Bell Curve The Law Talking Guy Raised by Republicans U.S. West
Well, he's kind of had it in for me ever since I accidentally ran over his dog. Actually, replace "accidentally" with "repeatedly," and replace "dog" with "son."

Friday, December 05, 2008

Teetering on the Brink

Today, we learn that more than half a million Americans lost their jobs in November alone. According to the NYTimes, the GDP is likely now to decline this quarter on an annualized basis of 4%. We also hear now that the number of households behind on their mortgages (or in foreclosure) is 10%, up from 4-6% last quarter. These are getting to be depression-sized numbers. There is no official definition of a "depression" but various economics folks on the web suggest it is a term meant to compare with the Great Depression, and should not be used until the GDP drops by 10% or more. As some wag said, a recession is when your neighbor is out of work, but a depression is when you are out of work. We may be headed that way if nothing is done.

Meanwhile, like old James Buchanan, George Bush is just watching the union burn, counting down the days until he exits (for those who don't get the reference: President James Buchanan was still in office when South Carolina seceded from the Union on December 18, 1860, in response to the election of Abraham Lincoln. By the time Lincoln took office on March 4, 1861, the whole Deep South had left the Union. Buchanan did nothing to save the union during these months of lame duckery).

So here we stand, teetering on the brink of serious global depression. What do I mean by "teetering on the brink?" Well, fear and anxiety are rising everywhere, and business activity is grinding to a halt, but the psychology of depression has not yet arrived. The public and business largely still believe that Barack Obama and the new Congress will do whatever it takes to avoid a depression, and will succeed in doing so. So most people and economists are still predicting and expecting a year or so of belt-tightening followed by an expansion in 2010 or 2011. This can be a self-fulfilling prophecy. If we all act like the economy will recover, it may. If we act like it won't, stop spending, pull all money out of investments, and hunker down for a storm, we will bring on the storm.

To use an analogy, the definition of heat is the speed of particles in motion. In a sense, heat is motion. In the same sense, somewhat counterintuitively, motion is heat. Bear with me. The economy heats up when we all start "moving" - spending, engaging in economic activity. It cools down when we slow down. Microwave radiation heats up food not the way a stove does (by conduction or radiation) but by agitating the particles inside food so that they move faster. Moving faster, they heat up. The economy will heat up or cool down if we engage in economic activity or withdraw from it. And we will behave (as a group) in rational ways in response to our expectations about the future. So we have a chance, Obama has a chance, to capitalize on those expectations, pour money on the fire, and let it start burning again.

8 comments:

Raised By Republicans said...

I wouldn't say that we're looking at Depression numbers here. Not because I think this is good news but because we forget how much worse the Depression was. The US GDP dropped by about 25% between 1929 and 1934. Unemployment rates were also at about 25%.

I recently had dinner with some economics professors (including a specialist in labor economics with strong Democratic political leanings) and they estimated that our GDP would drop by about 5% and that our unemployment rate would probably rise to about 10%. That's bad enough. But it's nothing like what we saw in the Great Depression.

There is something else we have going for us. The Depression started in 1929 but FDR didn't get elected and start doing something about it until 1932 and didn't take office until 1933. For us, this started in December of 2007 and we are already seeing some action in response with a strong mandate to a single party Democratic majority to continue doing something about it. So the fall is not as steep as in 1929 and we are lucky that our election cycle has given us about 3 year head start relative to what happened in the 1930s.

It's also worth noting that the recovery began in 1934 (about a year after FDR got into office). So I think this head start we have could end up saving valuable time and misery.

http://en.wikipedia.org/wiki/Great_Depression_in_the_United_States

Dr. Strangelove said...

By spewing out nothing but self-serving spin for eight long years, the Bush administration ended up losing all credibility and severely damaged the ability of the federal government to affect the psychology LTG speaks of. By restoring honesty, I hope Obama can restore credibility to the White House, so once again the government will be able to restore confidence in our economy.

Raised By Republicans said...

I completely agree with Dr. S regarding Bush's influence on how people are thinking about the future (which in turn is constraining investor and consumer confidence). This is similar to what Hoover did when he was President - his hard core laissez faire approach came across as a "do nothing" attitude which indeed it was.

But in Hoover's case, he sat there doing nothing for 3 years before the 1932 election could give people a chance to change leaders. In Bush's case he is on his way out barely a year after the economic problems began. We are lucky this started so close to an election. If it had started in 2005 we would have seen this stuff drag on for 3 years before we could vote for a new President.

This is one of the "flaws" that political scientists point to with Presidential systems. In a parliamentary system when a government refused to respond to a crisis or responds against the majority's wishes, that government can be replaced either by a quick election or by a vote of no confidence (other than Canada where Monarchy apparently still interferes - do they need to chop off another head?).

Raised By Republicans said...

I just heard a great quotation by Barney Frank (D-MA), "[President Elect Obama] says that we have only one president at a time. I understand that. The problem is that, in this time of crisis, I think he is over estimating the number of presidents we actually have."

The Law Talking Guy said...

It's interesting to note that Hoover actually did more than we give him credit for. The problem was as much psychological as anything else. Even though he began a process of increasing public spending in 1931, nobody in the public or the market believed that a Big Change was taking place. Much like Bush's first piecemeal reaction to the financial crisis, it did not change the underlying psychology of depression.

I think RBR is right - Obama may be coming to power in the nick of time. But the economic #s RBR discusses remain preliminary and the projections are very hard to gauge. We could very well see 4th quarter numbers staggeringly worse than before. And if holiday spending is bad - and it will be - the 1st quarter 2009 numbers could be even worse. In other words, the economics professors have little data to go on, and could be wrong. They could be wrong just as, last year, almost no economics professors were -publicly, at least- predicting the credit crisis and resulting recession.

Raised By Republicans said...

"almost no economics professors were -publicly, at least- predicting the credit crisis and resulting recession."

That's not how I remember the last 6 years. I've been hearing predictions of a recession caused by a collapsed in the sub-prime mortgage markets for years now. In fact, there were economists suggesting this could have been part of a second dip of the recession post 9/11. But it was postponed and possibly exacerbated by Greenspan's insistence on low interest rates and the Republicans' profligate spending policies.

And these concerns were public. US West is much better about digging in The Economists' archives than I but I seem to remember a series of stories several years ago in The Economist about the global housing bubble and how its collapse could lead to a global recession.

The Law Talking Guy said...

I don't recall any prediction that a global credit crisis would hit in August 2007, or that the decline would be as steep and rapid as we see now. Rather, there were broad general statements that if the housing bubble collapsed it could lead to a recession. The specifics we are dealing with - how deep, how soon, how fast, how broad - are things that even very well-informed economists just don't know and can't say.

Raised By Republicans said...

I don't see a reason to blame economists for dropping the ball on this one. It's a little unreasonable to expect them to give a precise date to the recession. As for how severe the recession could you must have missed it because I heard a lot of doom and gloom predictions as early as 2003.