Paul Krugman - The Third Depression

[RDamien]

When it comes to the example of WWII bringing us out of the Great Depression, that is true but it leads to the myth that government spending is efficient and, as a general principle, will help in an economic crisis. War is quite a different thing from the government running the economy for the various needs of a diverse society. The government (of the US during WWII at least) was indeed efficient at the single goal of winning the war. This does not mean that A) all enormous spending by the government is economically helpful or B) it will be efficient in it's spending on whatever it chooses to direct the funds towards.

As for the New Deal there are two sides to that. You have the post-depression programs which focused on relief and recovery. Those you could argue were needed due to the extraordinary circumstances. But programs like that are wholly different from things like wage and price controls which some (many?) say actually increased the duration and intensity of the depression.

 

[IndependentlyPoor]

As for the New Deal there are two sides to that. You have the post-depression programs which focused on relief and recovery. Those you could argue were needed due to the extraordinary circumstances. But programs like that are wholly different from things like wage and price controls which some (many?) say actually increased the duration and intensity of the depression.

Ironically enough, our present employer-paid medical insurance and pension systems began as unintended results of those wage controls.

The Emergency Stabilization Act was passed in October 1942, which placed wages and agricultural prices under control. There were immediate wage restrictions, and in order to attract labor, the employers offered a range of such fringe benefits as pensions, medical insurance, paid holidays, and vacations. Because the foregoing were not paid out in cash, they did not violate the wage ceiling. Controlling output proved easier than controlling wages.

from
u-s-history.com

 

[youbet]

I think almost everyone believes in at least some basic form of a social safety net.

But today's society would not tolerate the social safety nets of The Great Depression. Can you conceive of the current administration sending masses of people off to do hard manual labor while living in spartan camps for minimum wage?

It ain't gona happen........

 

[samclem]

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.

Sorry for the repeat, but I think the best case for SS comes from Bill Bernstein in "God Bless This Ponzi Scheme." Emphasis added.
In part:

Long, long ago, around the turn of the last century, we lived in a world of unfettered Ayn-Randian capitalism, with minimal government interference in daily life and commerce. And no income tax, a gauzy sort of New-Right Valhalla. The only problem was that the reaction to this system's excesses and inequities led to a backlash that inflicted communism and fascism on most of the planet. The US escaped these modern plagues, but just barely. This was largely because our political leadership had the courage and foresight to modestly redistribute income and wealth via antitrust legislation, a progressive income tax, and finally, Social Security. Of course, social and political peace also require a functioning market economy—Bismark’s prototypical welfare system did not save German society from the depredations of the Versailles Treaty, and the social benefits of the communist state did not overcome its crippling economic and political disadvantages. Social Security has not been a lousy investment; it never was an "investment" in the first place. It makes no sense to talk about the "rate of return" of a pass-through wealth redistribution scheme. But it also just may have saved the republic. . . I'm as unhappy as everyone else with the huge crater made by the layers of deductions in my monthly paycheck. But the New Right just doesn't get it; that hole in our take-home is largely responsible for a prolonged period of social peace and prosperity nearly unique in world history.

Mobs can take to the streets and undermine the social structure needed to have a functioning economy. The poor can turn to crime and inflict costs on the economy far higher than the goods they steal. The bits of collectivism and redistribution we have in our laws buys peace--it throws bread to the poor and those who cannot or will not work in order to keep them satisfied enough that they don't take to the streets. To some extent, it buys their passivity so they are less likely to vote, which serves as a counter to the natural impulse of those who have less to have the government take, on their behalf, from those who have more.

Some may view this as a cynical take on this program, but I think it makes some sense.

The balancing act is a tricky one. A small dose of redistribution buys social peace. A larger dose encourages more of the same by the ever-larger population of "net takers," and from this there's no obvious route of return. I think right now, with nearly a 50-50 split between those who pay no income tax and those who pay, we're way closer to the "too much" side than the "not enough" side of the see-saw.

 

[ziggy29]

Mobs can take to the streets and undermine the social structure needed to have a functioning economy. The poor can turn to crime and inflict costs on the economy far higher than the goods they steal. The bits of collectivism and redistribution we have in our laws buys peace--it throws bread to the poor and those who cannot or will not work in order to keep them satisfied enough that they don't take to the streets. To some extent, it buys their passivity so they are less likely to vote, which serves as a counter to the natural impulse of those who have less to have the government take, on their behalf, from those who have more.

Some may view this as a cynical take on this program, but I think it makes some sense.

The balancing act is a tricky one. A small dose of redistribution buys social peace. A larger dose encourages more of the same by the ever-larger population of "net takers," and from this there's no obvious route of return. I think right now, with nearly a 50-50 split between those who pay no income tax and those who pay, we're way closer to the "too much" side than the "not enough" side of the see-saw.

I certainly agree with that. There's certainly something to be said for "keeping the peasants away from torches and pitchforks" in a metaphorical sense.

We should be able to learn from the French Revolution, and even in a twisted sense the Cuban Revolution (not that the revolt's success means things improved under Castro's boot heel, but the huge wealth differentials and the sheer number of extremely poor relative to a small number of very wealthy are illustrative of the "peasants with pitchforks" idea). Poverty is an unfortunate human condition as it is, but when you allow too many people to become poor and desperate it is almost an invitation to social unrest, particularly when they see a ruling class which is wealthy beyond anyone's wildest dreams.

Just the same, if you make things *too* tough on capital, it doesn't need to revolt -- it just flees to another state, or another country, or goes underground. So I think on balance we want to provide enough to keep the civil order, while making sure we don't encourage the capital base from withdrawing.

 

[dex]

But today's society would not tolerate the social safety nets of The Great Depression. Can you conceive of the current administration sending masses of people off to do hard manual labor while living in spartan camps for minimum wage?

It ain't gona happen........

The CCC was voluntary.

Civilian Conservation Corps - Wikipedia, the free encyclopedia

Each enrollee volunteered, and upon passing a physical exam and/or a period of conditioning, was required to serve a minimum six month period with the option to serve as many as four periods, or up to two years if employment outside the Corps was not possible


Also, just as Nixon going to China, Regan running up the debt and Clinton changing welfare to workfare, it would take a democrat president with image of helping the poor to start "sending masses of people off to do hard manual labor while living in spartan camps for minimum wage". A republican would be vilified.

- What does it mean if I put 2x the number of laughing things at the end of my post? I never use them - just curious.

 

[ls99]

I think it means you see the humor in your next to the last paragraph.

 

[RDamien]

It's fine so long as it ends there. Laughing smiley faces that grow exponentially for an extended period of time... God help us all.

 

[explanade]

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.

What do you think would have happened in the fall of 2008 if the govt. did nothing, just let things fall where they may as some were advocating? Arguably, they should not have let Bear Stearns fail.

Andrew Ross Sorkin quotes some people as saying the carnage would have continued and would have hit sound companies like GE.


Where would we be if there wasn't a stimulus? As feeble as the economy is now, could it have been even worse if we decided to do the Austrian School experiement?

 

[ziggy29]

What do you think would have happened in the fall of 2008 if the govt. did nothing, just let things fall where they may as some were advocating? Arguably, they should not have let Bear Stearns fail.

This is an aside, but perhaps you're thinking of Lehman? As I recall, the government engineered a buyout of Bear by JP Morgan in March 2008, and aside from investors and creditors of Bear it wasn't a cataclysmic macroeconomic event. It was Lehman that was allowed to fail, IIRC, and *that* seemed to really [-]destroy 401K retirements[/-] start the market tanking in earnest in September 2008.

 

[explanade]

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.

Corporations as a whole have more cash on hand than in a long time. Maybe ever.

Profits are good, mostly due to all the job cutting. Few are seeing the top line grow as much as they'd like, if at all.

 

[explanade]

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?

It wouldn't be surprising if some members of the Tea Parties didn't believe in any kind of safety net.

FDIC came into being as a result of the Depression. So did capital reserve ratios and other regulations on banks.

But you heard such grousing about the financial reform bill. And when there was news that agreement was reached, the bank stocks rallied on that day.

Anyways, some of the opposition to stimulus or various reforms may be more political, about stopping anything from being passed than sincerely believing they're bad ideas which shouldn't be implemented.

 

[Rustic23]

Where would we be if......? Now that is a question that will be answered in different ways by different folks depending on their point of view. However, IMHO, there is no true answer to this question. There is only where we are now. The folks that say we would be worse off have good arguments, the folks that say we would better off also make good arguments. If you manage to create a program that accurately maps human behavior, and economics then you might be able to get an answer. However, my guess is you will be so wealthy that you won't care about the answer.

I am more interested in where we are going than where we have gone.

 

[explanade]

Right it was Lehman that started the cascade.

There was a palpable sense of panic in the air. Really can't imagine that any govt. that stood idly by, regardless of whatever ideology one subscribed to, would be tolerated in that scenario.

They wanted minimally to calm the markets and avoid panic. If the actions they took weren't taken as a serious attempt, the markets would have plunged farther.

Those who badmouth TARP and the stimulus now say we'd have been better off because we'd have bounced stronger after the plummet are pretty daring.

Or they didn't have any money in the market, although presumably, they might have been against the govt. attempts to shore up money market funds after bolstering the FDIC too.

So they kept their money in the mattress?

 

[dex]

What do you think would have happened in the fall of 2008 if the govt. did nothing, just let things fall where they may as some were advocating? Arguably, they should not have let Bear Stearns fail.

Andrew Ross Sorkin quotes some people as saying the carnage would have continued and would have hit sound companies like GE.

Where would we be if there wasn't a stimulus? As feeble as the economy is now, could it have been even worse if we decided to do the Austrian School experiement?

We will never find out.

Again, there is no evidence or examples that Keynesian theory of increasing deficit spending get an economy out of a recession/depression

 

[Gone4Good]

We will never find out.

Again, there is no evidence or examples that Keynesian theory of increasing deficit spending get an economy out of a recession/depression

Review U.S. economic history pre-1930 if you want to see how Austrian economics works. Not pretty.

 

[Gone4Good]

Those who badmouth TARP and the stimulus now say we'd have been better off because we'd have bounced stronger after the plummet are pretty daring.

A simple thought experiment helps to illustrate the folly of suggesting we'd be better off without TARP. And it goes like this . . .

What is the value of a house when no financing exists? Imagine the state of the economy in such a world.

 

[ziggy29]

What is the value of a house when no financing exists? Imagine the state of the economy in such a world.

On the other hand, what's the strength and sustainability of an economy when "affordability" is measured in terms of monthly payments instead of what we have in the bank?

Wasn't it partially an overdependence on financing and the "monthly payment" (not just in housing but all over) which inflated the bubble that's only now popping?

 

[ls99]

A simple thought experiment helps to illustrate the folly of suggesting we'd be better off without TARP. And it goes like this . . .

What is the value of a house when no financing exists? Imagine the state of the economy in such a world.

Don't need high finance to figure that out. It is worth whatever a qualified buyer is willing and able to pay.

A simplified version, financing by an incompetent buyer is like 4 wheel drive in incompetent driver's hands. The 4 wheel drive lets one get into the boonies much farther and get stuck much deeper than if one had a 2 wheel drive. It also lets a fool drive way too fast for conditons, no help in stopping, into the ditch the fool goes. Ditto with financing.

Disclaimer - our house is fully paid off, only had a mortgage for 2 years on it.

My opinion, TARP was one of the finest boondoggles foisted off on the population.

 

[Gone4Good]

Don't need high finance to figure that out. It is worth whatever a qualified buyer is willing and able to pay.

You need to flesh that out some more and see where it leads.

In a 10% down world, where the marginal buyer can afford a $2,000 per month payment, he can buy a house worth $390K at 5.5%. That's where the market was.

Without financing he can only afford $39K. That's where the market was potentially heading.

 

[ls99]

Yeah, and the problem is?

 

[Gone4Good]

Yeah, and the problem is?

It's safe to say that a ~$20 trillion loss in just one asset market would have a profound impact on employment and even social stability.

 

[ls99]

The question was about the value of a house sans financing. The fact that without financing someone can only afford 39K means the should buy what they can afford, or rent, save money to buy that 390K house when the can afford it.

No one should be obligated to participate in the "greater fool" game hoping for some other greater fool to come along. If one plays that game and looses. Too bad. Darwinism at its finest.

The quants created a system, that no one, even themselves clearly understood, let alone considered the consequences. Likely, considering the consequences was forbidden as idle useless non-moneymaking endeavor.

Ergo when the greater fool system collapsed TARP to the rescue.

Frankly nothing like a good crash, people starving, having to give up their cherished Ipods, to bring them back to understanding that living within your means is valuable.

TARP and the rest of the do-gooding measures just postpone the inevitable crash.


Wanna buy an apple?

 

[Nords]

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

Here's one from Business Week. They're quoting John Paulson from a London speech to make it look like he's inviting a cage match with Krugman:
Krugman or Paulson: Who You Gonna Bet On? - BusinessWeek

The debate over the economy can be thought of as a trade—Paulson taking one side, Krugman the other. Paulson's got real money on the table, but for both men, the main risk is reputational. Is Paulson another Wall Street one-hit wonder? Is Krugman another too-smart-for-his-own-good academic with no feel for animal spirits? Paulson may have an edge because he is just playing the market. Krugman is playing history, which is quite a bit trickier.

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

Our house overlooks a 1933 bridge on a twisty road through a gulch. The road has been upgraded many times over the last 77 years and is now four lanes on one side of the bridge and three on the other, but the bridge is only two lanes wide. Every year a half-dozen cars mess up the bridge approach or its crossing for various reasons, and the gulch's stream is eating away at the pilings. Over the last decade I've watched emergency concrete surgery performed a half-dozen times.

Clearly a new bridge is called for. However the only reason this project is still in service is because the replacement is too expensive for a state highway. The last estimate (1998) was over $100M, and the revised plan is pushing $200M.

So the "good" thing about [-]deficit spending[/-] Keynesian economics is that it offers life's conveniences which otherwise no one would ever agree to pay for...

A simple thought experiment helps to illustrate the folly of suggesting we'd be better off without TARP. And it goes like this . . .
What is the value of a house when no financing exists? Imagine the state of the economy in such a world.

A simple answer is that hundreds of financial entrepreneurs would see this as a fantastic business opportunity. Of course TARP leaped in before the free market could recover from its heart attack...

I think the idea of deficit spending is generally a good one. However the implementation of programs like TARP used a flamethrower to treat the cat's fleas, and I suspect the next decade's economic recovery is going to be just as messy. Hopefully no one has to start a world war to extract themselves from this situation.

 

[Gone4Good]

Frankly nothing like a good crash, people starving . . . to bring them back to understanding that living within your means is valuable.

I can see all reasonable lines of discussion are at an end.