Most people in our society today have never experienced a depression. We’re not unlike a class of twelve year-olds being presented with something new and uncomfortable in sex-ed class. We’re used to hearing about it but it’s mostly strange — and it’s not something most of us are used to talking about when it actually affects our lives. If we don’t talk about it, if we don’t ask questions and learn to say no, then we might find ourselves making some bad decisions we aren’t equipped to handle that will change the rest of our lives more deeply than anything we ever expected to face.
It was exactly last March that I saw the D-word used in an article about our economic crisis — “possibly the worst since the Great Depression,” or something like that. I remember roughly when it was because it was one of those giant …gulp moments. It took me months before I was comfortable with the idea of using it (knowing how self-perpetuating economic descriptions can be) and even then I can’t remember ever using it — except to paraphrase what someone else wrote — and even then…
Now I see that Tyler Cowen is referring to this as a depression in his posts, in a very matter-of-fact wort of way. I’m not sure when exactly he started doing that (I just noticed yesterday); today he points back to a Feb 18 post, quoting himself as saying “[A] central lesson of this depression will be…” and the original post reads ”One central lesson of this crisis…”
Yesterday for the Wall Street Journal, Robert Barro asked “What Are the Odds of a US Depression?“:
The bottom line is that there is ample reason to worry about slipping into a depression. There is a roughly one-in-five chance that U.S. GDP and consumption will fall by 10% or more, something not seen since the early 1930s.
Note: Barro’s calculation was made by looking for historical correlations between stock market crashes and depressions. From the article it looks like a pretty narrow study — the kind that emphasizes methodical purity over actual usefulness.
I’m more curious to see the odds of a depression correlating with massive stock market crashes and massive housing market crashes and banking crises (much of this occuring before the stock market crash, by the way, not as a result of it…) and multiple other crises in industries (e.g. auto, media) wrestling with immanent business model obsolescence and maybe the collapse of a massive consumer spending bubble and maybe an unprecedented pension fund crisis…
Of course it’s next to impossible to do a study like that and be perfectly rigourous about it – so we’ll never get it – and, guess what, we can’t rely on economists through this (which isn’t the same as saying we shouldn’t respect them).
While we can’t completely rely on them, economists are still the best source of guidance. Here’s Cowen in January, looking at eight reasons we are in a depression:
1. We have zombie banks.
2. There is considerable regulatory uncertainty in banking and finance.
3. There is a negative wealth effect from lower home and asset prices.
4. There is a big sectoral shift out of real estate, luxury goods, and debt-financed consumption.
5. Some of the automakers are finally meeting their end, or would meet their end without government aid.
6. Fear and uncertainty are high, in part because they should be high and in part because Bush and Paulson spooked everyone.
7. International factors are strongly negative.
8. There is a decline in aggregate demand, resulting from some mix of 1-7.
I have two simple points, First, a large fiscal stimulus addresses factor #8 but fares poorly in alleviating the other problems. Of course it may give a band-aid for #5 or #6 and you can tell other stories but we are in a multi-factor depression.
Second, forecasting will prove very difficult. These factors interacted with each other in a unique manner on the way down and they may well interact in an unpredictable manner on the way back up, whenever that comes. Just for a start, who has a good model of #1, #2, or #6? Right now we’re seeing a lot of good faith efforts to develop forecasts, but I say don’t believe any of them, whether they support your point of view or not.
I’m in no position to make a technical case for calling this a depression vs. a “long and deep recession” (which I think any sensible and informed person would admit we are in). As a cultural matter I think it might be useful (as I indicated at the top of this post) to get used to the word “depression” to describe the present… DEPRESSION.
This isn’t just “like” the Great Depression, it is a depression in its own special way.
I’m afraid that our constant referrals back to the Great Depression of the 1930′s are somehow an unconscious attempt to avoid talking about our present circumstances in plain terms. Ironically, I suspect we won’t be able to appreciate the differences between our Global Depression and the Great one (and the Long Depression before it) until we finally put it in the same category.
Now let’s stop being coy about the name and start talking about how to manage it with maturity.
[Everything that follows is an Update, published 12 hours later]: I had some other links I wanted to share in this but I was pressed for time earlier. (I had too many windows open and my computer pretty much crashed. Funny story though: as that was going on my new MacBook arrived via FedEx. I’ve never used one before. It took a few minutes to set it up and get accustomed to it but I managed to finish the post and publish it in somewhat decent condition.)
First, this video featuring Robert Shiller covers the material perfectly. Not only does he present a brief-yet-excellent case arguing this crisis is heading towards depression (maybe not explicitly), but he also addresses the difficulty of talking about it openly — especially using this explicit language (he admits that he himself is hesitant to use “depression” — preferring to stick to “crisis”).
The second discussion I wanted to share was about Michael Mandel’s case (via Matt Yglesias) that real productivity growth since the 90′s is a myth. I like Cowen’s take on it:
there was some productivity growth but much of it fell outside of the usual cash and revenue-generating nexus. Maybe you will live until 83 rather than 81.5 and your pain reliever will work better. In the meantime you will read blogs and gaze upon beautiful people using your Facebook account. Those are gains to consumer surplus, but they don’t prop until the revenue-generating sectors of the economy as one might have expected.
I seem to be relying on Tyler Cowen a lot in this post… anyways, John Quiggin at Crooked Timber liked it too, adding a few bullet points that Yglesias included when he came back to the discussion, writing about “the rise of social production.” The last bit especially stands out as being oriented more to the other side of this transitional crisis…
Once we admit these circumstances aren’t just “the worst since” the last depression but will actually become a historic depression in its own right, we don’t have to be so frightened by “staring into an abyss”; we can start to appreciate that we’re already in that abyss and it isn’t really that bad. The future has always been uncertain. The overarching lesson of all this is that we’ve been projecting rosy assumptions into an unknowable future; now we’re finally being honest but we’re not equipped to handle what we can’t see.
It might not seem like it but I actually think of myself as an optimist (though maybe “contrarian” is a more accurate word). On one hand I’m saying this is a depression, but on the other hand I want to point out that life goes on during depressions: the world doesn’t stop turning, the economy doesn’t halt altogether, people don’t stop buying things.
In fact, I’m buying more things now than I was before. Remember I just bought a new computer — my biggest purchase in years. In any given period, different people are moving in different directions. Fewer people will be buying cars and starting renovations, but there will still be young couples buying homes, etc. A depression isn’t a reason for people not to spend good money, and it certainly isn’t a reason to freak out.
When I used the sex-ed metaphor at the top — specifically the part about saying no — I didn’t mean we should stop doing things. Being able to say no means saying no at the appropriate moments and saying yes when it’s appropriate to say yes… yes to informed investments and manageable risks, no to knee-jerk reactions and hail mary rescue attempts, no to panicking… and sometimes even, say no to saying no.
[Last update Oct 3, 2009: deleted first paragraph -- it was a crude and superfluous development of the sex-ed metaphor.]
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