Paul Krugman - The Third Depression

[Gumby]

That site is a great resource. I may spend some time playing with it today.

 

[ERD50]

We are now running at 45 percent of GDP, I don't know how much bang for the buck you get when you already own 1/2 of the bucks.

Yes, interesting chart. So let's see... if what got us out of the depression was the increased Govt spending from 20% to 50% of GDP, that is just a 2.5x increase. So, apply that 2.5X to our current 45% and you get.... whoops!

-ERD50

 

[Texas Proud]

It seems to me that promoting government austerity now because we have been unable properly to pull back spending when we were flush in the past will simply compound the problem. It is the cutting off of one's nose to spite one's face.

At this point, we still need government spending to supplement private sector demand or the economy will not recover. What we should be doing is getting serious about the changes needed once the economy is back up to speed. Then, we can cut back.

Then why pass the most massive tax hike in the country history to pay for basically universal health care...

And also propose one of the biggest taxes in cap and trade....

The problem seems to me that we can not spend our way out of this recession... we have to let it run its course.... I would rather cut off my nose now than my head in a few years....

I think that more spending will be wasted... we will still have a bad economy but even more debt to pay off... and at some point and time there will be a massive tax hike to pay for this... there is no free lunch no matter what we think...

 

[Texas Proud]

The other problem that no one seems to want to talk about is our 'normal' level of gvmt (well, I guess some are)....

How much do you think the economy needs to grow until we are at a balanced budget I mean, if for some reason we just did not spend any more money tomorrow than we are spending today... nothing for increased inflation, no 'new' beneficiaries.. nothing... I suspect it would be many years and maybe a couple of decades..

We can not grow our way out of this problem... so I AM talking about austerity measures.... I am smart enough to say not right now.... but I want some kind of balance budget amendment NOW... not a 'if you elect me again I will balance the budget' speech... not a promise in 5 or 10 years... something that is hard...

 

[IndependentlyPoor]

The question is - does the Keynesian theory of increasing deficit spending get an economy out of a recession/depression. Again, there is no evidence or examples that it does.

I remembered Krugman's argument about this, but thought that I would have a look also.
Here is the GDP and government spending from 1929 to 1950. I was expecting to see a significant bump in government expenditures from 1933 to say 1936 as the New Deal programs kicked in, but nooo.
What I do see is the WWII giant expenditures.

If I understand correctly, Krugman claims that the New Deal was just too small. (He is saying pretty much the same thing about economic stimulus today.)
Krugman also claims that Roosevelt lost the faith, raised taxes and tried to restrain deficit spending in 1937 leading to a second dip. The data? Meh.

I must admit, the idea of vastly increasing the national debt right now terrifies me.
Data from
U.S. Department of Commerce. Bureau of Economic Analysis

 

[Running_Man]

Part of the reason you are seeing that is that from 1940 to 1948 net inflation was 67 percent so the 225 of GDP up from 1940's 80 is really an increase to 135. While in the 20's you had price deflation.

The equivalent for spending as we did in WWII would require the government spending to be the following

6 Trillion 2010
15.6 Trillion 2011
37.2 trillion 2012
56.4 trillion 2013

If you look at the Federal Government spending you will see that it went from 1.7 billion in 1929 to an excess of 5 billion by 1936. There were spending 86 billion by 1943. If you substitutte the word trillion for billion we have the same sort of scenario, these kinds of increases cannot be the basis of a sane economic policy

 

[IndependentlyPoor]

Same data, adjusted for constant 2010 dollars.

It does make the 1937 "austerity" show up, but it is still dwarfed by the mountain of war spending, almost 50% of the GDP at its peak. Truly horrifying numbers.

The economy took off after the war, despite the huge war debt. Whether this was due to the Keynesian stimulus of the war spending, or the fact that we had pretty much the only manufacturing left in the world is above my pay grade.

 

[bbbamI]

All this talk about depression is depressing me. Now, where's my cherry...

 

[Texas Proud]

Same data, adjusted for constant 2010 dollars.
View attachment 9591
It does make the 1937 "austerity" show up, but it is still dwarfed by the mountain of war spending, almost 50% of the GDP at its peak. Truly horrifying numbers.
View attachment 9592
The economy took off after the war, despite the huge war debt. Whether this was due to the Keynesian stimulus of the war spending, or the fact that we had pretty much the only manufacturing left in the world is above my pay grade.

Actually there is a theory that I had read that it was the case that we were the only intact manufacturing county after the war... so it was a big factor... then there was a lot of demand as the families started to grow at a huge rate (and we are the result of THAT fun)....

 

[IndependentlyPoor]

All this talk about depression is depressing me. Now, where's my cherry...

If you think that you are going to lure me into asking you about losing your cherry..

You're right!

Wanna tell us all about it?

 

[bbbamI]

Wanna tell us all about it?

......Four score and seven years ago.....

 

[kevink]

Just stumbled on this interesting bookend to the Krugman piece by Robert Reich:

Robert Reich (Slouching Toward a Double Dip or a Lousy Recovery at Best)

I'd like to believe he's wrong, or at least unduly pessimistic, but it seems pretty accurate. Tough for retirees, brutal for anyone just starting to make their way in the world.

 

[chinaco]

The odd part about all of this is that companies need workers.

Our organization has lost many people over the last 3 years due to attrition. Yet they have a hiring freeze. We are down 5% in personnel. I know that we could replace 2% or 3% in a year if we get the approval. Our company has the money... yet they wait.

I have no doubt that this is the situation in many many organizations.

Part of the problem is in Washington. The stalemate on important legislation has cast a cloud of uncertainty.

If we get Financial Regulation behind us and that oil spill is at least plugged... the mood could change.

 

[ziggy29]

The odd part about all of this is that companies need workers.

Our organization has lost many people over the last 3 years due to attrition. Yet they have a hiring freeze. We are down 5% in personnel. I know that we could replace 2% or 3% in a year if we get the approval. Our company has the money... yet they wait.

I have no doubt that this is the situation in many many organizations

In a job market this bad, I figure many employers are hoping to use "fear" to milk as much "free" productivity gain as they can. They may be able to *afford* more, to hire more, to give raises and whatever else, but in this market they simply have no reason to. They don't need to do it for retention and recruitment, and maybe they haven't worked their employees to the breaking point yet, and as long as you can keep them fearful of the unemployment line, let's see -- 50, 60, 70 hours a week, anyone?

Any wonder why so many of us want out?

 

[REWahoo]

In a job market this bad, I figure many employers are hoping to use "fear" to milk as much "free" productivity gain as they can. They may be able to *afford* more, to hire more, to give raises and whatever else, but in this market they simply have no reason to. They don't need to do it for retention and recruitment, and maybe they haven't worked their employees to the breaking point yet, and as long as you can keep them fearful of the unemployment line, let's see -- 50, 60, 70 hours a week, anyone?

Zig, don't be so darned cynical. The reason is they don't want to have to go through the agony of laying anyone off should they start hiring and then things take a turn for the worse. Yeah, that's it...

 

[HFWR]

Om a macro level, the FDR programs during the Depression may not have been the catalyst for ending the Depression, but the fact is many who would not have had a job found employment in those programs. I watched a PBS program a few months back about the CCC (or was it the WPA, the LMNOP, ?). They were interviewing some of those workers. Many talked about owning their first pairs of shoes EVER, and having three squares and such. Also, some say that the discipline instilled by these programs provided [-]cannon fodder[/-] a ready-made group ready to start fighting in WWII.

Edit to add: Many of the projects resulting from that era are still in use today.

 

[IndependentlyPoor]

My mother's family was dirt poor, and they all believed (and I think correctly so) that the New Deal programs kept them from starving. Her father was crippled with a broken hip, but her brothers all worked in one alphabet-soup program or another, and kept the family alive.

The programs may not have lifted the economy out of recession, but they were beyond value to millions of the poor who couldn't find any other work.

 

[ziggy29]

My mother's family was dirt poor, and they all believed (and I think correctly so) that the New Deal programs kept them from starving. Her father was crippled with a broken hip, but her brothers all worked in one alphabet-soup program or another, and kept the family alive.

I think almost everyone believes in at least some basic form of a social safety net. Heck, just for starters think about how much worse this last meltdown would have been without trust in FDIC insurance.

The disagreements mostly come in terms of the size and the approach to building it: how big do we build it? And do we design it (and the rest of economic policy) in a way that those who fall into it will be more likely to use it like a trampoline instead of as a hammock?

 

[IndependentlyPoor]

I think almost everyone believes in at least some basic form of a social safety net. Heck, just for starters think about how much worse this last meltdown would have been without trust in FDIC insurance.

The disagreements mostly come in terms of the size and the approach to building it: how big do we build it? And do we design it (and the rest of economic policy) in a way that those who fall into it will be more likely to use it like a trampoline instead of as a hammock?

Oops. That post was just a bit of not-quite-awake nostalgia prompted by the previous post. I wasn't thinking of the context of the thread, and didn't mean to imply anything about social security or present day social safety nets, or lack of them.
If it had a point at all, it was that government programs can do good in ways that economic measures cannot capture.

 

[ziggy29]

Oops. That post was just a bit of not-quite-awake nostalgia prompted by the previous post. I wasn't thinking of the context of the thread, and didn't mean to imply anything about social security or present day social safety nets, or lack of them.
If it had a point at all, it was that government programs can do good in ways that economic measures cannot capture.

I know. I'm just adding that the main points of discussion aren't *whether* some programs as a safety net are appropriate, but how much and in what ways.

Social Security is a New Deal era "safety net" and is incredibly popular despite its shortcomings. Even those who think it should be dismantled and replaced with something else don't usually wax nostalgic about, say, the 1920s or earlier when the only "safety nets" were family and charity.

 

[harley]

I'm not thrilled about the deficit increase, but I think I could swallow it more easily if the spending was actually accomplishing something. Maybe the CCC should be resurrected. The fire roads where I camp are in pretty rough shape.

Seriously, though, what about targeting some of the spending? We don't need cash for clunkers, the car industry isn't going to die. If a couple companies fail, others will pick up the slack. Green energy? Fine, if it adds value. But no matter where the energy comes from, our power grids could use some serious upgrading. Same with water. I'm no kind of expert on this stuff, and I don't even play one on the internet. But I suspect there might be less complaint about the expenditures if there was real and demonstrable results from it, including employment with value. We don't need more bureaucrats, and I know we're not going to get out of work IT guys building cabins in the woods. I guess I'm in the position of not knowing what will really work, but having a pretty good idea that what we're doing now isn't it.

 

[Texas Proud]

My mother's family was dirt poor, and they all believed (and I think correctly so) that the New Deal programs kept them from starving. Her father was crippled with a broken hip, but her brothers all worked in one alphabet-soup program or another, and kept the family alive.

The programs may not have lifted the economy out of recession, but they were beyond value to millions of the poor who couldn't find any other work.

Funny that I was talking to my mother the other day about this and how she had to live with her dirt poor grandmother..... and that GM refused to sign over the farm to the state so they COULD receive food... so they did not eat well... lucky for her she did some work at the local high school (where she was a student) and got free food... they also lived off the charity of others... the gvmt did not help her or her GM...

I do think that some of the family did work in the CCC or something like that... IIRC, my dad did some work there... I might have to ask mom tonight when she comes over...

 

[dex]

I think almost everyone believes in at least some basic form of a social safety net. Heck, just for starters think about how much worse this last meltdown would have been without trust in FDIC insurance.

The disagreements mostly come in terms of the size and the approach to building it: how big do we build it? And do we design it (and the rest of economic policy) in a way that those who fall into it will be more likely to use it like a trampoline instead of as a hammock?

That is the core of many questions today e.g. health ins. - both repubs and dems wanted it - the question was how to do it or the recent extension of unemployment benefits - repubs pay for it out of unspent money, dems debt.

 

[Texas Proud]

I'm not thrilled about the deficit increase, but I think I could swallow it more easily if the spending was actually accomplishing something. Maybe the CCC should be resurrected. The fire roads where I camp are in pretty rough shape.

Seriously, though, what about targeting some of the spending? We don't need cash for clunkers, the car industry isn't going to die. If a couple companies fail, others will pick up the slack. Green energy? Fine, if it adds value. But no matter where the energy comes from, our power grids could use some serious upgrading. Same with water. I'm no kind of expert on this stuff, and I don't even play one on the internet. But I suspect there might be less complaint about the expenditures if there was real and demonstrable results from it, including employment with value. We don't need more bureaucrats, and I know we're not going to get out of work IT guys building cabins in the woods. I guess I'm in the position of not knowing what will really work, but having a pretty good idea that what we're doing now isn't it.

I will be a fly in the ointment.... one of the problems with doing some of what you suggest is unions... in a number of places you can not do the work unless you are a member of the union.... so the feds do not want to rock the boat and have a program that would fix any of the things that need fixing because of the backlash of the unions...

 

[IndependentlyPoor]

Funny that I was talking to my mother the other day about this and how she had to live with her dirt poor grandmother..... and that GM refused to sign over the farm to the state so they COULD receive food... so they did not eat well...

Golly, that sounds horrible. Which New Deal program required signing over the family farm to receive aid? Do you mean state in the broad sense, or a particular state government?