four consecutive years (and by a total of more than 25%) between 1929 and 1933. Unemployment reached 25% (see chart above). Nothing today even comes close. GDP is now rising and we expect unemployment has peaked.

The reason the Great Depression became so great was because government policies were outrageously bad. The Federal Reserve, which was less than two decades old at the time, made huge mistakes, and allowed the money supply to decline by a third between 1929 and 1933. At the same time, President Herbert Hoover increased the top marginal income tax rate from 25% to 63% in 1932 – a more than 50% reduction in the incentive to work and invest.

The odds of repeating anything like the Great Depression are low and shrinking by the day. It’s not the 1930s, it’s not even close."


MP: In terms of the monthly unemployment rate, we haven't even come close yet to the peak of 10.8% in November and December of 1982, and the average annual rate of 9.3% for 2009 is less than the 9.7% average in 1982 by almost a full half point, and a full point less than the 12-month average of the 10.3% unemployment rate between mid-1982 and mid-1983 (data here).

23 Comments:

At 2/01/2010 2:24 PM, Blogger OBloodyHell said...

While I don't disagree with your overall thesis that this isn't close to the Great Depression, I do believe you can find much more accurate unemployment numbers than the official ones, which ignore lots of people who ARE out of work while reporting only those who collect unemployment. Since estimates of REAL unemployment are a reliable 15-20%, varying with area, to cite the 9% figure primarily lends credence to those who would charge you with disingenouousness, Doc....

You can make your points without this blatant pro-government lie. I suggest you should do that.

 
At 2/01/2010 2:39 PM, Anonymous Unsan said...

Damn, I hate it when people use "odds" to describe the likelihood of non-random events.

The conditions of the GD were NOT the result of some dice roll - an outcome in the lower tail of the distribution of a random variable. It was the result of POLICY and STRUCTURE and CONDITIONS and ACTIONS of economic agents.

Providing "odds" for us entering a depression of similar size and scope is nonsense. It presumes, first of all, that we know precisely what caused the GD and the risk those causes will be replicated. Second, it ignores the possibility that a different set of policies, structures, conditions, and actions might bring that outcome through an alternative mechanism.

We have learned a lot since the days of the GD and economic moderation was the result. But the Great Recession should prove to the most strident optimist that the GD CAN happen again, but not necessarily in the same fashion.

CRE could cause a collapse of the banking system. The rising deficit could crush our government. Wildcat Inflation could appear. I'm not predicting doom, but the people predicting fair weather are just reading their Farmer's Almanac and not looking at all at real-world pitfalls.

Then there's the Zero factor which none of us can predict.

 
At 2/01/2010 2:44 PM, Anonymous Anonymous said...

I agree with OBloodyHell. Certainly the "Great Recession" can be argued as not being as bad as the Great Depression in a number of ways: the loss in productivity, the number of failed banks, and farm closures were far worse during the Great Depression than they are now. However, the government's official unemployment data is misleading: some statistics list the real unemployment rate being somewhere between 15-17%. That is indeed bad.

While it doesn't touch the Great Depression's unemployment peak of 24% (I think, I could be wrong), one needs to remember it took three years from the start of the depression to hit the peak. While I don't think we'll ever reach that level, 17% is touching previous levels held in the 1930s and is very bad. Considering we're likely going to have (another) jobless recovery - that unemployment is likely to stay high for several years at minimal - this not good news for many people.

 
At 2/01/2010 3:00 PM, Anonymous Brian said...

First off, being an econ major in MO...love the blog Dr. Perry.

That being said, I only wonder whether or not the methodology for gathering these statistics was a lot different during the Great Depression than it is today. Are the unemployment rates during the Great Depression in any way comparable to our current U3?

Like the first commenter said, U6 is around 17%. That is the listed avg. of the Great Depression. Without further clarification of the methodology for gathering these numbers from the 1930's, how can we make an accurate comparison?

 
At 2/01/2010 3:15 PM, Anonymous Titus Pullo said...

So we are not as bad after one year of Obama as we were in 1982 after two years of Reagan? Or is it eight years of Dubya didn't mess us up as much as four years of Carter?

 
At 2/01/2010 4:04 PM, Anonymous Benny The Man said...

I hadn't heard that one before, that higher marginal tax rates at the top meant people worked less, deepening the Great Depression.

Why then the terrific economic growth of the 1950s and 1960s, when a very conservative Congress (think Everett Dirksen) kept top federal income tax rates at 90 percent?

In the 1950s, we were paying down federal debt. The last time we paid down federal debt, the 1990s, we also had a great boom.

We need to pay down federal debt. The top tax rate is not as important as paying down the debt.
The very conservative Congresses of the 1950s and early 1960s knew that, and did it.

 
At 2/01/2010 4:10 PM, Anonymous Anonymous said...

Did Hoover raise taxes, or did Congress?

 
At 2/01/2010 4:17 PM, Anonymous Anonymous said...

President Herbert Hoover increased the top marginal income tax rate from 25% to 63% in 1932 – a more than 50% reduction in the incentive to work and invest.

It would be hard to overstate the economically destructive tax rates already baked into the cake by Obama and the Democrats.

Bob Williams, Rosanne Altshuler, Katie Lim over at the Tax Policy Center bring things into focus:

Under the higher tax baseline of current law, we’d have to raise all individual rates by 15 percent to meet our 2 percent deficit goal. But under the lower-revenue scenario of current policy, rates would have to jump nearly 50 percent. In other words, the 10 percent bracket would become nearly 15 percent and the 35 percent top rate would go to 52 percent.

What if Congress just raised taxes for high-income taxpayers? Their rates would go up more than 40 percent under current law and more than 150 percent under current policy. In other words, the top tax rate would return to the bad old days of 90 percent. Even if we go for the Administration’s more modest goals—start with current policy and aim for deficits averaging 3 percent of GDP—those top tax rates would have to more than double, taking the top rate over 75 percent.

Tax Policy Center

When the huge tax-increase agenda arrives a year from now, the economy will begin to decline, and will be some 3% to 4% smaller than it otherwise would have been. The artificially high growth in 2010 followed by artificially low growth in 2011 would "represent a larger collapse than occurred in 2008 and early 2009," Mr. Laffer writes.

WSJ, An Economic Time Bomb

Generations of Americans will be paying for the fiscal recklessness of this Congress and administration.

 
At 2/01/2010 4:27 PM, Anonymous Anonymous said...

Benny arrives just in time to make the case for state slavery. Let's try taxing every registered Democrat at 90 percent first and see how that works out.

 
At 2/01/2010 4:30 PM, Anonymous Anonymous said...

So we are not as bad after one year of Obama as we were in 1982 after two years of Reagan? Or is it eight years of Dubya didn't mess us up as much as four years of Carter?

Or is it more than half a century of socialism produced nothing but slavery, misery and death.

 
At 2/01/2010 4:43 PM, Anonymous Benny The Man said...

Anon:

As we already went through two decades--the 1950s and the 1960s-in which the top tax rate was 90 percent, would you call that very prosperous era "the slave decades"?

I want to pay off federal debt so all of us can enjoy lower tax rates in the future. Right now, we are passing boatloads of IOUs onto America and its children.

The Red Ink Republicans and the Deficit Democrats seem not to care.

We have to cut spending and raise taxes. It worked before, and it will work again.

A little Spartan living for our country club set might toughen 'em a bit.

 
At 2/01/2010 4:50 PM, Blogger VangelV said...

With all due respect, I do not believe that there is a proper apples to apples comparison being done. While I do not mean to imply that we are anywhere close (yet) it looks to me as if we measured unemployment as we used to thirty years ago the number would be closer to 20% than to the 10% level that is being reported.

It is also important to look at structural factors to see where we are heading and that is not as positive as is being implied. For one, employment in the public sector has not adjusted to the fiscal reality, which means that bankrupt states and municipalities have added jobs at times when they should have been shedding them. The people who currently hold those jobs will be unemployed in the next few years. In fact a true recovery demands that those people are fired from their current jobs and join the productive, wealth producing sector.

What we have at this time are conditions that are in many ways very similar to those that were seen in the 1930s. We had a stock market collapse that was created by a massive liquidity explosion that fooled investors into risking their funds by making bets on speculative ventures that made no sense.

Instead of allowing those bad bets to bring down the individuals and institutions who made them, Bush/Obama acted to prevent the correction from running its course. The over-leveraged financial institutions that had seen their bets go bad were bailed out instead of being allowed to go under. The collapsing real estate markets were 'saved' by tax credits, loans to people who could not afford proper down-payments, and direct interventions in the mortgage markets. Failed automobile companies that had been rejected by their customers because they made lousy cars that were too expensive were not liquidated; instead, their bondholders were wiped out and the companies were given access to government funds so that they could keep making cars badly. The states and municipalities were given funds to keep hiring people asked to do jobs that could have been done better by the private sector.

All of the interventionist programs were supposed to be funded out of future tax increases and by making the rich pay their 'fair share.' But that approach is a proven failure because when the 'rich' suspect that their income will be confiscated so that the unproductive classes can be bailed out, they will no longer engage in the capital accumulation activities that are necessary for wealth creation. That means that the 'regime uncertainty' that was responsible for the lack of private investment during the Great Depression is in place under the Obama/Pelosi regime. Why would any rational individual decide to open up a business when Congress and the administration threaten to tax away the bulk of the profits? And if rational individuals do not choose to create new businesses where will the jobs that are necessary for a true recovery come from?

 
At 2/01/2010 5:19 PM, Anonymous Anonymous said...

I want to pay off federal debt so all of us can enjoy lower tax rates in the future.

No, you want someone else to pay off the federal debt for you. How noble of you to sacrifice their freedom in pursuit of your future security.

 
At 2/01/2010 6:03 PM, Anonymous Benny The Man said...

Hmmm. How about we pay off the federal debt with money from those who run our country? Since they are the ones who got us into this mess?
And who runs America?
Oh, I know. It's me.
I am the one who ordered Congress to borrow money instead of cutting outlays or raising taxes.
When we invaded Iraq, I am the one who convinced Congress to finance the war by borrowing, not taxes.
I am the one who told Congress that crop subsidies should grow every year.
I am the one who forced Congress to continue an enormous panoply of rural subsidy programs, including $8 billion a year for rural telephones on top of $60 billion every year in crop bail outs.
I invented ethanol, another rural-farm subsidy program, that lowers gasoline mpgs and costs you money every time you fill up.
And I blueprinted the $100 billion a year we spend in Homeland Security, and the $700 billion we spend every year on national defense--against a few punk terrorists.
Okay, I confess--I have bankrupted America.
So tax me.

 
At 2/01/2010 6:56 PM, Blogger Paul said...

"Okay, I confess--I have bankrupted America.
So tax me."

You endorse a 90% tax rate for others, and you voted for Obama, so why don't you lead by example, Benny?

 
At 2/01/2010 6:59 PM, Anonymous CrisisMaven said...

you have some very good points, however, we're not through yet: Of Mortgage Brokers, ARMs, Attrition and Marathons. For students or researchers: I have just added a Reference List to my economics blog with economic data series, history, bibliographies etc. for students & researchers. Currently 100+ meta sources, it will in the next days grow to over a thousand. Check it out and if you miss something, feel free to leave a comment.

 
At 2/01/2010 7:15 PM, Blogger juandos said...

"The last time we paid down federal debt, the 1990s, we also had a great boom"...

Hmmm, what planet was that? Planet Clinton Surplus Myth over in the liberal universe?

Recession? Depression? Either way the Brookings people seem depressed: The Suburbanization of Poverty: Trends in Metropolitan America, 2000 to 2008

Just gotta love that Community Reinvestment Act...

 
At 2/01/2010 7:59 PM, Anonymous Benny The Man said...

I will lead by example.
On every dollar I make past $10 million a year, I think I should pay a 90 percent federal income atx.
This would roughly equal the top tax rate paid in the 1950s and 1960s, when that commie Eisenhower and his R-Party pink-o stooges were running America.

Jaundos-

As a fraction of GDP, federal debt declined in the Clinton era. Credit the Republican Congress if you wish, but it happened.

It can happen again. We have to cut outlays and raise taxes.

It is called living within your means.

It is telling of the radically decreased mental capacity of modern right-wingers that they now detest the responsible means necessary to obtain balanced budgets.

Waa-waa, we hate government intrusion, but I want my crop subsidies.

 
At 2/01/2010 8:19 PM, Blogger juandos said...

"As a fraction of GDP, federal debt declined in the Clinton era"...

Ahhh, so this did happen in the liberal universe...

Here's what Marshall Auerback has to say: Here's Why Attempts To Cut The Deficit Will Definitely Make The Nation Poorer

 
At 2/01/2010 8:39 PM, Anonymous Benny The Man said...

Jaundos-

You know, if I smoke pot, I bet it will feel good. Deficit spending feels good.

I just suspect there is a consequence somewhere if overdone.

I did like the link, however. Interesting.

 
At 2/01/2010 9:42 PM, Blogger Paul said...

"I will lead by example.
On every dollar I make past $10 million a year, I think I should pay a 90 percent federal income atx."

In other words, you want to gouge someone else while you take every deduction you can get away with. Typical Obama voter.

"It is telling of the radically decreased mental capacity of modern right-wingers that they now detest the responsible means necessary to obtain balanced budgets.

Waa-waa, we hate government intrusion, but I want my crop subsidies."

Again with Benny's feverishly imagined crop subsidy devouring right-wingers.

I've never taken a penny in crop subsidies, nor have most of my "modern right-winger" friends.

You were one of the fools who voted for Obama, Benny, where do you get off pretending to be some deficit hawk?

 
At 2/01/2010 10:45 PM, Anonymous Anonymous said...

The "Great Recession" has been pretty bad, especially conspiring the finance industry was on the brink of collapse. What sort of pain did were we spared with the government bailing out the stupid idiots who caused the mess in the first place?

 
At 2/02/2010 4:25 AM, Anonymous niknaknoo said...

Try shadowstats.com.

Back in the 1930s unemployment was not calculated in the same way so this is not a fair comparison.

 

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