Please don't throw around the word "Depression."
"Depression" is one of those rare words like "Holocaust" best limited to their original context. There have been no Holocausts since the Nazi slaughter of the Jews, in magnitude and especially determined intent. And any other use of the term - apart from being casual and lazy - can only degrade our understanding and watchfulness of atrocities of such magnitude.
The "Great Depression," initially a euphemism for the early "panics" routine in Industrial Revolution America well into the 20th century, describes one human event only. That catastrophic economic failure is described well by historian William Manchester in his 1974 masterpiece, The Glory and the Dream: A Narrative History of America, 1932-1972.
Manchester's first chapter begins with these words to describe the conditions of early-1930s America:
That August [of 1932] a writer for the Saturday Evening Post asked John Maynard Keynes, the great British economist, whether there had ever been anything like the Depression before. 'Yes', he replied. 'It was called the Dark Ages, and it lasted four hundred years.' This was the calamity howling on a cosmic scale, but on at least one point the resemblance seems valid. In each case the people were victims of forces they could not understand.
Zero Hedge, among my favorite economics blogs, highlights David Rosenberg's assertion that "it's time to start calling this for what it is: A modern day depression."
Rosenberg's former employer, Merrill Lynch, no longer exists, an early victim of the global financial meltdown. A bearish fellow to start with, Rosenberg, a Canadian who is now with the multibillion-dollar money manager Gluskin Sheff, has even more reason to be fraught after the demise of "Mother Merrill." Charlie Merrill invented Main Street retail stock-market investing more generations ago that we all care to remember. And Merrill was the world's biggest brokerage when it succumbed in 2008 to illiquidity from choking on the "toxic waste" Kool-Aid. Though not before propelling Rosenberg to prominence as the firm's chief North American equities strategist, whose sage observations were must reading.
And they have continued to be, in Rosenberg's current role as effectively a daily blogger on the import of rapidly evolving global economic conditions. I've regarded Rosenberg's work as something of a public service by him and by Gluskin Sheff ever since Gluskin lured Rosenberg back to Toronto.
When someone of Rosenberg's stature, even with his longtime bearish sentiment as a caution against his findings, in calling a Depression, word rapidly gets around. "It's official, it's a Depression, Rosenberg says so." I can assure you that this will be show up in macroeconomics and securities analysts reports for months to come.
But we are not in a second Depression. Not remotely. And, no offense to Rosenberg, it really doesn't help those struggling to set straight our admittedly challenging conditions to have the current downturn described in alarmist terms.
I can hear you saying, Isn't that what George W. Bush told us as the 2001-03 recession was getting underway? Or, for that matter, what Irving Fisher, the Harvard professor famous for dismissing the real Depression, was saying not long after the Crash of '29? At all costs, let's not dampen consumer spending and corporate confidence with frank talk about the deep do-do we're in.
But, I repeat, we're not in a Depression by any standard used to measure the one Depression we have experienced in the past century.
The Great Depression saw the U.S. jobless rate soar to between 17% and 25% in most parts of America, and even higher in Applachia and the other worst-stricken jurisdictions. Today's U.S. jobless rate is 9.1%, which means more than 90% of the workforce remains employed. Not until 1954 did the Dow Jones Industrial Average recover to the record it set on Black Friday. Today's stock market is trading at 2000 levels, not bad given the whammy we've were dealt in 2008-09. American banks failed, and homes and farms were foreclosed, at a vastly higher rate - especially on a per capita, inflation-adjusted rate - than is the case today. The 1930s were plagued by mutually destructive trade wars, a condition not existing today. The Great Depression was accompanied by a pre-existing condition, the "Dust Bowl" - a combination of prolonged, severely unfavorable growing conditions through the 1920s followed by depressed sales and prices and the aforementioned trade wars in the 1930s. And that was at a time when agriculture still employed about half the working population. A population, by the way, largely in darkness at night, since rural electrification came only with the New Deal. Farming conditions were, to be charitable, primitive.
As Manchester notes, there was no precedent for the Great Depression. There is ample precedent for this severe downturn, as Ben Bernanke, famed as a student of the Great Depression, is well aware. The Keynesian economics that has consistently pulled us out of recessions in the post-WWII era was, in 1932, an untested set of theories wholly rejected by then-president Herbert Hoover, enthrall to balanced budgets as a solution to economic failures. As, in fairness, were his predecessors and contemporary experts. Even FDR, campaigning that year for the presidency, pledged to balance the books. That's how deeply embedded that obsolete theology was. You might point out that it's still embedded, or has undergone a revival this year. But more recently, Obama, David Cameron and Stephen Harper are having second thoughts about the calamitous implications of imposing government austerity on people already in distress.
There was, of course, no social safety net at the onset of the Great Depression, no Social Security, old-age pensions, unemployment insurance, Baby Bonuses, Medicare, Medicaid, Head Start, Aid to Families With Dependent Children (the chief welfare program from FDR's time to Bill Clinton's scrapping of it in 1996), Pell grants, Hope grants, SCHIP or Cobra. No Earned Income Tax Credit (EITC), devised by Sen. Russell Long (for whom the Senate office building is named) by which Clinton later narrowed the gap between rich and poor for the only time in the modern era, and expanded further by Obama.
There were, as important, few domestic regulators and no international ones of economic importance. The International Postal Union was about the best we could manage before the Bretton Woods agreements of 1944, in which Keynes, now finally a leading light, was the motive force. That New Hampshire conclave gave us the World Bank, the International Monetary Fund and the General Agreement on Tariffs and Trade (GATT, now the World Trade Organization) to effectively combat the scourge of trade wars. There was no Securities and Exchange Commission, created by FDR and first headed by Joe Kennedy, who knew a thing or two about unscupulous Street tactics, to ensure that the likes of Anthony Mozillo, chief tout of junk mortgages in the 2000s, would be made to disgorge much of his ill-gotten gains.
Central banks were young, largely untested, and held in suspect regard by the powers that be. (Ron Paul still favors dismantling the Fed. Stupid notions die hard.)
The September 14th edition of "Breakfast with Dave" is well worth reading, even compulsory, especially as a primer on how rare financial downturns, like this one, are different and hugely worse than run-of-the-mill industrial ones. But I have some difficulty with these passages:
A depression, put simply, is a very long period of economic malaise and when the economy fails to respond in any meaningful or lasting way to government stimulus programs. [It is] a series of rolling recessions and modest recoveries over a multiyear period of general economic stagnation as the excesses of the prior asset and credit bubble are completely wrung out of the system...
The economy is in a depression when the banks ar sitting on nearly $2 trillion of cash and yet there is no lending going on to the private sector. It's otherwise known as a 'liquidity trap.'...
In a recession, everything would be back to a new high nearly three years after the initial contraction in the economy. This time around, everything from organic personal income to employment to real GDP to home prices to corporate earnings to outstanding bank credit are still all below, to varying degrees, the levels prevailing in December 2007. [The month the U.S. economy is said to have gone into recession, though such figures are notoriously subject to revision.]...
We are talking about $5 trillion of excess debt that has to be extinguished either by paying it down or by walking away from it (or having it socialized). Look, we can understand the need to be optimistic, but it is essential that we recognize the type of market and economic backdrop we are in.
The economy has not failed to respond to government stimulus programs, of which they has been just one in America. The Obama stimulus of February 2009 took GDP from negative growth of more than 6 per cent to positive growth of more than 6% by the end of that same year. I'm not if in non-wartime U.S. history there has ever been a "swing" of 12%-plus magnitude. And, as Rosenberg notes, the result included a stunningly rapid recovery in a stock market that had plunged 40% and an equally stunning recovery in corporate profits. It also created or saved about 3 million U.S. jobs, according to the non-partisan Congressional Budget Office.
But then the stimulus ended, as designed. And so did the recovery. Here too we have a precedent, one of FDR's few major mistakes when he eased up on stimulus after his first re-election, in 1936, and the New Deal recovery stalled. (The "patrician of the Hudson" really did believe in balanced budgets, and was tacking back in that direction, also mindful of a looming world war that would play havoc with the Treasury.)
Obama, one could argue, made the same mistake, save that the roughly $800 billion stimulus over two years - a larger sum, even adjusted for inflation, than FDR spent during the entire New Deal era - was as much as conservative Dems in the Senate would give him. (The G.O.P. stood on the sidelines, withholding every one of its votes from the Recovery Act.)
So it's just wrong to say this U.S. economy doesn't respond to genuinely robust stimuli. It does, it has. So have the economies of Canada, China, Germany, Britain and every other nation that with admirable speed resorted to deficit financing to cushion the blow of what politicians and policymakers quickly understood was a devastating financial downturn and not a more routine, briefer and less harmful "correction" in an economy that was "getting ahead of itself" or "overheated," as economists say. No, this was the near-utter collapse of the global financial system, from Frankort to Frankurt, and the drastic steps required were taken because, unlike the Great Depression, there were institutions and procedures in place to act with competence, speed and power. By power, I mean the sheer size of the stimulus packages worldwide. Leaders correctly sensed that the events of 2008-09 were no time for half measures by way of restorative action.
I don't quibble with Rosenberg's bill of indictment against an economy whose performance is underwhelming or worse in one category after another. And if his purpose is to draw attention to the need for an American economic renaissance I applaud him. America's workforce has slid to one of the least-educated in the industrial world. Public-service cuts at the state level are further diminishing the Republic's still viable prospects of "winning" the 21st century as it did the proceeding one.
But here's one thing the current malaise (no argment with that term) has in common with the Great Depression. They each have been, not economic crises, but political ones. Like Hoover, a gifted and humane fellow who arguably was the best commerce secretary in U.S. history, those pols today influenced by reactionary Tea Partiers don't get that you have to spend money to make money, or in political economy terms, you have to invest in your people, not starve them of a future as contributing Americans.
No less than Rosenberg, I despair at government policies that appear to have been ineffectual, but a second look shows they worked as long as they were in place. First they saved the global financial system from utter ruin, then stabilized the domestic economies of the U.S. and other industrial nations. And then the forces of reaction and austerity took over. On came the "moralizers," as Paul Krugman calls them, who can't bear the idea of spendthift Greeks not being punished for living beyond their means, when the real issue is a domino effect if Greece is left to default.
Calling this downturn a Depression is too easy. It lets too many people off the hook. It suggests, as Republicans now do, that the first stimulus didn't work (plainly untrue), so why sign onto Obama's recently sought $444-billion "Son of Stimulus." Indeed, why do anything? Calling it a Depression, which was regarded in the 1930s as an incomprehensible act of the Almighty, obscures the reality that what we broke we can repair, shorn of ideological fixations that hold us back.