Updates on the Managed Depression

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Economic health, like personal health, starts with honesty. When something is wrong a good diagnosis is the first step towards the proper cure and a strong recovery. Our economy is been deep in what is commonly called a “Great Recession”. That strange term is a substitute for the dreaded word that most of us know is the true condition – a depression.

That “D-word” may be feared, but it should not be. It simply points to different and more unusual treatment than we are used to. History will eventually come to know our present economy as what I call a “Managed Depression” – unusual among similar stages in the business cycle in that this one has been carefully managed.

There is no strong definition of a “Depression”. The most technical is a long recession (decline in GDP) lasting more than two years or a decline of 10% in GDP in one year. Some will say it’s simply a severe recession, putting the term “Great Recession” to the test. In popular language there often is only one Depression, the Great Depression of 1929-1938.

Officially, there was a recession in year 2001 and another from 2008-2009 in which there were downturns of 0.4% and 3.6% respectively. The short time period between them shows how easily they are linked in critical ways that suggest they were actually one event:

• Gross Domestic Product (GDP) – Between 2000 and 2008 the total GDP expanded by 1.8 trillion dollars in real (inflation adjusted, constant 2005 dollar) terms. Yet in that time there was an accumulated Federal debt of 2.1 trillion dollars. The short contraction in 2001 was met with unusually slow growth afterwards despite the deficits run – showing that the private sector continued to shrink the entire time.

• Jobs – In 2000, 64.4% of the population had a job. In 2002 (after the first official recession) that shrank to only 62.7% – and never exceeded 63.1% (2006) in the “recovery” period afterwards. What little job growth occurred after this official recession barely kept up with population growth.

• Poverty – From 2001 to 2008 the number of people on food stamps increased from 17.3 million to 27.7 million. But even more striking are the most comprehensive figures for those living in poverty as compiled by the National Academy of Science (NAS). They found that those in poverty jumped from 12.2% of the population to 13.4% in 2002 and never went back down before spiking dramatically in the next official “recession” to 15.8%.

Once these two official “recessions” are linked, it is hard to call the resulting single event anything other than a depression. If that is not reason enough to believe this is a depression, the total contraction in GDP without a federal deficit would have exceeded 10% in 2009. Without Federal intervention, first one definition of a depression would have been met, then the other.

This is highlighted by the character of this depression and how it has been managed. Back in 2002 it was common to talk of a “jobless recovery” and the specter of deflation, not inflation. The Federal Reserve under Alan Greenspan kept interest rates low through the period – and upon his retirement Ben Bernanke was chosen to replace him, a man whose PhD thesis was on the mistakes made by the Fed in the Great Depression of 1929-1938. This also explains Vice President Cheney’s famous remark that “Deficits don’t matter.”

As we learned in the last depression, the most important thing to do is to “prime the pump” to restart the economy. We can see how important that is as the European economy collapses amid insistence on budget balancing. Our leaders, in contrast, have been much freer with money and prevented the worst effects of a depression so far.

In short, the system has worked as it is supposed to. There was a depression, or a long-term deep contraction in the private sector, but it has been carefully managed. Government action to loosen credit and continue to spend on benefits has shielded us from the worst effects.

That is why I call this the “Managed Depression” and how it is unique as roughly the fifth depression in US history. President Monroe first used the term depression to describe the downturn of 1819, the first such event after independence. We learned much along the way and know how to prevent the worst effects from this phase of economic and business cycles – but not all of them. The careful management of this depression has left out several important considerations:

  • Debt – One of the key features of this depression is that banks have not been allowed to fail. However, bank failures are an important part of economic cycles in that they lead to write-downs or canceling of debt. While public debt at 75% of GDP (total of all government) is chilling, the privately held debt spiked to 276% of GDP in 2010, a staggering figure. Without traditional mechanisms for canceling it such as bank failures or a decreed period of Jubilee (as in Leviticus 25:10) that debt remains around the necks of households and businesses. Additional “stimulus” should be used to buy that debt and cancel it.
  • Jobs – Work is increasingly done by contractors or temps, not employees. Part of what is driving this is the overhead per employee – the fixed costs including health care, training, recruiting, taxes, and so on. Any small business owner will tell you that is at least 30% of the salary, meaning that a worker making $40k per year actually costs $52k per year. In larger companies that is much higher – but no one knows how much because this has never been studied. Reducing the overhead per employee, including taxes on employment, would encourage job growth.
  • Risk – Despite a lot of money pouring into the economy from Federal deficits and Federal Reserve policies of “quantitative easing” (literally printing 3 trillion dollars), money has been shy to go into new ventures. Any depression is highly psychological in nature, which is to say that once aggressive investors become shy and slow to take on additional risk. From a policy standpoint it is hard to encourage more risk in the economy – but steps such as taxing passive investment such as stock trades should definitely be considered.

This economic situation is much better understood as a depression, requiring assertive action, than a long and deep recession where we simply wait for an eventual recovery. One feature of a depression is that the economy which failed at the start has to restructure into a new one before the depression ends. This Managed Depression needs more honesty and intervention before that can be developed.

A better definition of a depression is where not simply a few sectors of the economy slow down but instead the whole system of money fails. That is what has happened as the credit bubble moved into a housing bubble before bursting. Additional cheap credit, the key method of managing this depression so far, is not enough. Cutting government spending blindly is potentially suicidal.

We are in a Managed Depression. Honesty about this will give us the necessary sense of urgency and direction to deal with it and bring it to a much quicker end.