Letter of the Week (Under a heading: The New Deal Revisionists: Will They Ever Learn?)
To the Editor:Re "New Deal Revisionism: Theories Collide" (Arts pages, April 4):You paraphrase two economists as arguing that federal spending cannot stimulate the economy because "government spending just crowds out private investment" and "the money supply is the only thing that matters."Yes, federal spending can crowd out private investment — if it is financed through higher taxes or increased borrowing from the American public and accompanied by no expansion in the money supply.But government spending can cut high rates of unemployment if it is financed by expanding the money supply. This means borrowing from the Federal Reserve System, which can create more money, either by issuing checks or by printing cash.In this case, increased spending and monetary expansion are both parts of the same process. In fact, government spending stimulated the American economy during the early New Deal years and again during World War II.
Peter EcksteinAnn Arbor, Mich., April 4, 2009
The writer is a retired research director of the Michigan A.F.L.-C.I.O.
********
COMMENT: This and other critical letters were provoked by a comment of Richard K. Vedder, of Ohio University [and supported by Anna Schwartz (widow of Milton Friedman and co-writer with her husband of a monetarist interpretation of the Depression) and Nobelist (in economics) Robert Lucas, among others, at a right-wing conference on the New Deal], in a story authored by Patricia Cohen on April 3.These (nutcake) economists, including Friedman, were he alive, believe that a fiscal stimulus will not work, World War II spending and an unemployment rate of 1.2 %, in 1944, notwithstanding. Only monetary solutions will work, they say. Except they are not working now, as the Fed’s rate–the federal funds rate--is, and has been for a while, as close to zero as it can go. Nor did low rates get Japan out of its decade long slump.
Eckstein has it absolutely correct. I would only add that the reason this is not 100% clear to all, even the wingnuts, is that FDR (fearful of deficits and behaving like a traditionalist) raised taxes and cut spending in 1937 and caused a relapse, in 1937-38, just as we were approaching a full recovery. Unemployment rates had fallen from a high of about 25% to nearly 10%, when Roosevelt got cold feet. World War II spending gave us the recovery.
Right wing economists and right wing politicos, including many in Congress, are doing everything they can to destroy the recovery–whatever the human costs--so that Obama and the Democrats can be blamed and the Republicans can return to power. (The economists might actually believe their own nonsense.)
Friday, April 10, 2009
False Recovery? (Repeat)
False Recovery?
False Recovery?More on economic prospects in a moment, but I want to get you while I have you. The stock market has made a comeback from its recent trough and that has inspired hope that the worst is behind us. (And there are a few hopeful signs–housing sales, for example, have slightly picked up, but more on this shortly.)
Ever wonder why Herbert Hoover was able to say "Prosperity is around the corner?" (I hope he said that since this is from memory.) I suspect that it was because a stock recovery appeared to be taking place. I found a month-by-month account of the Dow between 1929 and 1933. (The following are my approximations based on the chart I was reading–on a German web site (!): in late 1929 to about May 1930, the Dow rose about 40%; between July and October, the Dow rose about 9%. Plunging to new lows, the Dow then rose about 21% from the end of 1930 to about March 1931; again in May, 1931, it rose about 13% for two months. Near the end of 1931, it rose about 10% for about two months.
It reached bottom in mid-1932 and rose erratically after that. The peak, in 1929 was about 385 and the trough was about 40.While standard terms for the rallies are "false recovery" or "bear market rally," the one I like most is "dead cat bounce."
False Recovery?More on economic prospects in a moment, but I want to get you while I have you. The stock market has made a comeback from its recent trough and that has inspired hope that the worst is behind us. (And there are a few hopeful signs–housing sales, for example, have slightly picked up, but more on this shortly.)
Ever wonder why Herbert Hoover was able to say "Prosperity is around the corner?" (I hope he said that since this is from memory.) I suspect that it was because a stock recovery appeared to be taking place. I found a month-by-month account of the Dow between 1929 and 1933. (The following are my approximations based on the chart I was reading–on a German web site (!): in late 1929 to about May 1930, the Dow rose about 40%; between July and October, the Dow rose about 9%. Plunging to new lows, the Dow then rose about 21% from the end of 1930 to about March 1931; again in May, 1931, it rose about 13% for two months. Near the end of 1931, it rose about 10% for about two months.
It reached bottom in mid-1932 and rose erratically after that. The peak, in 1929 was about 385 and the trough was about 40.While standard terms for the rallies are "false recovery" or "bear market rally," the one I like most is "dead cat bounce."
First of Four Questions (Repeat)
First of "Four Questions"
It’s Passover. Why is this recession different from all other recessions?1. The banks are in more trouble than ever before, since WWII, and maybe ever. The only reason there are not more bank failures so far is FDIC and TARP and other bail-outs and expected bail-outs. A recovery of any oomph requires a loaning system that works and we are a long way away from this.
2. The world economy is worse than a mess. It’s both economically and politically frightening. But narrowly, a normal recovery requires us to export and that can’t happen in any meaningful way in today’s nightmare.
3. Recessions are usually caused by the Fed’s tight money policy instituted to fight inflation and recoveries are usually caused by the reversal, easy money. I think this was true of every recession since WWII, with possibly an exception being the readjustment after the War, which is called a recession, but probably shouldn’t be. This time the Fed neither caused the recession nor has it been able to reverse it, even though it has indirectly lowered Treasury Bills to zilch and flooded the economy with money. (My CREF money market fund appears to be increasing at the annual rate of 1%!, if that.)
4. Beyond this are the unique situations: (A) income and wealth are more concentrated than anytime since the late 1920's. The more inequality the more difficult it is to increase consumption expenditures, since wealthy persons presumably save a greater proportion of their incomes, although how much that is true these days is uncertain.
(B) Savings rates had plunged to zero from a post-war average of about 8%, although it is now creeping higher. The effects here are complex and not readily analyzed. People who saved less, from their incomes, did so (in many cases) because they thought they were "earning" money on their houses and borrowed on their higher-valued houses. This, presumably, is no longer happening, at least in a meaningful way. But also, people borrowed on their credit cards in amounts they previously had not done. This, too, is not as possible.Hidden away in Wednesday’s Times, on B9, was a story which began, "Consumer borrowing plunged in February at a 3.5 percent annual rate, more than analysts had expected, as Americans cut back their use of credit cards by a record amount."The irony is that while individuals should save more, to protect themselves in case they lose their jobs (and because they have no way of paying off loans), what the economy needs is more spending and less saving.
( C) The trade deficit is at record highs, both absolutely and percentage-wise. The budget deficit has been unusually high and for 2010 will probably be almost as high as it was during World War II. Both of these factors make recovery more difficult.
( D) Housing construction cannot save us. The low interest rates the Fed created, in the past, that stimulated the economy and led to recoveries, caused mortgage rates to fall and, therefore, there was greater housing construction. Given the collapse of housing, preceded and caused by the bursting of the bubble, housing can’t play the positive role it usually plays in a recovery.
(E) Manufacturing ceases to play as significant a role in our economy than it did in the past.
(F) Finally, the present is a product of two big bubbles, both of which have burst. This makes comparisons of the past and present difficult, since what is needed is comparability. (Maybe more on this later.)
It’s Passover. Why is this recession different from all other recessions?1. The banks are in more trouble than ever before, since WWII, and maybe ever. The only reason there are not more bank failures so far is FDIC and TARP and other bail-outs and expected bail-outs. A recovery of any oomph requires a loaning system that works and we are a long way away from this.
2. The world economy is worse than a mess. It’s both economically and politically frightening. But narrowly, a normal recovery requires us to export and that can’t happen in any meaningful way in today’s nightmare.
3. Recessions are usually caused by the Fed’s tight money policy instituted to fight inflation and recoveries are usually caused by the reversal, easy money. I think this was true of every recession since WWII, with possibly an exception being the readjustment after the War, which is called a recession, but probably shouldn’t be. This time the Fed neither caused the recession nor has it been able to reverse it, even though it has indirectly lowered Treasury Bills to zilch and flooded the economy with money. (My CREF money market fund appears to be increasing at the annual rate of 1%!, if that.)
4. Beyond this are the unique situations: (A) income and wealth are more concentrated than anytime since the late 1920's. The more inequality the more difficult it is to increase consumption expenditures, since wealthy persons presumably save a greater proportion of their incomes, although how much that is true these days is uncertain.
(B) Savings rates had plunged to zero from a post-war average of about 8%, although it is now creeping higher. The effects here are complex and not readily analyzed. People who saved less, from their incomes, did so (in many cases) because they thought they were "earning" money on their houses and borrowed on their higher-valued houses. This, presumably, is no longer happening, at least in a meaningful way. But also, people borrowed on their credit cards in amounts they previously had not done. This, too, is not as possible.Hidden away in Wednesday’s Times, on B9, was a story which began, "Consumer borrowing plunged in February at a 3.5 percent annual rate, more than analysts had expected, as Americans cut back their use of credit cards by a record amount."The irony is that while individuals should save more, to protect themselves in case they lose their jobs (and because they have no way of paying off loans), what the economy needs is more spending and less saving.
( C) The trade deficit is at record highs, both absolutely and percentage-wise. The budget deficit has been unusually high and for 2010 will probably be almost as high as it was during World War II. Both of these factors make recovery more difficult.
( D) Housing construction cannot save us. The low interest rates the Fed created, in the past, that stimulated the economy and led to recoveries, caused mortgage rates to fall and, therefore, there was greater housing construction. Given the collapse of housing, preceded and caused by the bursting of the bubble, housing can’t play the positive role it usually plays in a recovery.
(E) Manufacturing ceases to play as significant a role in our economy than it did in the past.
(F) Finally, the present is a product of two big bubbles, both of which have burst. This makes comparisons of the past and present difficult, since what is needed is comparability. (Maybe more on this later.)
Short Term Predictions (Repeat)
Thursday, April 9, 2009
Short Term Predictions
Short Term PredictionsIt is possible, but I doubt it, that we will have a small rise in GDP this summer or early this fall. The greater likelihood is that there will be a small rise in GDP after the effects of the stimulus take place and this will happen late in the year or, more likely, in 2010. But unemployment will probably hit double digits this summer and approach 15% before a genuine recovery takes place, especially if, as I expect, the "genuine" recovery will never be a strong one. And I am referring to the official unemployment rate, which excludes part time workers who want to work full time and excludes those who would look for a job but believe it is hopeless.The standard estimate of unemployment at the depth of the Great Depression is 25 %. Then, we didn’t collect data month by month as we do now, so all we have are retrospective estimates. But I have read that unemployment in cities was in the low 30's. Also, the estimates probably do not take into account, or do not do so fully, the fact that many went back to farms, where they were pulling weeds, but not really employed.
I suspect that by summer it will be realized by the Obama team that some banks have to be nationalized, whatever name is given it, and that a second stimulus is needed. Politically, this will be difficult. But Obama will then have two choices–unhappiness over the continued recession and/or weak recovery or unhappiness over having the government play the larger role it will have to play. Nationalization in March and a greater stimulus, which would have been obtainable, had Obama not been obsessed with the need to be, or appear to be, bipartisan, would have been the best for Obama and the Democrats in the longer run, since it would do more to get us out of this disaster than what they have chosen to do–unless the bank bail-out works better than most believe and/or the stimulus stimulates more than most believe.I have a bet with a friend that the Dow will hit 6,000 before it hits 10,000.
Recent recovery notwithstanding, I think I have a 50-50 chance of winning. I guess it depends on whether we are having a "dead cat bounce."In short, [1] investment is weak because: (a) consumption is weak and (b) businesses can’t get loans [Aside: there are always new industries that pop up and help, and this will occur (although raising the money for them is a problem) but the amount needed is much higher than usual, so unless something spectacular appears, which is unlikely, this positive is nowhere in sight.];[2] consumption is weak since not only are incomes down for so many–unemployment and shorter weeks--and others are scared, but the ability and willingness to borrow is down; [3] exports will remain weak. This exhausts the GDP (not counting imports, which are made elsewhere), except for Government. State and local government cutbacks are enormous, so in the end, given the banking situation, it all depends on the stimulus and the willingness to increase government expenditures even more. [Tax cuts could also work but you need to run an even larger deficit to get a designated amount of spending (or jobs created).]
LIKELIHOOD: WEAK RECOVERY BEGINNING IN LATE 2009 OR 2010. THE QUESTION THEN BECOMES, WILL THERE BE A RELAPSE OR WILL THE RECOVERY GAIN MOMENTUM? NO ONE KNOWS, OF COURSE, BUT I STRONGLY SUSPECT THIS DEPENDS ON THE ABILITY TO HAVE A SIGNIFICANT 2ND STIMULUS AND A FUNCTIONING BANKING SYSTEM BROUGHT ABOUT BY "TEMPORARY NATIONALIZATION."
Short Term Predictions
Short Term PredictionsIt is possible, but I doubt it, that we will have a small rise in GDP this summer or early this fall. The greater likelihood is that there will be a small rise in GDP after the effects of the stimulus take place and this will happen late in the year or, more likely, in 2010. But unemployment will probably hit double digits this summer and approach 15% before a genuine recovery takes place, especially if, as I expect, the "genuine" recovery will never be a strong one. And I am referring to the official unemployment rate, which excludes part time workers who want to work full time and excludes those who would look for a job but believe it is hopeless.The standard estimate of unemployment at the depth of the Great Depression is 25 %. Then, we didn’t collect data month by month as we do now, so all we have are retrospective estimates. But I have read that unemployment in cities was in the low 30's. Also, the estimates probably do not take into account, or do not do so fully, the fact that many went back to farms, where they were pulling weeds, but not really employed.
I suspect that by summer it will be realized by the Obama team that some banks have to be nationalized, whatever name is given it, and that a second stimulus is needed. Politically, this will be difficult. But Obama will then have two choices–unhappiness over the continued recession and/or weak recovery or unhappiness over having the government play the larger role it will have to play. Nationalization in March and a greater stimulus, which would have been obtainable, had Obama not been obsessed with the need to be, or appear to be, bipartisan, would have been the best for Obama and the Democrats in the longer run, since it would do more to get us out of this disaster than what they have chosen to do–unless the bank bail-out works better than most believe and/or the stimulus stimulates more than most believe.I have a bet with a friend that the Dow will hit 6,000 before it hits 10,000.
Recent recovery notwithstanding, I think I have a 50-50 chance of winning. I guess it depends on whether we are having a "dead cat bounce."In short, [1] investment is weak because: (a) consumption is weak and (b) businesses can’t get loans [Aside: there are always new industries that pop up and help, and this will occur (although raising the money for them is a problem) but the amount needed is much higher than usual, so unless something spectacular appears, which is unlikely, this positive is nowhere in sight.];[2] consumption is weak since not only are incomes down for so many–unemployment and shorter weeks--and others are scared, but the ability and willingness to borrow is down; [3] exports will remain weak. This exhausts the GDP (not counting imports, which are made elsewhere), except for Government. State and local government cutbacks are enormous, so in the end, given the banking situation, it all depends on the stimulus and the willingness to increase government expenditures even more. [Tax cuts could also work but you need to run an even larger deficit to get a designated amount of spending (or jobs created).]
LIKELIHOOD: WEAK RECOVERY BEGINNING IN LATE 2009 OR 2010. THE QUESTION THEN BECOMES, WILL THERE BE A RELAPSE OR WILL THE RECOVERY GAIN MOMENTUM? NO ONE KNOWS, OF COURSE, BUT I STRONGLY SUSPECT THIS DEPENDS ON THE ABILITY TO HAVE A SIGNIFICANT 2ND STIMULUS AND A FUNCTIONING BANKING SYSTEM BROUGHT ABOUT BY "TEMPORARY NATIONALIZATION."
Thursday, April 9, 2009
Suggestion
Suggestion.
Start with the earliest post of today, Letter of the Week, and then work your way back to the most recent post, Long Term Prospects.
Start with the earliest post of today, Letter of the Week, and then work your way back to the most recent post, Long Term Prospects.
Long Term Prospects
Long Term Prospects
There are so many people who believe that once we are out of this catastrophe things will return to normal. Delusions, I’m afraid. In short, I believe the long term prospects are as bad, or possibly even worse, than the short term prospects.
We cannot keep buying and not selling–that is, importing and not exporting. But our ability to export is all but disappearing as our ability to manufacture is all but disappearing, although (of course) many cars will still be made here, even if we lose the big three (although many of the parts for Japanese cars will probably be made in Japan).
But cars aside, how do we manufacture things when Chinese workers are paid $2 a day? The other day, I read that the Chinese are going to bypass the internal combustion engine and build electric cars. The persons I have talked to scoffed, when I mentioned this and the possibility that the Chinese will have a workable electric car not long from now that will retail for $10,000. It reminds me of 1979. I called and got statements from 20 economists (you can read this–it was the cover story for The New York Times Magazine, December 30, 1979, entitled "The Threatening Economy") that expressed "their views on how the United States can extricate itself from its economic troubles."
Not a single economist mentioned Japan, in looking ahead. Nor did I, in my commentary. And the reason, and there is other evidence for this, is that few believed the Japanese were capable of producing advanced industrial products like cars. Yes, they were excellent in making plastic replicas of the Empire State Building, sold in stores in Times Square. But cars–no way. Within a few years, there was the rust belt, the area decimated by the imports of Japanese cars.
Okay, the Chinese today are further behind, technologically, than the Japanese were then. And who knows what effect their lack of democracy will have? But $2 a day!! And even if Chinese electric cars are decades away, there are all the other products. And low wages exist elsewhere. And India, as everyone knows, is increasingly able to produce services, like read Xrays, an ability that leads Alan Blinder, a notable Princeton economist and former VP of the Federal Reserve, to believe that services of all kinds will increasingly be produced in places like India.
We simply can’t keep importing more than we export. Sooner or later the value of the dollar will fall. And it will likely be sooner, given the vast amount of printing that is taking place and the monumental budgetary deficit being created. What this means is that American living standards are going to fall as the price of everything imported increases, from socks and shirts to cell phones and sinks and anything else that someone thinks of that begins with an ess sound.
When and how far the dollar will fall is difficult to say since those we owe money to, such as the Chinese, do not want the value of the dollar to fall, but in the end too many holders of the deteriorating dollar will try to sell it before others do, and will cause it to fall. My bet is that when the mood hits, the dollar will fall like the Dow did in 1987–about 23% in a day–only worse.
Of course, we could resort to protectionism–but remember how the Smoot-Hawley Tariff Act of 1930 helped usher in the Depression. I don’t think protectionism will work now either, especially with the increased globalization that has taken place and given our genuine need for many products produced elsewhere. And politically, protectionism would be an unmitigated disaster (although we can play at the fringes–no goods produced by child labor or no goods produced by prison labor or no goods produced under environmentally harmful conditions–but these fringes can’t solve the problem).
The result of a weaker dollar is higher prices and the Fed will feel it has to increase interest rates to counter the inflation (and maybe we have no choice unless we want to face triple digit inflation every year, or worse). The higher rates will cut off any recovery, or if this takes place a decade from now, cause a recession. In any event, what I expect is endless stagflation–inflation about 5-10% a year and unemployment averaging about 8% a year–in other words, a horrendous situation.
Any hope, in my view, is a government that provides jobs–a modern WPA; aids investment–partnerships, if possible; and one that provides a safety net. But we live in a culture in which government is considered the problem, not the solution. It will be difficult for Obama and his successors to get the government to do what will mitigate these problems. Moreover, it must be accompanied by a different conception of the good life than what Americans now hold. It must be one in which leisure and simple pleasures are more appreciated than goods. Not likely.
The ending may be unhappier still. How long will the American people sit by silently accepting their lot? If what I am describing is the future, living standards may drop 10 or 20 or 30 or 40 percent over the next two or three decades. The American people are, it is true, increasingly tolerant–electing a black man president, increasingly allowing gays to marry–but this is a country in which vast numbers believe we are God’s gift to mankind. They believe high living standards are theirs by right. Moreover, this America–which is very chauvinistic--is, as often as not, characterized by dismaying political ignorance. Many do not even know there are three branches of government.
In such an atmosphere, how secure is our democracy? In the 1930's, many believe Roosevelt’s leadership prevented the Huey Longs and the Father Coughlins from gaining strength and taking over. Fascism triumphed in Italy, Germany and Spain, but not here. But economic failure has given rise to tyrants many times and in many places. Are we immune?
What a happy note to conclude on!!!
There are so many people who believe that once we are out of this catastrophe things will return to normal. Delusions, I’m afraid. In short, I believe the long term prospects are as bad, or possibly even worse, than the short term prospects.
We cannot keep buying and not selling–that is, importing and not exporting. But our ability to export is all but disappearing as our ability to manufacture is all but disappearing, although (of course) many cars will still be made here, even if we lose the big three (although many of the parts for Japanese cars will probably be made in Japan).
But cars aside, how do we manufacture things when Chinese workers are paid $2 a day? The other day, I read that the Chinese are going to bypass the internal combustion engine and build electric cars. The persons I have talked to scoffed, when I mentioned this and the possibility that the Chinese will have a workable electric car not long from now that will retail for $10,000. It reminds me of 1979. I called and got statements from 20 economists (you can read this–it was the cover story for The New York Times Magazine, December 30, 1979, entitled "The Threatening Economy") that expressed "their views on how the United States can extricate itself from its economic troubles."
Not a single economist mentioned Japan, in looking ahead. Nor did I, in my commentary. And the reason, and there is other evidence for this, is that few believed the Japanese were capable of producing advanced industrial products like cars. Yes, they were excellent in making plastic replicas of the Empire State Building, sold in stores in Times Square. But cars–no way. Within a few years, there was the rust belt, the area decimated by the imports of Japanese cars.
Okay, the Chinese today are further behind, technologically, than the Japanese were then. And who knows what effect their lack of democracy will have? But $2 a day!! And even if Chinese electric cars are decades away, there are all the other products. And low wages exist elsewhere. And India, as everyone knows, is increasingly able to produce services, like read Xrays, an ability that leads Alan Blinder, a notable Princeton economist and former VP of the Federal Reserve, to believe that services of all kinds will increasingly be produced in places like India.
We simply can’t keep importing more than we export. Sooner or later the value of the dollar will fall. And it will likely be sooner, given the vast amount of printing that is taking place and the monumental budgetary deficit being created. What this means is that American living standards are going to fall as the price of everything imported increases, from socks and shirts to cell phones and sinks and anything else that someone thinks of that begins with an ess sound.
When and how far the dollar will fall is difficult to say since those we owe money to, such as the Chinese, do not want the value of the dollar to fall, but in the end too many holders of the deteriorating dollar will try to sell it before others do, and will cause it to fall. My bet is that when the mood hits, the dollar will fall like the Dow did in 1987–about 23% in a day–only worse.
Of course, we could resort to protectionism–but remember how the Smoot-Hawley Tariff Act of 1930 helped usher in the Depression. I don’t think protectionism will work now either, especially with the increased globalization that has taken place and given our genuine need for many products produced elsewhere. And politically, protectionism would be an unmitigated disaster (although we can play at the fringes–no goods produced by child labor or no goods produced by prison labor or no goods produced under environmentally harmful conditions–but these fringes can’t solve the problem).
The result of a weaker dollar is higher prices and the Fed will feel it has to increase interest rates to counter the inflation (and maybe we have no choice unless we want to face triple digit inflation every year, or worse). The higher rates will cut off any recovery, or if this takes place a decade from now, cause a recession. In any event, what I expect is endless stagflation–inflation about 5-10% a year and unemployment averaging about 8% a year–in other words, a horrendous situation.
Any hope, in my view, is a government that provides jobs–a modern WPA; aids investment–partnerships, if possible; and one that provides a safety net. But we live in a culture in which government is considered the problem, not the solution. It will be difficult for Obama and his successors to get the government to do what will mitigate these problems. Moreover, it must be accompanied by a different conception of the good life than what Americans now hold. It must be one in which leisure and simple pleasures are more appreciated than goods. Not likely.
The ending may be unhappier still. How long will the American people sit by silently accepting their lot? If what I am describing is the future, living standards may drop 10 or 20 or 30 or 40 percent over the next two or three decades. The American people are, it is true, increasingly tolerant–electing a black man president, increasingly allowing gays to marry–but this is a country in which vast numbers believe we are God’s gift to mankind. They believe high living standards are theirs by right. Moreover, this America–which is very chauvinistic--is, as often as not, characterized by dismaying political ignorance. Many do not even know there are three branches of government.
In such an atmosphere, how secure is our democracy? In the 1930's, many believe Roosevelt’s leadership prevented the Huey Longs and the Father Coughlins from gaining strength and taking over. Fascism triumphed in Italy, Germany and Spain, but not here. But economic failure has given rise to tyrants many times and in many places. Are we immune?
What a happy note to conclude on!!!
Short Term Predictions
Short Term Predictions
It is possible, but I doubt it, that we will have a small rise in GDP this summer or early this fall. The greater likelihood is that there will be a small rise in GDP after the effects of the stimulus take place and this will happen late in the year or, more likely, in 2010. But unemployment will probably hit double digits this summer and approach 15% before a genuine recovery takes place, especially if, as I expect, the "genuine" recovery will never be a strong one. And I am referring to the official unemployment rate, which excludes part time workers who want to work full time and excludes those who would look for a job but believe it is hopeless.
The standard estimate of unemployment at the depth of the Great Depression is 25 %. Then, we didn’t collect data month by month as we do now, so all we have are retrospective estimates. But I have read that unemployment in cities was in the low 30's. Also, the estimates probably do not take into account, or do not do so fully, the fact that many went back to farms, where they were pulling weeds, but not really employed.
I suspect that by summer it will be realized by the Obama team that some banks have to be nationalized, whatever name is given it, and that a second stimulus is needed. Politically, this will be difficult. But Obama will then have two choices–unhappiness over the continued recession and/or weak recovery or unhappiness over having the government play the larger role it will have to play. Nationalization in March and a greater stimulus, which would have been obtainable, had Obama not been obsessed with the need to be, or appear to be, bipartisan, would have been the best for Obama and the Democrats in the longer run, since it would do more to get us out of this disaster than what they have chosen to do–unless the bank bail-out works better than most believe and/or the stimulus stimulates more than most believe.
I have a bet with a friend that the Dow will hit 6,000 before it hits 10,000. Recent recovery notwithstanding, I think I have a 50-50 chance of winning. I guess it depends on whether we are having a "dead cat bounce."
In short, [1] investment is weak because: (a) consumption is weak and (b) businesses can’t get loans [Aside: there are always new industries that pop up and help, and this will occur (although raising the money for them is a problem) but the amount needed is much higher than usual, so unless something spectacular appears, which is unlikely, this positive is nowhere in sight.];
[2] consumption is weak since not only are incomes down for so many–unemployment and shorter weeks--and others are scared, but the ability and willingness to borrow is down; [3] exports will remain weak. This exhausts the GDP (not counting imports, which are made elsewhere), except for Government. State and local government cutbacks are enormous, so in the end, given the banking situation, it all depends on the stimulus and the willingness to increase government expenditures even more. [Tax cuts could also work but you need to run an even larger deficit to get a designated amount of spending (or jobs created).]
LIKELIHOOD: WEAK RECOVERY BEGINNING IN LATE 2009 OR 2010. THE QUESTION THEN BECOMES, WILL THERE BE A RELAPSE OR WILL THE RECOVERY GAIN MOMENTUM? NO ONE KNOWS, OF COURSE, BUT I STRONGLY SUSPECT THIS DEPENDS ON THE ABILITY TO HAVE A SIGNIFICANT 2ND STIMULUS AND A FUNCTIONING BANKING SYSTEM BROUGHT ABOUT BY "TEMPORARY NATIONALIZATION."
It is possible, but I doubt it, that we will have a small rise in GDP this summer or early this fall. The greater likelihood is that there will be a small rise in GDP after the effects of the stimulus take place and this will happen late in the year or, more likely, in 2010. But unemployment will probably hit double digits this summer and approach 15% before a genuine recovery takes place, especially if, as I expect, the "genuine" recovery will never be a strong one. And I am referring to the official unemployment rate, which excludes part time workers who want to work full time and excludes those who would look for a job but believe it is hopeless.
The standard estimate of unemployment at the depth of the Great Depression is 25 %. Then, we didn’t collect data month by month as we do now, so all we have are retrospective estimates. But I have read that unemployment in cities was in the low 30's. Also, the estimates probably do not take into account, or do not do so fully, the fact that many went back to farms, where they were pulling weeds, but not really employed.
I suspect that by summer it will be realized by the Obama team that some banks have to be nationalized, whatever name is given it, and that a second stimulus is needed. Politically, this will be difficult. But Obama will then have two choices–unhappiness over the continued recession and/or weak recovery or unhappiness over having the government play the larger role it will have to play. Nationalization in March and a greater stimulus, which would have been obtainable, had Obama not been obsessed with the need to be, or appear to be, bipartisan, would have been the best for Obama and the Democrats in the longer run, since it would do more to get us out of this disaster than what they have chosen to do–unless the bank bail-out works better than most believe and/or the stimulus stimulates more than most believe.
I have a bet with a friend that the Dow will hit 6,000 before it hits 10,000. Recent recovery notwithstanding, I think I have a 50-50 chance of winning. I guess it depends on whether we are having a "dead cat bounce."
In short, [1] investment is weak because: (a) consumption is weak and (b) businesses can’t get loans [Aside: there are always new industries that pop up and help, and this will occur (although raising the money for them is a problem) but the amount needed is much higher than usual, so unless something spectacular appears, which is unlikely, this positive is nowhere in sight.];
[2] consumption is weak since not only are incomes down for so many–unemployment and shorter weeks--and others are scared, but the ability and willingness to borrow is down; [3] exports will remain weak. This exhausts the GDP (not counting imports, which are made elsewhere), except for Government. State and local government cutbacks are enormous, so in the end, given the banking situation, it all depends on the stimulus and the willingness to increase government expenditures even more. [Tax cuts could also work but you need to run an even larger deficit to get a designated amount of spending (or jobs created).]
LIKELIHOOD: WEAK RECOVERY BEGINNING IN LATE 2009 OR 2010. THE QUESTION THEN BECOMES, WILL THERE BE A RELAPSE OR WILL THE RECOVERY GAIN MOMENTUM? NO ONE KNOWS, OF COURSE, BUT I STRONGLY SUSPECT THIS DEPENDS ON THE ABILITY TO HAVE A SIGNIFICANT 2ND STIMULUS AND A FUNCTIONING BANKING SYSTEM BROUGHT ABOUT BY "TEMPORARY NATIONALIZATION."
First of "Four Questions"
It’s Passover. Why is this recession different from all other recessions?
1. The banks are in more trouble than ever before, since WWII, and maybe ever. The only reason there are not more bank failures so far is FDIC and TARP and other bail-outs and expected bail-outs. A recovery of any oomph requires a loaning system that works and we are a long way away from this.
2. The world economy is worse than a mess. It’s both economically and politically frightening. But narrowly, a normal recovery requires us to export and that can’t happen in any meaningful way in today’s nightmare.
3. Recessions are usually caused by the Fed’s tight money policy instituted to fight inflation and recoveries are usually caused by the reversal, easy money. I think this was true of every recession since WWII, with possibly an exception being the readjustment after the War, which is called a recession, but probably shouldn’t be. This time the Fed neither caused the recession nor has it been able to reverse it, even though it has indirectly lowered Treasury Bills to zilch and flooded the economy with money. (My CREF money market fund appears to be increasing at the annual rate of 1%!, if that.)
4. Beyond this are the unique situations: (A) income and wealth are more concentrated than anytime since the late 1920's. The more inequality the more difficult it is to increase consumption expenditures, since wealthy persons presumably save a greater proportion of their incomes, although how much that is true these days is uncertain.
(B) Savings rates had plunged to zero from a post-war average of about 8%, although it is now creeping higher. The effects here are complex and not readily analyzed. People who saved less, from their incomes, did so (in many cases) because they thought they were "earning" money on their houses and borrowed on their higher-valued houses. This, presumably, is no longer happening, at least in a meaningful way. But also, people borrowed on their credit cards in amounts they previously had not done. This, too, is not as possible.
Hidden away in Wednesday’s Times, on B9, was a story which began, "Consumer borrowing plunged in February at a 3.5 percent annual rate, more than analysts had expected, as Americans cut back their use of credit cards by a record amount."
The irony is that while individuals should save more, to protect themselves in case they lose their jobs (and because they have no way of paying off loans), what the economy needs is more spending and less saving.
( C) The trade deficit is at record highs, both absolutely and percentage-wise. The budget deficit has been unusually high and for 2010 will probably be almost as high as it was during World War II. Both of these factors make recovery more difficult.
( D) Housing construction cannot save us. The low interest rates the Fed created, in the past, that stimulated the economy and led to recoveries, caused mortgage rates to fall and, therefore, there was greater housing construction. Given the collapse of housing, preceded and caused by the bursting of the bubble, housing can’t play the positive role it usually plays in a recovery.
(E) Manufacturing ceases to play as significant a role in our economy than it did in the past.
(F) Finally, the present is a product of two big bubbles, both of which have burst. This makes comparisons of the past and present difficult, since what is needed is comparability. (Maybe more on this later.)
1. The banks are in more trouble than ever before, since WWII, and maybe ever. The only reason there are not more bank failures so far is FDIC and TARP and other bail-outs and expected bail-outs. A recovery of any oomph requires a loaning system that works and we are a long way away from this.
2. The world economy is worse than a mess. It’s both economically and politically frightening. But narrowly, a normal recovery requires us to export and that can’t happen in any meaningful way in today’s nightmare.
3. Recessions are usually caused by the Fed’s tight money policy instituted to fight inflation and recoveries are usually caused by the reversal, easy money. I think this was true of every recession since WWII, with possibly an exception being the readjustment after the War, which is called a recession, but probably shouldn’t be. This time the Fed neither caused the recession nor has it been able to reverse it, even though it has indirectly lowered Treasury Bills to zilch and flooded the economy with money. (My CREF money market fund appears to be increasing at the annual rate of 1%!, if that.)
4. Beyond this are the unique situations: (A) income and wealth are more concentrated than anytime since the late 1920's. The more inequality the more difficult it is to increase consumption expenditures, since wealthy persons presumably save a greater proportion of their incomes, although how much that is true these days is uncertain.
(B) Savings rates had plunged to zero from a post-war average of about 8%, although it is now creeping higher. The effects here are complex and not readily analyzed. People who saved less, from their incomes, did so (in many cases) because they thought they were "earning" money on their houses and borrowed on their higher-valued houses. This, presumably, is no longer happening, at least in a meaningful way. But also, people borrowed on their credit cards in amounts they previously had not done. This, too, is not as possible.
Hidden away in Wednesday’s Times, on B9, was a story which began, "Consumer borrowing plunged in February at a 3.5 percent annual rate, more than analysts had expected, as Americans cut back their use of credit cards by a record amount."
The irony is that while individuals should save more, to protect themselves in case they lose their jobs (and because they have no way of paying off loans), what the economy needs is more spending and less saving.
( C) The trade deficit is at record highs, both absolutely and percentage-wise. The budget deficit has been unusually high and for 2010 will probably be almost as high as it was during World War II. Both of these factors make recovery more difficult.
( D) Housing construction cannot save us. The low interest rates the Fed created, in the past, that stimulated the economy and led to recoveries, caused mortgage rates to fall and, therefore, there was greater housing construction. Given the collapse of housing, preceded and caused by the bursting of the bubble, housing can’t play the positive role it usually plays in a recovery.
(E) Manufacturing ceases to play as significant a role in our economy than it did in the past.
(F) Finally, the present is a product of two big bubbles, both of which have burst. This makes comparisons of the past and present difficult, since what is needed is comparability. (Maybe more on this later.)
False Recovery?
False Recovery?
More on economic prospects in a moment, but I want to get you while I have you. The stock market has made a comeback from its recent trough and that has inspired hope that the worst is behind us. (And there are a few hopeful signs–housing sales, for example, have slightly picked up, but more on this shortly.)
Ever wonder why Herbert Hoover was able to say "Prosperity is around the corner?" (I hope he said that since this is from memory.) I suspect that it was because a stock recovery appeared to be taking place. I found a month-by-month account of the Dow between 1929 and 1933. (The following are my approximations based on the chart I was reading–on a German web site (!): in late 1929 to about May 1930, the Dow rose about 40%; between July and October, the Dow rose about 9%. Plunging to new lows, the Dow then rose about 21% from the end of 1930 to about March 1931; again in May, 1931, it rose about 13% for two months. Near the end of 1931, it rose about 10% for about two months. It reached bottom in mid-1932 and rose erratically after that. The peak, in 1929 was about 385 and the trough was about 40.
While standard terms for the rallies are "false recovery" or "bear market rally," the one I like most is "dead cat bounce."
More on economic prospects in a moment, but I want to get you while I have you. The stock market has made a comeback from its recent trough and that has inspired hope that the worst is behind us. (And there are a few hopeful signs–housing sales, for example, have slightly picked up, but more on this shortly.)
Ever wonder why Herbert Hoover was able to say "Prosperity is around the corner?" (I hope he said that since this is from memory.) I suspect that it was because a stock recovery appeared to be taking place. I found a month-by-month account of the Dow between 1929 and 1933. (The following are my approximations based on the chart I was reading–on a German web site (!): in late 1929 to about May 1930, the Dow rose about 40%; between July and October, the Dow rose about 9%. Plunging to new lows, the Dow then rose about 21% from the end of 1930 to about March 1931; again in May, 1931, it rose about 13% for two months. Near the end of 1931, it rose about 10% for about two months. It reached bottom in mid-1932 and rose erratically after that. The peak, in 1929 was about 385 and the trough was about 40.
While standard terms for the rallies are "false recovery" or "bear market rally," the one I like most is "dead cat bounce."
Letter of the Week
Hello everyone. I took a vacation. I’m back.
********
Letter of the Week (Under a heading: The New Deal Revisionists: Will They Ever Learn?)
To the Editor:
Re "New Deal Revisionism: Theories Collide" (Arts pages, April 4):
You paraphrase two economists as arguing that federal spending cannot stimulate the economy because "government spending just crowds out private investment" and "the money supply is the only thing that matters."
Yes, federal spending can crowd out private investment — if it is financed through higher taxes or increased borrowing from the American public and accompanied by no expansion in the money supply.
But government spending can cut high rates of unemployment if it is financed by expanding the money supply. This means borrowing from the Federal Reserve System, which can create more money, either by issuing checks or by printing cash.
In this case, increased spending and monetary expansion are both parts of the same process. In fact, government spending stimulated the American economy during the early New Deal years and again during World War II.
Peter EcksteinAnn Arbor, Mich., April 4, 2009
The writer is a retired research director of the Michigan A.F.L.-C.I.O.
********
COMMENT: This and other critical letters were provoked by a comment of Richard K. Vedder, of Ohio University [and supported by Anna Schwartz (widow of Milton Friedman and co-writer with her husband of a monetarist interpretation of the Depression) and Nobelist (in economics) Robert Lucas, among others, at a right-wing conference on the New Deal], in a story authored by Patricia Cohen on April 3.
These (nutcake) economists, including Friedman, were he alive, believe that a fiscal stimulus will not work, World War II spending and an unemployment rate of 1.2 %, in 1944, notwithstanding. Only monetary solutions will work, they say. Except they are not working now, as the Fed’s rate–the federal funds rate--is, and has been for a while, as close to zero as it can go. Nor did low rates get Japan out of its decade long slump.
Eckstein has it absolutely correct. I would only add that the reason this is not 100% clear to all, even the wingnuts, is that FDR (fearful of deficits and behaving like a traditionalist) raised taxes and cut spending in 1937 and caused a relapse, in 1937-38, just as we were approaching a full recovery. Unemployment rates had fallen from a high of about 25% to nearly 10%, when Roosevelt got cold feet. World War II spending gave us the recovery.
Right wing economists and right wing politicos, including many in Congress, are doing everything they can to destroy the recovery–whatever the human costs--so that Obama and the Democrats can be blamed and the Republicans can return to power. (The economists might actually believe their own nonsense.)
********
Letter of the Week (Under a heading: The New Deal Revisionists: Will They Ever Learn?)
To the Editor:
Re "New Deal Revisionism: Theories Collide" (Arts pages, April 4):
You paraphrase two economists as arguing that federal spending cannot stimulate the economy because "government spending just crowds out private investment" and "the money supply is the only thing that matters."
Yes, federal spending can crowd out private investment — if it is financed through higher taxes or increased borrowing from the American public and accompanied by no expansion in the money supply.
But government spending can cut high rates of unemployment if it is financed by expanding the money supply. This means borrowing from the Federal Reserve System, which can create more money, either by issuing checks or by printing cash.
In this case, increased spending and monetary expansion are both parts of the same process. In fact, government spending stimulated the American economy during the early New Deal years and again during World War II.
Peter EcksteinAnn Arbor, Mich., April 4, 2009
The writer is a retired research director of the Michigan A.F.L.-C.I.O.
********
COMMENT: This and other critical letters were provoked by a comment of Richard K. Vedder, of Ohio University [and supported by Anna Schwartz (widow of Milton Friedman and co-writer with her husband of a monetarist interpretation of the Depression) and Nobelist (in economics) Robert Lucas, among others, at a right-wing conference on the New Deal], in a story authored by Patricia Cohen on April 3.
These (nutcake) economists, including Friedman, were he alive, believe that a fiscal stimulus will not work, World War II spending and an unemployment rate of 1.2 %, in 1944, notwithstanding. Only monetary solutions will work, they say. Except they are not working now, as the Fed’s rate–the federal funds rate--is, and has been for a while, as close to zero as it can go. Nor did low rates get Japan out of its decade long slump.
Eckstein has it absolutely correct. I would only add that the reason this is not 100% clear to all, even the wingnuts, is that FDR (fearful of deficits and behaving like a traditionalist) raised taxes and cut spending in 1937 and caused a relapse, in 1937-38, just as we were approaching a full recovery. Unemployment rates had fallen from a high of about 25% to nearly 10%, when Roosevelt got cold feet. World War II spending gave us the recovery.
Right wing economists and right wing politicos, including many in Congress, are doing everything they can to destroy the recovery–whatever the human costs--so that Obama and the Democrats can be blamed and the Republicans can return to power. (The economists might actually believe their own nonsense.)
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