So it seems that we aren’t going to have a second Great Depression after all. What saved us? The answer, basically, is Big Government.
Just to be clear: the economic situation remains terrible, indeed worse than almost anyone thought possible not long ago...
For all that, however, the latest flurry of economic reports suggests that the economy has backed up several paces from the edge of the abyss...
So what saved us from a full replay of the Great Depression? The answer, almost surely, lies in the very different role played by government...
Probably the most important aspect of the government’s role in this crisis isn’t what it has done, but what it hasn’t done: unlike the private sector, the federal government hasn’t slashed spending as its income has fallen...
In addition to having this “automatic” stabilizing effect, the government has stepped in to rescue the financial sector. You can argue (and I would) that the bailouts of financial firms could and should have been handled better, that taxpayers have paid too much and received too little. Yet it’s possible to be dissatisfied, even angry, about the way the financial bailouts have worked while acknowledging that without these bailouts things would have been much worse.
The point is that this time, unlike in the 1930s, the government didn’t take a hands-off attitude while much of the banking system collapsed. And that’s another reason we’re not living through Great Depression II.
Last and probably least, but by no means trivial, have been the deliberate efforts of the government to pump up the economy. From the beginning, I argued that the American Recovery and Reinvestment Act, a k a the Obama stimulus plan, was too small. Nonetheless, reasonable estimates suggest that around a million more Americans are working now than would have been employed without that plan — a number that will grow over time — and that the stimulus has played a significant role in pulling the economy out of its free fall.
All in all, then, the government has played a crucial stabilizing role in this economic crisis. Ronald Reagan was wrong: sometimes the private sector is the problem, and government is the solution.
And aren’t you glad that right now the government is being run by people who don’t hate government?
Yglesias points out that "“bailouts saved the economy” and “bailouts were structured so as to be very favorable to politically influential financiers” are not exclusive options."
I think that's right. The stimulus worked, but it could have worked better if it had been targeted solely at... stimulus, and less at, oh, say Goldman Sachs.
If there are any responsible Republicans left, please take lessons from this for the healthcare debate. You can't stop it, like you couldn't stop the stimulus. (In fact you shouldn't stop it, like you shouldn't have stopped the stimulus.) But if instead of fearmongering and holding your breath and throwing tantrums, you direct your opposition to things that actually should be opposed, you could affect positive change.
With regard to the stimulus, you could have held your fire, not smeared Obama as Stalin-incarnate, not ridiculed the very idea of stimulus, and instead insisted on making sure that the stimulus was as trim and directed as possible. Oh, you'll say you did argue against some of the waste and misdirected funds, and of course you did, but that was lost among the greater lunacy.
Now you have an opportunity to make sure that the health care plan does what it sets out to do rather than rewarding corporate interests at the expense of everybody else. But you've got to stop lying about everything, smearing Obama as a socialist, pretending that Obama's coming for grandma, insisting that government can never do good, and generally engaging in fearmongering. Instead, be a responsible opposition party. The Dems put forward a plan, respond with the same plan slightly improved. Stay on message. Say you support the plan, but you want to include tort reform. Or you want less money for X and more for Y. You can do that. If you put all your energy on making the plan better and none of it on insanity, you could not only cause a better health care plan, but take great strides in restoring a civil democracy.
Or you can scream "Socialism" and tear at your hair and have to live with whatever the Democrats manage to ram through without your help. Your choice.
23 comments:
Uh, which stimulus "worked"? The two that passed last year, or the one that passed this year? Or have we forgotten about the Bush stimulus's? Or is that stimuli?
Of course all of this is just a typical rainmaker scheme. Give me all your money and I'll make it rain. If it does, then your money "worked". If it doesn't, you didn't pay me enough.
Also, why is anyone listening to Paul Krugman after he called for the housing bubble? If it wasn't for his ideas, we wouldn't *NEED* a so-called stimulus?
Let's spend a moment talking about the bailout.
I just spent two hours with a dear friend who is terrified of losing his house. He lost his job last year and has been draining his savings trying to keep things going.
Unemployment doesn't cover his nut and he has yet to find a full time job.
So he contacted his mortgage company to see if he would qualify for the Housing Stimulus plan.
He is current on his mortgage and explained that he wanted to stay current, but was afraid that he might not be able to continue.
The bank told him that it would take 30 days for his application to be processed into the system and then another 90 to be approved or disapproved.
So in effect it is 120 days that he could end up waiting. In the interim his tax dollars and yours are providing the bank with money that is supposed to be used to help protect homeowners.
The banks didn't have to wait, they just got it. They'll make money off of the interest and maybe, just maybe they'll find a way to help him.
Or maybe not. Either way he is in major trouble with a very hazy future.
I support social responsibility and a gov't that looks out for all people. But this is not working as well as some people want to suggest it is.
Scott:
Uh, which stimulus "worked"? The two that passed last year, or the one that passed this year? Or have we forgotten about the Bush stimulus's? Or is that stimuli?
I think we're talking about both part one under Bush and part two under Obama.
Of course all of this is just a typical rainmaker scheme. Give me all your money and I'll make it rain. If it does, then your money "worked". If it doesn't, you didn't pay me enough.
Well if your goal is to have it rain, then yes, that would work. The government's goal was to avoid a catastrophic depression. So yes, taking money from the future and throwing it around now does that. The beauty of it is that having it around now ALSO means that there will be more in the future.
Also, why is anyone listening to Paul Krugman after he called for the housing bubble?
That is a flatly untrue meme being put out by the right now. Go track down the sources and read them in context. Krugman said that Greenspan was causing a housing bubble essentially to keep the economy up after the tech bubble popped. He never "called for it." On the contrary, he warned and warned about it consistently for 5-7 years before it popped.
Jack:
Nobody's saying the stimulus fixed everything, just that it prevented a second depression. As Krugman says, things are still terrible and getting worse (albeit more slowly.) Krugman believes that a million more people could have been in your friend's position. The bailout didn't help your friend, but it may have helped a million like him... which ultimately will probably help him too. Just not now, when he needs it.
It should be noted that Krugman all along has said the bailout is too small. Perhaps if it had been big enough your friend would have found a new job as well.
Jewish Atheist,
"Well if your goal is to have it rain, then yes, that would work. The government's goal was to avoid a catastrophic depression. So yes, taking money from the future and throwing it around now does that."
Scott's point is that although we observe that we seem to have avoided a depression, that observation on its own does not support the argument that the stimulus was the cause.
Even so, I am inclined to accept that the stimulus has helped, but this is based on economic models rather than evidence of the effects this particular stimulus.
You should also consider the argument that monetary policy by the Federal Reserve has had a much greater effect than the stimulus or anything else the White House or Congress has done so far.
I also want to point out that the stimulus is intended to reduce unemployment over the next few years, which the Federal Reserve recently projected will still be 9.0 to 9.5% at the end of 2010. The stimulus is not intended as simply a quick fix.
"The beauty of it is that having it around now ALSO means that there will be more in the future."
If we are talking about the stimulus package, this is not clear. The CBO projected in March 2009 that the stimulus could cause GDP to decrease between 2015 and 2019 relative to the baseline (no stimulus).
Jewish Atheist,
I also notice you seem to be using the terms stimulus and bailouts interchangeably, but they are actually two different things.
You'll never convince a Republican that government did it. If we do fully pull out of the recession they will deny that it was the stimulus and claim it was the free market that did it in spite of government interference. If we sink into another recession like many are predicting it will be the fault of government and they will say that it would not have happened if free markets were allowed to operate without interference.
JA -
Delightful post. From being around gruntings marines all day, some intellectual stimulus works quite well for my brain this early in the morning.
I loved the "lost among greater lunacy line", it gave me a chortle.
I'm so moderate that I can't really make up my mind about anything. The stimulus was nice, but at what cost to taxpayers? And why is CNN telling us the recession is "nearly" over when I know many, many people who are still without jobs? Isn't it at like 10% or something like that? If the bailouts/stimuli programs worked, that's awesome.
But yeah, I'm not a dem or a republican either way completely just because both sides talk a bunch of bullshit on a constant basis.
avian30:
Scott's point is that although we observe that we seem to have avoided a depression, that observation on its own does not support the argument that the stimulus was the cause.
It may not prove the argument, but it does "support" it.
If we are talking about the stimulus package, this is not clear. The CBO projected in March 2009 that the stimulus could cause GDP to decrease between 2015 and 2019 relative to the baseline (no stimulus).
Okay, fair enough. I'm still learning about economics. :-)
I also notice you seem to be using the terms stimulus and bailouts interchangeably, but they are actually two different things.
Yeah, I know the difference, it was just sloppy writing.
Geonite:
You'll never convince a Republican that government did it.
That's true of many Republicans, of course, but I keep hoping that the remaining intellectuals will come around and try to take back their party.
FrumCurious:
First of all, great name. :-)
But yeah, I'm not a dem or a republican either way completely just because both sides talk a bunch of bullshit on a constant basis.
Try to ignore the bullshit and look at results. Compare income growth under both kinds of president, look at the history of legislation, etc.
I think we are too short-term sighted to declare the stimulous a success.
In fact, "kicking the can down the road" is not the best idea to save us from recession/depression. Just printing more money, and pumping it into the system and calling it stimulous, which it is, still leaves us with a bigger hole that becomes larger and larger and harder to fix.
Our country is in MASSIVE debt - have you noticed that? What do you think the reprecussions are for taking out mortgage after mortgage on your house until there is so much negative equity, that when the bill comes due you have no way of paying? What happens then?
No one cares, becasue its not "today", its down the road....
JA:
That is a flatly untrue meme being put out by the right now. Go track down the sources and read them in context. Krugman said that Greenspan was causing a housing bubble essentially to keep the economy up after the tech bubble popped. He never "called for it." On the contrary, he warned and warned about it consistently for 5-7 years before it popped.
A meme by the right? Well look, I've never understood these left right labels, so maybe you could clear that statement up for me. Who is the right that is putting out this meme?
At any rate, he continuously advocated for lowering interest rates, which, you know, caused the housing bubble. Sooooo.......
http://blog.mises.org/archives/010153.asp
And yes, he always claims the State "doesn't do enough." But then, that's the nature of centrally planned economies, isn't it? I mean, how much IS enough? No one can say, but when it doesn't work, we know it's not enough.
The Rainmaker.
Scott:
A meme by the right? Well look, I've never understood these left right labels, so maybe you could clear that statement up for me. Who is the right that is putting out this meme?
As far as I can tell it was started by Mark Hemingway. (Refuted here, by the way.)
As of two or three days ago, I'd never heard anybody blame Krugman for advocating for the housing bubble. Then, all of the sudden, yesterday or the day before, every right-wing blog I read was talking about it. It's a familiar pattern.
At any rate, he continuously advocated for lowering interest rates, which, you know, caused the housing bubble. Sooooo.......
I don't "know" that at all. Did they contribute? Probably. Were they the primary cause? I don't think so.
You should consider adding some non-Austrian, non-libertarian economists to your Mises Institute habit. Obviously they're going to blame everything on the government. That's what they do.
And yes, he always claims the State "doesn't do enough." But then, that's the nature of centrally planned economies, isn't it? I mean, how much IS enough? No one can say, but when it doesn't work, we know it's not enough.
Actually, Krugman did say what he thought was enough. (I believe it was about 150% as big it actually was.)
the housing bubble was caused by fannie and freddie relaxing underwriting standards and government requiring banks to lend to non-conforming borrowers.
(fannie and freddie in bed with the dems - not that the repubs did anything about it while they were in power, but still)
"I don't "know" that at all. Did they contribute? Probably. Were they the primary cause? I don't think so."
Well wait, if the official refutation of Krugman's advocacy of the housing bubble was that he WASN'T advocating the housing bubble, but merely stating the fact that IF the Fed were to lower interest rated it would cause a housing bubble, then isn't Krugman the one blaming the Fed?
bankman:
the housing bubble was caused by fannie and freddie relaxing underwriting standards and government requiring banks to lend to non-conforming borrowers.
If you look into it honestly, you'll find that Fannie and Freedie were involved with only a small fraction of the bad loans. Government requirements to loan to people were also responsible for only a small fraction. Many, many lenders gleefully handed out bad loans left and right without being forced to by the government.
(fannie and freddie in bed with the dems - not that the repubs did anything about it while they were in power, but still)
That's kind of my main theme in this post. That's exactly the kind of thing the Republicans *should* have been doing and should still be doing. They could provide a very valuable service to the country by focusing on the things that are actually wrong with the Democrats which would easily get lots of support with voters. Yet they prefer to do nothing about that sort of thing and instead push lunacy and fearmongering -- which is bad for both the Republican party and for Americans in general.
Scott:
Well wait, if the official refutation of Krugman's advocacy of the housing bubble was that he WASN'T advocating the housing bubble, but merely stating the fact that IF the Fed were to lower interest rated it would cause a housing bubble, then isn't Krugman the one blaming the Fed?
I don't see where Krugman stated that "fact." Here, read Krugman's original 2002 column. Note while you read it just how dishonest it is to pretend that he was advocating a housing bubble in it.
I've read it. Have you read the assortment of other articles that were quoted in the post I linked to above. He continually advocated the lowering of interest rates. That's the point. He advocates Keynesian economics full force. He advocates constant tinkering and manipulation of interest rates and monetary supply. The exact kind of thing that causes wide spread booms and busts.
How, specifically then, is it dishonest to state that he advocated the housing bubble? He advocates bubbles. Period. Full stop.
You can't have centrally managed economies without booms and busts. That's the way it goes when just a few people are deciding for the rest of us. Cause *gasp* sometimes they're wrong. Shocking, I know.
JA - I disagree with you. I have spent A LOT of time examining fannie and freddie's actions during the housing boom and they are EGREGIOUS. Encouraging the banks to loosen standards by buying up every piece of junk mortgage, wrapping them in MBS, guarnateeing them, holding onto the AAA portion and selling the remiander to investors.
All while takng MASSIVE salaries for themselves, paying off politicians (democrats mostly) and granting sweetheart mortgages to their govt supporters.
sick sick sruff bro. I wish govt would investigate - but they never will.
Scott:
He continually advocated the lowering of interest rates.
Agreed.
He advocates Keynesian economics full force.
Mostly agreed.
He advocates constant tinkering and manipulation of interest rates and monetary supply.
Agreed.
The exact kind of thing that causes wide spread booms and busts.
Aha! Here is where we disagree. What you claim is what the Austrians claim.
I (and again, I'm not an economist) think that the Keynesians have it right: booms and busts are a *natural* part of capitalism, while regulation (and tinkering and manipulation) have drastically *reduced* the boom-and-bust cycles.
If you look back in American history, you'll find that the Keynesian explanation conforms more with reality than does the Austrian one.
For example, just take the boom-and-bust immediately before this one -- the tech bubble. That was not caused by federal tinkering and manipulation, but by an overexuberant "gold rush" on these new-fangled dot-coms that everybody collectively lost their minds about. Speculation was wild, everybody wanted to get rich quick, so the markets shot up until it became so inflated it couldn't possibly sustain itself... and then it busted.
The housing bubble, from this perspective, was pretty similar. After the bust of the markets, people wanted to invest somewhere else. So they started buying up real estate, which increased prices. Then other people started to notice that housing was going up, so they jumped on board. Then EVERYBODY noticed that housing was going up so they jumped on board, too. Most crucially, that included lenders. They happily handed out loans knowing that AS LONG AS PRICES WENT UP borrowers would have no trouble paying them back. The key is, they just assumed, like IDIOTS, that the real estate market could go up for ever. When the inevitable crash came, all the loans which would have been fine if the idiotic assumption had held true were now junk. And worse than that, the financial sector had been making huge bets on those loans assuming ALSO that housing prices wouldn't go down. None of that was the government's fault, *except* if you consider the fact that the government didn't take steps to end it or inject sanity into the financial world by, for example, regulating the ratings agencies so they couldn't pretend that shitty loans were AAA or by limiting the amount of risk financial institutions could take by gambling on obviously idiotic assumptions.
(cont.)
How, specifically then, is it dishonest to state that he advocated the housing bubble? He advocates bubbles. Period. Full stop.
Not at all. He supported using an increase in the real estate market to allay the effects of the dot-com bust, it's true, but he clearly wanted to avoid turning it into a bubble, and explicitly warned of it as early as 2005:
In parts of the country there's a speculative fever among people who shouldn't be speculators that seems all too familiar from past bubbles - the shoeshine boys with stock tips in the 1920's, the beer-and-pizza joints showing CNBC, not ESPN, on their TV sets in the 1990's.
Even Alan Greenspan now admits that we have "characteristics of bubbles" in the housing market, but only "in certain areas." And it's true that the craziest scenes are concentrated in a few regions, like coastal Florida and California.
But these aren't tiny regions; they're big and wealthy, so that the national housing market as a whole looks pretty bubbly. Many home purchases are speculative; the National Association of Realtors estimates that 23 percent of the homes sold last year were bought for investment, not to live in. According to Business Week, 31 percent of new mortgages are interest only, a sign that people are stretching to their financial limits.
The important point to remember is that the bursting of the stock market bubble hurt lots of people - not just those who bought stocks near their peak. By the summer of 2003, private-sector employment was three million below its 2001 peak. And the job losses would have been much worse if the stock bubble hadn't been quickly replaced with a housing bubble.
So what happens if the housing bubble bursts? It will be the same thing all over again, unless the Fed can find something to take its place. And it's hard to imagine what that might be. After all, the Fed's ability to manage the economy mainly comes from its ability to create booms and busts in the housing market. If housing enters a post-bubble slump, what's left?
You can't have centrally managed economies without booms and busts. That's the way it goes when just a few people are deciding for the rest of us. Cause *gasp* sometimes they're wrong. Shocking, I know.
I believe I've covered that. Booms and busts are a feature of capitalism (at least with fiat money) not of managed economics.
bankman:
I'm not debating whether Fannie and Freddie did good, bad, or EGREGIOUS things... just that they were responsible for only a small fraction of what happened.
FrumCurious,
"I'm so moderate that I can't really make up my mind about anything ... But yeah, I'm not a dem or a republican either way completely just because both sides talk a bunch of bullshit on a constant basis."
I used to be like you. But there are different degrees of bullshit and I recently discovered that Republicans tend to bullshit more. Some nonpartisan websites that led me to this conclusion:
* FactCheck.org
* PolitiFact.com
* CBO Director's Blog
* Economix
"The stimulus was nice, but at what cost to taxpayers?"
The CBO has some numbers.
"And why is CNN telling us the recession is 'nearly' over when I know many, many people who are still without jobs? Isn't it at like 10% or something like that?"
Unemployment tends to lag behind broader economic growth. The Federal Reserve projected in April that unemployment will be 9.0 to 9.5% at the end of 2010 and 7.7 to 8.5% at the end of 2011. Not a good situation.
ROTFL!!!
Wow.
You're so in the bag to whatever is spoon fed to you.
JA,
You should check out Richard Posner's The Failure of Capitalism, which sets out in a clear and compelling way why depressions are a natural result of the free market and require government intervention to get out of.
You could do that...or you could set aside policy books for a time and first learn economics. For instance, the economics of money, banking, and business cycles. Once you understand just what a business cycle is, it's easy to see what it means for a "stimulus" to work. Here's a simple analogy - a stimulus works the same way hair of the dog works. That is, you can get rid of hangover by more of what caused the hangover, but either you stop at some point, or you give up your life to alcoholism. When you stop, you're going to get a serious hangover - one much worse than you would have had if you had just dealt with it.
In the boom of a business cycle (as opposed to either a secular growth pattern or a genuine growth pattern resulted from changed time preference) what happens is production expands, people are pulled into the workforce, and so on - all premised on the belief that in the future, there will be consumers for the endproducts of this enhanced production.
In the bust portion of the cycle, it is realized that there is not sufficient demand for these endproducts, revealing misallocation of resources. Resources will have to be reallocated in more productive ways, and that will be painful. In the transitional period, people will be laid off.
Or, we can decide not to do that, and we can get the numbers looking good again by restarting the process (by printing more money.) Then we'll have more misallocation of resources, and we'll have production that is even further from meeting real demand, and even less productive. We have people going to work each day and literally destroying wealth. Then the crash comes...and you prevent it again, and so on. Now, maybe you think you can do this forever, and do something about the failure to produce what is actually needed...like buy what you need from China for worthless dollars. Maybe - but eventually, the rest of the world decides it doesn't want to play that game anymore. The first few who decide that, you just invade or threaten to invade - Iraq, Iran, Syria...but once it's enough of the world, that fails too.
So, you can spare me the talk about the stimulus plan, the bailouts, etc. working. If they're working, they're only putting off the inevitable, and destroying what wealth we have left in the process.
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