What more does one need to say when, over the past couple of days, two of our nation’s most prescient economists, Simon Johnson and Paul Krugman, take slightly separate paths to end up telling us virtually the same thing? (Read on.)
M.I.T. economics professor, former chief economist of the International Monetary Fund (IMF) and author Simon Johnson posted an interesting analysis of where our economy is and where it’s headed over at the NY Times Economix blog, Thursday morning, “A Second Great Depression, or Worse?”
He immediately answers the rhetorical question with a flat-out “No.” He continues: “…it is increasingly likely that we will find ourselves in the midst of something nearly as traumatic, a long slump of the kind seen with some regularity in the 19th century…”
This is the guy, IMHO, who authored one of the most important books on the causes of our current economic downturn, “13 Bankers” (March 2010, Pantheon), and at least two of the most important (IMHO) MSM pieces on our economy, the year prior to that: “The Quiet Coup” (May 2009, Atlantic), and “The Two-Track Economy: Inequality Emerging From Today’s Recession” (August 2009, New York Times’ Economix Blog).
For some context, here are Elizabeth Warren’s sentiments on Johnson's thoughts in ”13 Bankers”: “…(Johnson and Kwak) provide[s] the best explanation yet for how the smart guys on Wall Street led us to the brink of collapse. In the process, they demystify our financial system, stripping it down to expose the ruthless power grab that lies at its center…”
Here’s Johnson from Thursday morning…
A Second Great Depression, or Worse?
New York Times
Economix Blog
August 18, 2011, 5:00 am
With the United States and European economies having slowed markedly according to the latest data, and with global growth continuing to disappoint, a reasonable question increasingly arises: Are we in another Great Depression?
The easy answer is “no” — the main features of the Great Depression have not yet manifested themselves and still seem unlikely. But it is increasingly likely that we will find ourselves in the midst of something nearly as traumatic, a long slump of the kind seen with some regularity in the 19th century, particularly if presidential election-year politics continue to head in a dangerous direction…
Johnson continues on to provide comparisons between where we are now and where we were in the early 1930’s, focusing upon: economic output (gross domestic product, and/or “GDP”), unemployment, and the shrinking of the credit system, because “banks failed in an uncontrolled manner.”
We’re told that output dropped by some 25% during the Great Depression, and that G.D.P. only sunk about 4% at its lowest point of this past recession. (I believe the recently-revised GDP numbers had us at one quarter at a bit lower point than that.)
He notes that unemployment rose to a point well over 20% in the 1930’s and stayed there; but, at the height of this past recession we only surpassed 10% for a short while (in the fourth quarter of 2009).
Even by the highest estimates — which include people discouraged from looking for a job, thus not registered as unemployed — the jobless rate reached around 16 to 17 percent. It’s a jobs disaster, to be sure, but not the same scale as the Great Depression.
And, third, “…in the 1930s the credit system shrank sharply. In large part this is because banks failed in an uncontrolled manner — largely in panics that led retail depositors to take out their funds. The creation of the Federal Deposit Insurance Corporation put an end to that kind of run and, despite everything, the agency has continued to play a calming role.”
I would tend to at least partially disagree with the last two of Johnson’s three points, historically, and for what I believe are quite sound, fact-based reasons, too.
As I’ve noted in numerous posts, even the President’s Chair of his Council of Economic Advisors Austan Goolsbie is of the opinion that monthly Bureau of Labor Statistics’ (BLS’) U.3 Index numbers are usually about 1% to 2% lower than the reality on Main Street. (So, with unemployment currently at the “official” rate of 9.1%, that means , according to Goolsbie, it’s somewhere between 10.1% and 11.1%.) And, as I noted in a post, early on Wednesday, the BLS’ annual benchmark revisions over the past few years have consistently and significantly demonstrated to us that, at least during economic downturns, our government tends to understate actual jobless stats on a month-to-month basis, opting to quite significantly adjust them to the downside in their annual benchmark revisions, each February.
Interestingly, in my post where I focused on Binyamin Appelbaum’s lead in Wednesday’s NY Times, we’re seeing this backward “adjustment” issue play out in our nation’s critical GDP statistics. This “backward adjustment” is also now an ongoing “reality” with regard to our nation’s beyond-Depression-level housing statistics, where it was noted that the National Association of Realtors (NAR) has consistently overstated our nation’s monthly, preexisting home sales metrics for quite awhile, too.
Just a day after I posted my diary early on Wednesday, and as Calculated Risk noted it, the NAR stated in a press release that they would be providing an annual “benchmark revision” (something they have never really done up until now, even though they’re now attempting to sell it otherwise) to their 2010 home sales numbers (and, perhaps, to earlier years’ home sales numbers, too) in an “update” in “upcoming weeks.” (Heh! Even Calculated Risk inferred a bit of a frown regarding the NAR’s new-found, borrowed use of the term from the BLS, which really amounts to little more than p.r. obfuscation for the reality that the NAR did, indeed, overstate national home sales numbers for 2010, and perhaps for many years prior to that; to the tune of somewhere between 10% and 15%, as Calculated Risk noted.)
By the way, and for the record, for any that deny what’s going on before their eyes, this month-over-month/year-over-year number inflation issue is not a “conspiracy theory.” These are cold, hard facts, (independently facilitated--without ANY inference/implication of collusion) by three separate entities publishing many of the most important key economic metrics utilized within our society: our government’s Bureau of Labor Statistics, the Bureau of Economic Analysis and the private sector’s National Association of Realtors.
(At this point, it is fair to note that, in addition to the Republican Party turning our House of Representatives into the trainwreck that it is, today, the publicized statistics relating to key metrics in our economy, in many ways, also support what has been an insufficient response to fixing our country's economic ills.)
Furthermore, with regard to the concept of credit “shrinking” and fewer banks failing this time around, in comparison to what occurred in the 1930’s, I would argue with Johnson’s assessment and point out that the situation now, once one pulls away the proverbial curtain of obfuscation, is actually far more severe than it was in the 1930’s. As I’ve noted and documented it quite extensively, our nation’s leading credit card issuers slashed available credit among the consumer population by approximately 50% between 2008 and 2010. And, it is also widely documented that while fewer banks have gone bust over the past three years than in the 1930’s, the reality is that our nation’s top 10 banks hold somewhere in the neighborhood of 70%-80% of all of the U.S. consumer population’s assets. And, at least two or three of them (think: Bank of America, Citigroup, etc.), easily, would have gone under—and they’re still insolvent, today--were it not for the government committing many hundreds of billions of dollars in financial support to them, and then on an ongoing basis to the tune of some $200 billion per year in hidden financial bailouts to these top banks, continually, since 2008.
Ironically, one need look no further than the stock market’s “stellar rebound,” this past Monday, for the greater truth obfuscated behind the headlines. Here’s Ilargi, over at the Automatic Earth blog, pointing out the inconvenient truth about our country’s top banks.
Ilargi: The August 15 trading day closed to headlines such as this:
"[US] stocks jumped, posting the third consecutive gain and the best 3-day rally since March 2009...".
Sounds good, doesn't it? But perhaps a wee bit of perspective is in order. Financials were up yesterday, but here's what they look like over the medium term:
• Bank of America:
+7.93% Aug 15, but -22.4% in past month, -34.95% in past 3 months
• Citigroup:
+4.76% Aug 15, but -18.53% in past month, -24.71% in past 3 months
• Morgan Stanley:
+6.10% Aug 15, but -15.03% in past month, -25.74% in past 3 months
• Goldman Sachs:
+2.28% Aug 15, but -8.28% in past month, -15.79% in past 3 months
• Société Générale:
+2.06% Aug 15, but -28.53% in past month, -41.23% in past 3 months
Reality is not quite the same, in other words, as the headlines. The "best 3-day rally since March 2009" leaves a lot to be desired. In fact, the chances that these stocks will ever recover are very slim, and even if they do, it won't be for long.
Bold type is diarist’s emphasis.
Johnson continues along in his Economix blog post drawing comparisons between today’s economic downturn and what occurred in late 19th century America as being: “…not as horrendous, yet very traumatic for many Americans. The heavily leveraged sector more than 100 years ago was not housing but rather agriculture — a different play on real estate.”
And, perhaps my biggest issue with Johnson is that he defends Bernanke’s and the Fed’s actions which many on the Democratic side of the aisle have noted have all but completely ignored that organization’s responsibility for doing everything in its power to maintain full employment.
Early on Friday, Krugman tells us, on the other hand, we’re entering into our second lost decade, and, “Instead of turning into Greece, we’ve turned into Japan, except much worse. And policy is replaying 1937.”
Awesome Wrongness
Paul Krugman
“Conscience of a Liberal” (NY Times) Blog
August 19, 2011 4:39AM
…Instead of turning into Greece, we’ve turned into Japan, except much worse. And policy is replaying 1937.
In the past, you could make excuses on the grounds of ignorance. In the 1930s they didn’t have basic macroeconomics. Even in Japan in the 1990s you could argue that it took a long time to realize that the liquidity trap was a real possibility in the modern world.
But we came into this crisis with a pretty good understanding of what was at stake and pretty good analysis of the policy options — yet policy makers and, I’m sorry to say, many economists just chose to ignore all that and go with their prejudices instead.
And the worst of it is that the people who got this so wrong have not and probably won’t admit to their awesome wrongness; on the contrary, they’ll dig in. And the Lesser Depression will go on and on and on.
On April 26th, I posted a diary which reported upon “…behind-the-scenes commentary by President Obama in December, in a 90-minute, "off-the-record" meeting, speaking to Krugman and a group of five other "liberal economic thinkers" (Nobel Prize-winner Joseph Stiglitz, Clinton administration Labor Secretary Robert Reich, and economists Jeffrey Sachs, Alan Blinder and Larry Mishel) at the White House, the day after "...the president had announced a deal with congressional Republicans, agreeing to extend the Bush tax cuts in exchange for middle-class tax relief and an extension of unemployment benefits."
...It was a month after the midterms, and many progressives were worried that even the modified liberalism of the administration’s first two years would dissolve in a new spirit of conciliation with the ascendant right. The economists present understood the meeting, one of them says, as the moment when Obama “talked to the left...”
...
...Now, in the Oval Office, he [President Obama] told his guests that this effort had been his “last chance to move the dial” on jobs, as one economist present recalls, and that, with the exception of smaller initiatives (he mentioned infrastructure spending), the politics had now made further stimulus impossible...
On July 11th, I published a diary which covered Paul Krugman’s analysis of how the general, totally ass-backwards, revisionist meme in D.C. was that “we tried Keynesian policies and they didn’t work.”
The numbers, as Krugman notes, below, and the truths behind stimulus effiorts to date, tell us this simply is not true.
Where The Money Went
Paul Krugman
New York Times’ Blog
July 10, 2011, 2:54 pm
Somehow I missed the BEA’s very useful page tracking the Recovery Act and how it is translated into taxes and spending. (Thanks to the commenter who mentioned it). It’s especially useful for thinking about what the Obama stimulus really involved — and what it didn’t.
Look at the peak quarter of stimulus (pdf), which was the first quarter of 2010. I’m going to rearrange the categories a bit. Here’s how I read it: at annual rates (in other words, actual numbers in the quarter were only 1/4 as large), the total budget impact was $357 billion. Of that, we had:
Tax cuts and refundable tax credits: $151 billion
Aid to individuals (mainly unemployment insurance and food stamps): $70 billion
Aid to state and local governments: $103 billion
Everything else: $33 billion
…
So much for “we tried Keynesian policies and they didn’t work.”
Bold type is diarist’s emphasis.
On Friday, Kossack PlutocracyFiles posted a diary entitled: “Paul Krugman on Elizabeth Warren's Populism (and Obama's lack thereof).” In it, they noted the following…
…The right intends to run against Obama on the issue of jobs.
Given that we're in the Lesser Depression, the lack of economic populism from Obama (and others) is weird. The country turned against John McCain when he said - in the wake of economic devastation - that the "fundamentals of the economy are sound." I think what Wisconsin and Ohio are showing us is that there really is a place for a candidate who will take up the mantle of economic populism. And what the rhetoric on the right is showing us is that if Obama doesn't take up economic populism, he cedes it to the right. So, it is "weird" and it's also a huge strategic mistake.
Earlier on Friday, per a post from blogger who received an email from the White House, we’re starting to hear some fairly vague details of a proposed jobs bill the President will be supporting next month. The bullet points of this plan are as follows…
Extend the payroll tax cut so that middle class families have more money in their paychecks next year. If you've got more money in your paycheck, you're more likely to spend it, and that means businesses of all sizes will have more customers. They'll be in a better position to hire.
Extend unemployment benefits so that millions of workers who are still pounding the pavement looking for jobs can support their families.
Pass a bipartisan road construction bill. There are over a million construction workers out of work after the housing boom went bust, just as a lot of America needs rebuilding. We can put these workers back to work by rebuilding our roads and bridges and railways.
Pass the patent reform bill to help our innovators and entrepreneurs get their job creating ideas to market faster.
Pass the trade agreements that will help businesses sell more American-made goods and services to Asia and South America, supporting tens of thousands of jobs here at home.
Put our bright, talented and skilled veterans returning from Iraq and Afghanistan to work. The President has proposed several initiatives to make sure our veterans are able to navigate this difficult labor market and succeed in the civilian workforce, including the Returning Heroes and Wounded Warrior Tax Credits, and his challenge to the private sector to train or hire 100,000 unemployed veterans.
Upon even a slightly closer look, only one of these points involves the government actually directly creating jobs: a bipartisan road construction bill. (The veterans plan, as vaguely described, appears to be yet another tax rebate program.) And, even that is unspecific.
While, once again, this certainly beats a sharp stick in Main Street’s eye, and the President does deserve kudos for it, the REALITY is that—even in its vague outline form—it does not appear to be sufficient enough to seriously move the unemployment bar significantly between now and the 2012 elections. Of course, it IS too early to pass judgment on this set of proposals. Much detail, never mind the upcoming horse trading that’ll be necessary to get this by a Republican House in any semblance of the form in which the White House supports it, remains to be seen.
I would consider myself, at this point, to be not cautiously optimistic; at best I’m just cautious about it. (And there’s plenty of precedent for my caution if you simply review the facts in this diary, up above.) Like the ARRA, which passed in 2009, this latest proposal does not appear, at this early juncture, to provide anything close to a true solution, Keynesian or otherwise.
Going full-circle on this, given the reality that the administration is now commencing preemptive political action to support this vaguely-worded “outline,” IMHO, it reinforces Johnson’s and Krugman’s sentiments, above; and, it also takes us to where Charles Blow leaves us in his commentary in Saturday’s NYT.
Obama in the Valley
Charles Blow
New York Times Op-Ed
August 20, 2011
…Great leaders draw us together by our universal humanity; they galvanize the wills of the willing; they draw clarity for the spigot of chaos.
But that is not how this president is performing at this critical moment, and people are growing increasingly unhappy with him. A Gallup poll released on Aug. 15 found that Obama’s approval rating had fallen to the lowest level of his presidency, and Gallup polls released a few days later found that the number of people not satisfied with the direction of the country and who disapproved of the president’s performance on the economy, budget deficit, job creation, education and foreign affairs had reached the highest levels of the administration.
The country needs the president to rise to this crisis in word, spirit and deed. We need him to reach out of his nature and into the nation’s need. We are on the precipice. There’s growing concern that we may slip into a second, more painful recession. There is little optimism that the housing crisis will loosen its grip on the economy anytime soon. The unspeakable truth is that we may well be on the leading edge of a prolonged period of national stagnation, if not decline.
A robotic Sustainer-in-Chief with an eerie inhumanity will not satisfy. At this moment, we need less valley and more mountaintop.
Until our country stops pouring its resources (to the tune of $200 billion, annually, even now) into propping up the too-big-to-fail banks (per my multiple diaries on this matter, over many months, and over the past week, alone), the bottom line is that our government continues to focus upon a policy that includes insufficient job creation on Main Street while insuring Wall Street doesn’t miss a meal, let alone its six, seven and eight-figure, annual salary bonuses for doing little more than leading the way in their now-institutionalized charade to obfuscate their still-insolvent balance sheets.
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(Diarist’s Note: Please consider this post a complement to gjohnsit’s excellent diary, currently on the Rec List. If you look closely at what we’re discussing, you’ll see there’s not much overlap in our commentary, today.)