Robert Reich Connects The Dots to Tell What’s Happened To Our Economy In 2 Minutes

Berkeley Professor and former U.S. Department of Labor Secretary Robert Reich has put together a good, short 2 minute 15 second video that explains a large part of what’s happened to the economy over the last 30 years.

In summary, Reich connects five “dots”:

  1. The economy has doubled since 1980 but wages have been flat.  So where did the money go?
  2. All the gains have gone to the super rich.   And…
  3. With money goes political power.  Taxes on the super rich have been slashed, government revenues have fallen, leading to…
  4. Huge budget deficits. The middle class gets agitated.  To balance budgets, governments slash spending and set middle class to fighting amongst itself…
  5. Middle class is divided.  It fights for scraps.  When borrowing ability dries up, spending slows and can’t return…
  6. We get an anemic recover.

He explains it better (and draws neat pictures, too), but that’s the jist of it.  I would add more such as how the financial industry gained such power in Washington and pushed an ideological but economically flawed agenda of deregulation that led to the monumental but avoidable financial crises in 2007-2009.  But Reich gets the basics right.

What to Call This Unpleasantness? Little Depression or Workers’ Depression?

Brad Delong has had enough.  So have I.

“The Little Depression”

Back in late 2008 people asked me: is this a recession or a depression? I said that I would call it a depression if the unemployment rate kissed 12%. I said that I would call it a depression if the unemployment rate stayed above 10% for a year.

Neither of those has come to pass. But the unemployment rate has kissed 10%, and has stayed at or above 9% for two years now.

So I am moving the goalposts. I am adopting a suggestion in comments of Full Employment Hawk . Henceforth, I will call the current unpleasantness not “The Great Recession,” but rather “The Little Depression.”

It’s a good question.  In late 2008 when people were asking me, I said I wasn’t sure.  It would either be “The Great Recession” or “The Lesser Depression”, I said.  Eventually I fell in line with most commentators and referred to it as “Great Recession”.  But with the continuing bad, very bad, news on employment, wages, and growth, I’m with Brad.  We need to call this what it is.  It’s not been a “Great Recession”.  Recessions are events when the central bank says things have gotten out of hand, they raise interest rates, and everybody sobers up.  Then after an appropriate time of perhaps 6-12 months, the growth machine fires up and we start to regain lost territory.  This is different. We aren’t regaining lost ground and people are suffering.

What most folks are calling the “Great Recession” I think we ought to call the “Panic of 2008”.  It was, after all, a good old-fashioned financial panic updated with 21st century technology and corporate forms. It lasted roughly the time period the NBER says was the recession.

What has me going though is the continuing poor conditions for the millions of Americans.  This unpleasantness has gone on too long and been too severe to call it recession.  It’s a depression of some form.  The problem here is how to distinquish it semantically from the Great Depression of 1929-1940, or the Long Depression of 1873-1896.  My personal preference is for Workers’ Depression.  I think it sums it up.  For the banks and rentier classes, it’s good times again.  It’s only for working stiffs that things continue so ugly.  But if people want to use “Little Depression”, I could go along for the sake of clarity.

Why the Austerity Talk?

Brad DeLong is as puzzled as I, but is more eloquent in expressing it.  In so doing he does my classes a favor in expressing a quick version of the history of addressing macro economic crises.

For nearly 200 years economists from John Stuart Mill through Walter Bagehot and John Maynard Keynes and Milton Friedman to Ben Bernanke have known that a depression caused by a financial panic is not properly treated by starving the economy of government purchases and of money. So why does “austerity” have such extraordinary purchase on the minds of North Atlantic politicians right now?

Let me speak as a card-carrying neoliberal, as a bipartisan technocrat, as a mainstream neoclassical macroeconomist–a student of Larry Summers and Peter Temin and Charlie Kindleberger and Barry Eichengreen and Olivier Blanchard and many others.

We put to one side issues of long-run economic growth and of income and wealth distribution, and narrow our focus to the business cycle–to these grand mal seizures of high unemployment that industrial market economies have been suffering from since at least 1825. Such episodes are bad for everybody–bad for workers who lose their jobs, bad for entrepreneurs and equity holders who lose their profits, bad for governments that lose their tax revenue, and bad for bondholders who see debts owed them go unpaid as a result of bankruptcy. Such episodes are best avoided.

From my perspective, the technocratic economists by 1829 had figured out why these semi-periodic grand mal seizures happened. In 1829 Jean-Baptiste Say published his Course Complet d’Economie Politique… in which he implicitly admitted that Thomas Robert Malthus had been at least partly right in his assertions that an economy could suffer from at least a temporary and disequliibrium “general glut” of commodities. In 1829 John Stuart Mill wrote that one of what was to appear as his Essays on Unsettled Questions in Political Economy in which he put his finger on the mechanism of depression.

Semi-periodically in market economies, wealth holders collectively come to the conclusion that their holdings of some kind or kinds of financial assets are too low. These financial assets can be cash money as a means of liquidity, or savings vehicles to carry purchasing power into the future (of which bonds and cash money are important components), or safe assets (of which, again, cash money and bonds of credit-worthy governments are key components)–whatever. Wealth holders collectively come to the conclusion that their holdings of some category of financial assets are too small. They thus cut back on their spending on currently-produced goods and services in an attempt to build up their asset holdings. This cutback creates deficient demand not just for one or a few categories of currently-produced goods and services but for pretty much all of them. Businesses seeing slack demand fire workers. And depression results.

What was not settled back in 1829 was what to do about this. Over the years since, mainstream technocratic economists have arrived at three sets of solutions:

  1. Don’t go there in the first place. Avoid whatever it is–whether an external drain under the gold standard or a collapse of long-term wealth as in the end of the dot-com bubble or a panicked flight to safety as in 2007-2008–that creates the shortage of and excess demand for financial assets.
  2. If you fail to avoid the problem, then have the government step in and spend on currently-produced goods and servicesin order to keep employment at its normal levels whenever the private sector cuts back on its spending.
  3. If you fail to avoid the problem, then have the government create and provide the financial assets that the private sector wants to hold in order to get the private sector to resume its spending on currently-produced goods and services.

There are a great many subtleties in how a government should attempt to do (1), (2), and (3). There is much to be said about when each is appropriate. There is a lot we need to learn about how attempts to carry out one of the three may interfere with or make impossible attempts to carry out the other branches of policy. But those are not our topics today.

Our topic today is that, somehow, all three are now off the table. There is right now in the North Atlantic no likelihood of reforms of Wall Street and Canary Wharf to accomplish (1) and diminish the likelihood and severity of a financial panic. There is right now in the North Atlantic no likelihood at all of (2): no political pressure to expand or even extend the anemic government-spending stimulus measures that have ben undertaken. And there is right now in the North Atlantic little likelihood of (3): the European Central Bank is actively looking for ways to shrink the supply of the financial assets it provides to the private sector, and the Federal Reserve is under pressure to do the same–both because of a claimed fear that further expansionary asset provision policies run the risk of igniting unwarranted inflation.

But there is no likelihood of unwarranted inflation that can be seen either in the tracks of price indexes or in the tracks of financial market readings of forecast expectations.

Nevertheless, you listen to the speeches of North Atlantic policymakers and you read the reports, and you hear things like:

“Obama said that just as people and companies have had to be cautious about spending, ‘government should have to tighten its belt as well…’”

Now there were—and perhaps there still are—people in the White House who took these lines out of speeches as fast as they could But the speechwriters keep putting them in, and President Obama keeps saying them, in all likelihood because he believes them.

And here we reach the limits of my mental horizons as a neoliberal, as a technocrat, as a mainstream neoclassical economist. Right now the global market economy is suffering a grand mal seizure of high unemployment and slack demand. We know the cures–fiscal stimulus via more government spending, monetary stimulus via provision by central banks of the financial assets the private sector wants to hold, institutional reform to try once gain to curb the bankers’ tendency to indulge in speculative excess under control. Yet we are not doing any of them. Instead, we are calling for “austerity.”

John Maynard Keynes put it better than I can in talking about a similar current of thought back in the 1930s:

It seems an extraordinary imbecility that this wonderful outburst of productive energy [over 1924-1929] should be the prelude to impoverishment and depression. Some austere and puritanical souls regard it both as an inevitable and a desirable nemesis on so much overexpansion, as they call it; a nemesis on man’s speculative spirit. It would, they feel, be a victory for the Mammon of Unrighteousness if so much prosperity was not subsequently balanced by universal bankruptcy.

We need, they say, what they politely call a ‘prolonged liquidation’ to put us right. The liquidation, they tell us, is not yet complete. But in time it will be. And when sufficient time has elapsed for the completion of the liquidation, all will be well with us again.

I do not take this view. I find the explanation of the current business losses, of the reduction in output, and of the unemployment which necessarily ensues on this not in the high level of investment which was proceeding up to the spring of 1929, but in the subsequent cessation of this investment. I see no hope of a recovery except in a revival of the high level of investment. And I do not understand how universal bankruptcy can do any good or bring us nearer to prosperity…

I do not understand it either. But many people do. And I do not understand why such people think as they do.

 

No do I understand why they think that way.  But I suspect that it has to do with political and rich elites preferring to have a more dominant share of a smaller pie than to rationally wanting to share a larger one.  As one of the commenters to Brad’s post put it:

We’ve been down this road before. “Auterity” is just a euphemism for getting the ignorant and foolish to support their own ruin in the name of wealth transference to the already wealthy by destroying government programs and services that benefit the middle class and needy.

 

 

So Where Are We? Part I

A new semester is beginning, and with it get start another dialogue on the macro-economy with new group of students.  So to start the conversation I’m going to make a few posts that take a look at just where are we in the U.S. economy.

This first post is going to look at GDP and the growth trend (or lack thereof).  For my first expert witness I call Menzie Chinn of Econbrowser and the University of Wisconsin.  In a post last Monday (source here), he observes just how much the U.S. economy has lost as a result of the financial crisis and resulting Great Recession of 2007-2010.

In our forthcoming book [5], Jeffry Frieden and I tried to tabulate the likely costs of lost output associated with the Great Recession that followed the financial crisis driven by financial deregulation, lax fiscal and monetary policy, and ample capital supplies abroad. Using the January 2010 CBO projections, we calculated the cumulative GDP loss (relative to potential GDP) from 2007Q4-2014Q1 at 3.53 trillion Ch.2005$, 11349 per person (Ch.2005$), or about $12604 in current dollars).

Macroeconomic conditions, as well as the projections of potential output, have changed somewhat since I undertook that calculation earlier this year, so I decided to update the calculation. I present the estimated cumulative loss from 2008Q1-2010Q3, as well as the cumulative loss from 2010Q4-2011Q4.

cumloss1.gif
Figure 1: GDP, in bn Ch.2005$, 2010Q3 3rd release (blue), mean forecasted GDP from WSJ January 2011 survey (red), potential GDP as projected by CBO. Light green figures are cumulative output gap figures for indicated periods. NBER defined recession dates shaded gray. Sources: BEA, GDP 2010Q3 3rd release, WSJ January 2011 survey, CBO, Budget and Economic Outlook: An Update (August 2010) – additional data on potential GDP, NBER, and author’s calculations.

Fears of overheating, when counterbalanced against the costs of lost output, seem somewhat misplaced in this context. [

Menzie (one of the premier academic econometricians around), projects that by 2014 the cumulative lost output in the U.S. from the crisis-recession (and the weak recovery policies following it) will be over $3.5 trillion, or over $12,000 per person in the U.S.

As the graph also shows, our recovery is weak and nearly non-existent.  Instead of “healing” and returning to health (long-term trend) as the economy did after recessions during the long 1948-2000 period, we have effectively said good-bye to a large chunk of the U.S. economy. What’s left is returning to normal growth rates, but we are not really recovering what was idled.  This is not good.

It’s Over. Economists are Speechless.

I’m a few days late with this, but much of the mainstream media have covered it already.  The recession is over.  Officially.  We are now in recovery officially.  Actually we’ve been in recovery for over a year now, ever since June 2009.  The official pronouncement is here. Of course this has led to much confusion and contention.  Many people, rightly feeling the pain of nearly 10% unemployment, slow sales, foreclosures, weakening incomes, etc. are wondering “In whose universe is the recession over? I’m still hurting!”

What this all points out, though, is confusion over terms.  Or, more precisely, the lack of vocabulary among economists.  First, the whole reason for dating recessions “officially” is so that economic research amongst different economists can go on without endless confusion and arguments about the timing of some historical decline in GDP.  In this case, the practice of “officially dating recessions” might well be a bust.  It’s hard to tell.  But in the larger public discussion, the current confusion of “how can the recession be over if I still don’t have my job back and it still looks grim?” actually reveals two serious flaws in economic theory/terminology.

First is the fact that economists have not defined the term recovery adequately.  Basically, there’s a definition for recession, but not for recovery.  Instead, a recovery is happening anytime a recession isn’t happening.  So, since the period since June 2009 doesn’t really seem to fit the definition of recession (no broad-based decline in aggregate measures of the economy such as output, employment, and production), we are therefore, by default, declared to be recovering.  Except of course that we aren’t really recovering. We’re going nowhere. In aggregate we stopped declining in summer 2009, but we haven’t started really growing in a broad-based way.  We certainly haven’t come anywhere near re-couping what we lost.  And that brings us to the second terminological problem.  Economists and theory are based on the assumption that an economy is either growing significantly or declining significantly.  We have “recovery” for when we’re growing, getting better, and moving upward.  We have “recession” for when things are declining, getting worse, and moving down.  We don’t have a word, indeed we barely have a concept, for an economy that’s parked. Stationary. Going nowhere. That’s why we’re speechless.  The economy has fallen and it can’t get up. But we don’t know how to say that.

BTW:  Want to know the official dates of previous recessions?  Check it out here.

One Quick Thing: GDP Not Good

I know I said I’d be on vacation, but thanks to 3G coverage, I can add this item today.  The second revision of 1st qtr GDP 2010 GDP growth rate was announced.  It’s revised down again, and it still looks like it’s mostly all the result of inventory accumulation.  So we have GDP = C + planned Investment + unplanned Inventory accumulation + G + net exports.   And the major reason the overall number is up 2.7% is due to unplanned Inventory accumulation.  We need C and planned Investment to increase — that’s a healthy economy.  But it wasn’t happening in 1st qtr and it looks like things have slipped or slowed since 1st quarter.   So I’m raising my estimate of the chances of a double-dip recession with negative GDP growth in the second half of 2010 to 50% or maybe 60%.

See Calculated Risk:

The Q1 real GDP rate was revised down again (third estimate) to 2.7% from the 2nd estimate of 3.0%.

Consumer spending was weaker in Q1 than originally estimated. PCE growth (personal consumption expenditures) was revised down to 3.0% in Q1 from the previous estimate of 3.5%.

Some more from Reuters: Economy Grew Slower in First Quarter than Expected, Up 2.7%

… business spending, which only rose at a 2.2 percent rate instead of 3.1 percent as reported last month. This was as a spending on structures was revised down to show a slightly bigger decline than reported last month. Growth in software and equipment investment was also lowered to a 11.4 percent rate from 12.7 percent.

Another drag on growth came from exports whose growth was eclipsed by a rise in imports, resulting in a trade deficit that subtracted from GDP.

… real final sales to domestic purchasers, considered a better measure of domestic demand, rose at a 1.6 percent rate instead of the 2.0 percent pace reported last month.

The “Change in private inventories” was revised up to a contribution of 1.88% from the previous estimate of 1.65%. So inventory adjustment accounted for over two-thirds of the GDP growth in Q1 – and the inventory adjustment appears over. This is a weak third estimate.

Posted by CalculatedRisk on 6/25/2010 08:32:00 AM

The Great Deprivation: Decapitating Human Capital

Good article describing the long-term impacts of our short-term failure to address unemployment and jobs creation:

Everyone keeps calling it the Great Recession, as though they are not too depressed about the prolonged backslide in gross domestic product, which only recently resumed its upward climb.

Backslide may describe what happened to the market economy, but it doesn’t capture what’s happening now in families hit hardest by persistent unemployment.

They are suffering not a temporary setback, but a permanent reduction in their ability to develop their own and their children’s capabilities. Put in terms that economists are fond of, their human capital is being … decapitalized.

via The Great Deprivation – Economix Blog – NYTimes.com.