Friday, March 29, 2013

A "Lesser" Depression, a Great Recession or Great Depression II?

"I should stop calling the current episode the Lesser Depression," writes Brad DeLong. "Yes, its shape is different from that of the Great Depression; but, so far at least, there is no reason to rank it any lower in the hierarchy of macroeconomic disasters." (Let it Bleed? Project Syndicate 03/28/2013)

He makes this judgment based on comparing the course of depressed US economic growth since 2007 with the Great Depression:

In fact, the losses from what I have been calling the "Lesser Depression" will almost certainly not be over in 2017. There is no moral equivalent of war on the horizon to pull the US into a mighty boom and erase the shadow cast by the downturn; and when I take present values and project the US economy's lower-trend growth into the future, I cannot reckon the present value of the additional loss at less than a further 100% of a year's output today – for a total cost of 1.6 years of GDP. The damage is thus almost equal to that of the Great Depression – and equally painful, even though America's real GDP today is 12 times higher than it was in 1929. [my emphasis]
Looking at the behavior of the bond market, he diagnoses the view of that strange collective entity expects, "a slack and depressed economy, if not for the next generation, at least for most of it."

And that's just for the United States.

Matters are even worse in much of Europe. And what DeLong writes of the US is true of much of euro, especially in the eurozone where German Chancellor Angela "Frau Fritz" Merkel has her austerity boot planted on the necks of those countries:

Once upon a time, policymakers understood that the government should tweak asset supplies to ensure sufficient supplies of liquid assets, safe assets, and savings vehicles. That way, the economy as a whole would not come under pressure to deleverage and thus push production below potential output. But this basic principle of macroeconomic management has simply gone out the window.
This is a remarkable thing. Supposedly the Great Depression taught "us" all how to deal with such an economic emergency. But in Germany and much of the rest of the eurzone as well as in the US, the political elite both center-right and center-left as well as the Establishment media in the US are completely sold on the economics of Herbert Hoover and Heinrich Brüning.

And he expands on the argument in Barbers on the March Project Syndicate 03/28/2013. Here's something to think about:

The U.S. economy today, however, has two and a half times as many people as the U.S. economy of 1929. And the U.S. economy today is five--or perhaps more--times as rich as the economy of 1929. In terms of the sheer real value of goods and services lost due to the depression waste output shortfall, the fact that the U.S. economy today is some 12.5 times the size of the economy of 1929 means that the absolute size of this downturn looks to be some fourteen times the size of the Great Depression.
The fact that the US is doing relatively better - less badly might be more appropriate - than Europe is cold comfort for Americans: "The relative attractiveness of the United States to global investors remains roughly what it was, strongly suggesting that the dismal outlook for American long-term stagnation is mirrored around the globe," DeLong writes.

He's even dubious that the economics profession will respond appropriately in the proverbial ivory towers of the academy:

At this point in the Great Depression John Maynard Keynes turned away from focusing on influencing policy to attempt to reconstruct macroeconomic thought by writing the *General Theory* so that the next time the crisis came economists would think about the economy in a different and more productive way than they had over 1929-1933. Up until 2009, I would have said that he had succeeded ...

But today it is clear that the task was only half-done, if that. The same ritual incantations to summon the Confidence Fairy to appear and shower the blessings of prosperity on the economy that were made by the Herbert Hoovers and Andrew Mellons and Ramsay McDonalds and Stanley Baldwins of the 1930s are now being made by the Olli Rehns, the Wolfgang Schaubles, the Tim Geithners, repeatedly and ever-more frantically.
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