1929 and Now

1929 and Now

Paul Krugman (blog entry, from Sweden, squeezed in before he receives the award)
December 4, 2008, 9:07 am Worries about next year

I’ve been ruminating over economic prospects for next year, and I’m getting scared.
Two points:
1. The economy is falling fast. We’ll see what tomorrow’s employment report says, but we could well be losing jobs at a rate of 450,000 or 500,000 a month. IT WAS MUCH MORE

2. Infrastructure spending will take time to get going — a new Goldman Sachs report suggests that projects that are "shovel-ready" are probably only a few tens of billions worth, and that a larger effort would take much of a year to get going. Meanwhile, it’s very questionable how much effect tax rebates will have on consumer demand. So it may be hard for stimulus to get much traction until late 2009 — and that’s even if Congress goes along, which may be a problem given all the bad analysis and disinformation out there.

So here’s what I’m wondering: will it, in fact, even be possible to pull the economy out of its nosedive before unemployment goes into double digits? I’m starting to wonder.
**************
ME

I think, in general, more informed people are becoming more "deformed," not to mention scared to death, over the economy. One reason, though I haven’t seen it argued anywhere, may be as follows:

The current situation is much worse than what existed in 1930. Yes, the stock market had bubbled in the late 1920's, and had burst, and yes, there were enormous imbalances in the economy that needed to be addressed. But there were no derivatives to speak of, no credit default swaps, no slicing and dicing. Compared to the situation we are now in, solving the Great Depression was a snap.

However, what was lacking was the will. And by the time there was "will" (or at least a much greater amount of it), the deterioration of the economy was so great it was hard to bring back our prosperity, except by the massive expenditures devoted to World War II. Than you, Tojo.
Today, there is much more "will," (assuming the Republicans, or most of them, don’t become extreme obstructionists, making the recovery impossibly difficult), but the problems are incredibly harder.

In other words, we could have had a recovery starting in 1930 or, surely, by 1931, and a strong if not booming economy by 1932. Instead, we had a disaster by 1932. Today, it is an open question as to whether we can avoid a disaster since we are only in 1930, so to speak, and we simply don’t know (1) whether the financial chaos can be cleaned up enough so that we can begin to resume normal economic growth and (2) how effective the stimulus can be in the short run. Note Krugman’s citing the Goldman Sachs report, indicating that only a few tens of billions of projects are "shovel-ready." And much of what is really interesting about Obama’s list of projects–in essence his efforts in trying to green America–surely are not shovel-ready.

Therefore, while it seems not likely to me that we will have as bad an economic mess as we had in the thirties, it also seems to me that we will be struggling with our unique economic problem for a number of years to come.

Also, the setting is different. Once the United States got its act together (and it took World War II to make this happen), it was then clear sailing. No one could match our productivity and not only because our competitors–Japan and Western Europe–were knocked out by the war, and we were not, but because, in general, we had a huge technological lead. In 2008, that lead has vanished or is vanishing. One need only look at the trade picture. We have had, by any measure, record-setting trade deficits and will end 2008 with a trade deficit near $700 billion.

Now, it’s possible the trade situation may be significantly improved. I think Krugman leans to this view and may indeed be implicitly arguing this in his Nobel acceptance speech which I believe took place earlier yesterday. But I doubt that the picture is going to improve much unless we utilize our science and technology knowledge and come up with new exportable products. There is some hope: according to the Times, (Sunday), Obama seeks to have his stimulus package expand programs "to include new-era jobs in technology and so-called green jobs that reduce energy use and global warming emissions." But, unfortunately, time is of the essence, as people used to say.

But even if Obama gets what he wants, and what he wants is what we need, the road ahead is steep and it will be difficult to climb. Or put another way, even without the existing financial nightmare–say it never existed–we were increasingly losing our competitive advantages and certainly losing much of our manufacturing. And while the loss to Japan, starting in 1980 (or thereabouts), had its limits since Japan is ultimately not that large, the actual losses of our manufacturing to China have been stupendous, and the potential future losses are almost without limits, given China’s size and the fact that it has hundreds of millions willing to work at a fraction of what America’s average worker is paid.

The ultimate result is likely to be one that few in America can emotionally accept: an average living standard that does not grow and, worse, one that will probably decline. This could possibly be acceptable if we were a people that thought differently about the meaning of life, persons who could prefer a little more leisure to more goods. But we are not.

I think if living standards remain stagnant, and to some extent that has been the situation for most families for a few decades, the upper 5% (or maybe 20%) being exceptions, the political consequences are terrifying. As I have elsewhere mentioned, the Father Coughlins and Huey Longs flourished in the 30's and why wouldn’t deep economic despair make us ripe for future Coughlins or Longs.

Replies to this conjecture which emphasize our Democratic traditions are not convincing to me because our history, even our recent history, is not reassuring. Democracy has eroded under Bush–executive power has increased at the expense of the legislature; there was the firing of Democratic prosecutors; Abu Ghraib was sanctioned; the Iraq war was started, one we had no moral right to start, utilizing outright lies–the Saddam Hussein-Osama bin Laden connection, as well as all but claiming we had incontrovertible evidence that weapons of mass destruction existed in Iraq, when they did not.

But there is a longer history--and I'm just going back to WWII--of immoral behavior, such as overthrowing the Guatemalan government in 1954 and the Iranian government in 1953 and aiding the overthrow of Allende, in Chile, in 1973. Or covering up the mass slaughter of unarmed civilians at My Lai, in 1968. And decades earlier, we rounded up the Japanese and put them in camps. (Or read, with judiciousness, The Shock Doctrine, by Naomi Klein.)

While Sarah Palin’s unpopularity helped defeat John McCain, she still had something like 35% approval, when, with her credentials, not to speak of her creationist ideology, she deserved no support whatever. To me, this means that in a relatively calm atmosphere, 35% of our adult population are fanatics How far will authoritarian and dictatorial attitudes go when the economy fails to meet the expectations of vast numbers and the failure feels like it is never-ending? I suspect pretty far. And I write this believing we have come a long way, in racial attitudes (obviously, Mr. President-elect) and sexual attitudes, including both a modern and equal role for women (not completely, of course) and a greater acceptance of homosexuality, the California vote notwithstanding.

But under deep and lasting economic stress, why shouldn’t we be fearful of political desperados taking over? After all, Schicklgruber achieved power in a reasonably civilized society. So I’m "deformed" not only over the economy but over the political implications of a deformed economy.