Sunday, November 23, 2014

The Greater Depression

BERKELEY – First it was the 2007 financial crisis. Then it became the 2008 financial crisis. Next it was the downturn of 2008-2009. Finally, in mid-2009, it was dubbed the “Great Recession.” And, with the business cycle’s shift onto an upward trajectory in late 2009, the world breathed a collective a sigh of relief. We would not, it was believed, have to move on to the next label, which would inevitably contain the dreaded D-word.

But the sense of relief was premature. Contrary to the claims of politicians and their senior aides that the “summer of recovery” had arrived, the United States did not experience a V-shaped pattern of economic revival, as it did after the recessions of the late 1970s and early 1980s. And the US economy remained far below its previous growth trend.

Indeed, from 2005 to 2007, America’s real (inflation-adjusted) GDP grew at just over 3% annually. During the 2009 trough, the figure was 11% lower – and it has since dropped by an additional 5%.

The situation is even worse in Europe. Instead of a weak recovery, the eurozone experienced a second-wave contraction beginning in 2010. At the trough, the eurozone’s real GDP amounted to 8% less than the 1995-2007 trend; today, it is 15% lower.

Cumulative output losses relative to the 1995-2007 trends now stand at 78% of annual GDP for the US, and at 60% for the eurozone. That is an extraordinarily large amount of foregone prosperity – and a far worse outcome than was expected. In 2007, nobody foresaw the decline in growth rates and potential output that statistical and policymaking agencies are now baking into their estimates.

By 2011, it was clear – at least to me – that the Great Recession was no longer an accurate moniker. It was time to begin calling this episode “the Lesser Depression.”

But the story does not end there. Today, the North Atlantic economy faces two additional downward shocks.

The first, as Lorcan Roche Kelly of Agenda Research noted, was discussed by European Central Bank President Mario Draghi while extemporizing during a recent speech. Draghi began by acknowledging that, in Europe, inflation has declined from around 2.5% in mid-2012 to 0.4% today. He then argued that we can no longer assume that the drivers of this trend – such as a drop in food and energy prices, high unemployment, and the crisis in Ukraine – are temporary in nature.

In fact, inflation has been declining for so long that it is now threatening price stability – and inflation expectations continue to fall. The five-year swap rate – an indicator of medium-term inflation expectations – has fallen by 15 basis points since mid-2012, to less than 2%. Moreover, as Draghi noted, real short- and medium-term rates have increased; long-term rates have not, owing to a decline in long-term nominal rates that extends far beyond the eurozone.

Draghi’s subsequent declaration that the ECB Governing Council will use “all the available unconventional instruments” to safeguard price stability and anchor inflation expectations over the medium-to-long term is telling. The pretense that the eurozone is on a path toward recovery has collapsed; the only realistic way to read the financial markets is to anticipate a triple-dip recession.

Meanwhile, in the US, the Federal Reserve under Janet Yellen is no longer wondering whether it is appropriate to stop purchasing long-term assets and raise interest rates until there is a significant upturn in employment. Instead, despite the absence of a significant increase in employment or a substantial increase in inflation, the Fed already is cutting its asset purchases and considering when, not whether, to raise interest rates.

A year and a half ago, those who expected a return by 2017 to the path of potential output – whatever that would be – estimated that the Great Recession would ultimately cost the North Atlantic economy about 80% of one year’s GDP, or $13 trillion, in lost production. If such a five-year recovery began now – a highly optimistic scenario – it would mean losses of about $20 trillion. If, as seems more likely, the economy performs over the next five years as it has for the last two, then takes another five years to recover, a massive $35 trillion worth of wealth would be lost.

When do we admit that it is time to call what is happening by its true name?

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    1. CommentedStamatis Kavvadias

      As Pingfan Hong says below, the real question is whether we blame pre- or post-crisis policies. Currently, we blame the latter and we are ...recession-silent about the former. This is telling of the political corridor from wall-street and the banking system to US ministries and the banking supervision institutions, but, more fundamentally, of the embedding of banking lobbying power to US politics at the congressman level.

      Unless congressmen are selected randomly (or accountable to and revocable by a body of random citizens), there is no exit.

      As for the ...eurozone, we do not even have a meaningful parliament, so the "Ministry of Plenty" will be the ECB and the "Ministry of Truth" will be the press. The outcome will be random.

        CommentedStamatis Kavvadias

        It would be simpler to see why lobbying accounts to corruption, if you ban electoral campaign funding by private money and use taxes to collect the money.

        Then lobbying becomes clearly undemocratic and must be banned also, and the private sector eventually has the same access to the political process as all citizens, i.e., the press.

        Of course, then you will have a problem with the press, expressing the limited range of issues and views important to the plutocracy (since it belongs to it), and it will be, more or less, a similarly opaque problem.

        CommentedStamatis Kavvadias

        Naming is just the demonstration of deep corruption. A new Ministry (or mindset) of Truth will fix the problems.

        The Ministry of Plenty rations and controls food, goods, and domestic production; every fiscal quarter, the Miniplenty publishes false claims of having raised the standard of living, when it has, in fact, reduced rations, availability, and production. The Minitrue substantiates the Miniplenty claims by revising historical records to report numbers supporting the current, "increased rations".
        Wikipedia -- "Nineteen Eighty-Four"

    2. CommentedPhoenix Woman

      As for how (in the US at least) Big Business was able to use the poisoned opiate of consumer credit to lull the masses into thinking that the Good Times really didn't end circa 1974 (the time period when US businesses by and large stopped handing out wage increases on a regular basis), one need only look at the history of the alliance between Big Business and Big Bigotry (the institutionalized racism exemplified by things like "sundown towns" and "sovereignty commissions" - the "Uptown Klan" as Thurgood Marshall called it). This alliance is called "The Southern Strategy", and it's why the Party of Big Business is no longer the Party of Lincoln.

      The Southern Strategy is, when Big Media (itself an arm of Big Business) deigns to notice it at all, usually described as something that is purely about racism, and/or something that the Republicans only used when Nixon was president. In fact, it is the foundational philosophy of the I-Got-Mine-So-Screw-You crew that runs both modern conservatism and the Republican Party. The way it works was explained back in 1981 by none other than Lee Atwater (look up "lee atwater abstract southern strategy" in any search engine and you'll find his exact words, and even the video of him saying them).

      In the Southern Strategy, racists use the language of finance to cloak their racist desires (for example, talking about tax cuts as "fiscal responsibility" when the true Grover Norquistian goal is to cut revenues in order to justify cutting government programs that might help nonwhites), and business types in turn use racist appeals (either cloaked in the language of finance, or just straight-out directly racist appeals) to convince white working class and middle class voters to back giving tax cuts and other goodies to rich people.

      This is the underlying political strategy of Big Business, and yet most Americans know as much about it as they know about Baibars.

    3. CommentedPhoenix Woman

      This was inevitable in the US and Canada ever since the end in the 1970s of the century-plus-long labor shortage that forced businesses to pay rising wages to workers. Once that stopped, the banks stepped in with credit cards to make the workers ever more chained to them while giving the illusion of rising wages. This could not be sustained forever, and the 00s saw the breaking point.

    4. CommentedWaleed Addas

      Depression or Recession it does not matter much anymore. The real question is whether we have learnt from this crises any lessons? Most probably the only lesson that we have learnt is that we did not learn a single lesson!!
      Call it not the Greatest Depression but the Greatest Decay as no matter how much GDP grows from now since morality is on a continuous downward trend.

    5. Commentedjim bridgeman

      But by definition 2005 to 2007 was a bubble. Why should anyone expect that it will be repeated, never mind define a trend line we should have expected to return to?

    6. Commentedwalter dyer

      The kleptomania is funding government to its insane 30% of GDP rate. Take that down a notch or two and kill any regulation made in the last forty years - make it fifty for a nice even number. cut taxes on individuals by 80% and on corporations by 65% and wait five years to see the results. If things get better - I think they will - do it again. Don't forget the eighteen things government is supposed to do. Let the government have to scrape and tighten their belts like we are for a generation or two.

        CommentedCurtis Carpenter

        The notion that the government is the Head Kleptomaniac in our society would make me laugh if I could do that anymore. What about the Banksters? What about the Big Medicine/Big Pharma Gang? The Airline Fee Boys?

        Kleptomania and "show me the money" has morphed into virtue. Welcome aboard.

    7. CommentedChris Cowsley

      The lost wealth is imaginary. It doesn't exist and won't until the 'haves' can figure out how to get a return on $700tr from 7 billion 'have nots'. The larest scam of revaluing their own assets just stopped working.

      Don't hold your breath.

    8. CommentedPierre ratcliffe

      Growth in absolute terms and per capita - ie. prosperity - has always been driven by innovation; innovation being the practical use and diffusion of inventions that permit to respond to wants, to adapt to a limiting constraint or to the scarcity of something. But indefinite exponential growth is physically impossible and applies to all things, including population growth. What we need today is innovation. We had innovation in financial instruments but this led to the depression that we have now. Many other innovations can be found to increase the prosperity of the 7 billion humans dispersed with unequal conditions in the 193 united nations of the planet. I suggest this reading and its more than a hundred references linked to the subject of innovation: Economic history of modern Europe Vol I, Chapter 7, Industry 1700-1870 Stephen Broadberry University of Warwick UK link

    9. CommentedYoshimichi Moriyama

      Yes, let's call it by its true name. Well, what is it? Does anyone know what it is? What does our economics text say it is?

    10. Portrait of Pingfan Hong

      CommentedPingfan Hong

      What is the point? Shall we blame the policies in the period after the financial crisis for failing to boost the recovery, or blame the policies in the period before the financial crisis for creating the unsustainable bubble driven false prosperity?

        CommentedStamatis Kavvadias

        Definitely, both. Mostly, pre-crisis policies, though.

        If we do not, we will not become politically conscious of the the banking system monopoly favored by these policies.

        And the political system will not have enough criticism, as to cut (or, at least, hide) its ties to this monopoly.

        Plain people have significant reasons to be puzzled over a reaction to the crisis. Experts puzzled, after 6 years, is a *clear* sign of complicity.

    11. CommentedDallas Weaver, Ph.D.

      It seems that the real question is what has changed?

      As per capita economic growth is a strong function of innovation, we get to the question of why we have less overall small innovative business formation.

      We do have the froth of extremely rapid innovation and business formation in the "permission-less" sectors of our economy like silicon valley. A good idea for a new app or software gets support of VC's and the business starts in days to months.

      However, in the real sectors of our economy where any new business proposal now has a dozen regulatory agencies, each with veto power, combined with dozens of opponent activist groups who want no change or creating destruction who also have effective veto or delay power. When getting permissions (permits, etc) to build a large solar energy facility (pure PC project) can take 5 years for a project that only takes 1 year to actually build, something is very wrong.

      Every new regulation interacts with all existing regulations creating an N! (N factorial = N(N-1)(N-2)....1 ) type function rate of complexity increase. Like exponentials, such as population increases, this type of growth doesn't register on the human brain until the last few doublings, then it appears as a "straw that broke the camels back" or "something unexpected or unprecedented".

        Commentedde Lafayette

        {DW: As per capita economic growth is a strong function of innovation, we get to the question of why we have less overall small innovative business formation.}

        I sometime think that our American friends have gone overboard on "innovation".

        I would like to see someone do a definitive study of how the Internet has "innovated" new-jobs. As far as I can tell, it is destroying jobs in the bricks 'n mortar retailing.

        Even in IT, most production has moved overseas - to Japan, Korea and China.

        Just what has been the real advantage of "innovation"? To make some Silicon Valley overnight- millionaires? Why should this impress anybody?

        Job creation must come back in the traditional way. From the BLS 4th quarter Business Employment Dynamics report: "During the fourth quarter of 2013, gross job gains exceeded gross job losses in all industry sectors except the utilities sector and the other services sector. The professional and business services sector, which includes temporary help services, experienced a net increase of 193,000 jobs as a result of higher gross job gains this quarter. The retail trade sector experienced a net increase of 113,000 jobs. This represents an increase of 76,000 jobs compared to the prior quarter. The transportation and warehousing sector experienced the largest net change in the history of the series for that industry sector, a gain of 79,000 jobs.“

        All this job-creation happened at the “grassroots” of American industry and commerce …

    12. CommentedPaul Peters

      Statistics is what happens when we stop making meaning. Agree with this side of the situation sketched, yet opportunities lie in the different modalities to capture the 'foregone prosperity'. That can only be done by doing.

    13. CommentedNathan Weatherdon

      Judging lost prosperity on the assumption that growth cycles trends continue during the trough is like crying over sour apples that everything doesn't fit picture perfect to plan.

      By 2005, people had somehow learned that there is no such thing as a business cycle.

      Let's not forget something.

      Business cycles are real.

      If creative destruction can play its technology- and productivity-enhancing role in a positive growth framework (even 0.1%), then great! That means that many families will not have had to get kicked out of houses they can't afford, take children out of schools and social circles they were connected to, etc., etc.

      Now how to pay for all that fiscal stimulus necessitated by years of excessive (benefit of hindsight) optimism? I suggest that cutting all taxes to zero is not likely to be a highly effective strategy.

    14. CommentedMargaret Bowker

      I imagine by promulgating the use of the 'dreaded D for depression-word,' J. Bradford DeLong is hoping to shake up policymakers and encourage them to consider the global economic situation realistically; and getting policy right would be an appropriate reaction to that acknowledgement. He refers to the EU and the US. With the EU, a Eurozone fiscal policy co-ordinator, working with or incorporated into the position of EuroGroup leader, is greatly needed and as positions are being considered shortly, this would be the time to establish one. It's fairly straightforward in a single country, however large, to say monetary and fiscal policy should work alongside and enable a realistic pace of reduction and stimulate growth, whilst aiming for 2% inflation, but in a zone of numerous nation states it needs strong direction and co-operation. The Eurozone has the ECB and significant monetary action is on the immediate horizon to prevent zero inflation, 0.3% latest figure, coming into effect before the end of the year. But fiscal and monetary policy should support each other and create growth to balance reduction. With the US, there doesn't appear any need for policy development until mid to late 2015, assuming that growth is on a set course.

    15. CommentedJohn A Werneken

      This is what happens when voters and/or governments try to help people. Can't be done, ought not to be tolerated.

    16. CommentedPeter Me

      It is really quite simple.....the change in economic growth (GDP) = the change in population + the change in productivity.

      Growth was above trend in 1980-2007 due to Government & consumers borrowing to consume. (Not to invest & earn a return).

      Now is payback...we are experiencing below trend growth until debt levels at sustainable levels.

      The FOMC has done everything it could.

      The best solution is for the Government to create a more efficient environment. Europe & Japan are stagnating due to structural impediments. Big Government and centrally controlled Government economies are inefficient. Can't we learn that from the USSR collapse??

      The US is following the path that Japan & Europe on towards slower growth due to the growth of Government regulations that serve little purpose and create large costs.

      The best example is Obama wanting to force the US to use solar & wind power which is more costly than coal or natural gas. The extra cost starting in 2014 & continuing until wind & solar costs decrease will cause consumers & businesses to spend more on energy costs and therefore have less to spend on other goods & services. This will cause businesses to layoff workers leading to lower growth. This is a real issue in the next few years.

      I would like to see Delong or Krugman refute this.

      The low interest rate environment is the direct cause of growing income inequality which the liberals cry about.

        CommentedPhoenix Woman

        "Obama forcing" Americans to use solar and wind power would be a shot in the arm of the US economy, especially if he mandated using US solar and wind power companies:

        As for the cost of solar/wind versus coal and oil, costs have dropped dramatically worldwide over the past two decades, to the point where even solar has reached grid parity in a growing number of nations and places -- such as India, Hawaii, and Spain:

        Right now, the main bottleneck for sustainable energy is in storage. But even that barrier is starting to yield:

    17. CommentedMarc Sargen

      I do think that history will name it a Depression. It has a basic similarity to the last depression, over-leverage. While recessions hit the average people jobs, depressions in addition hit their saving & confidence. In the Great Depression, many average people were wiped out because they dipped their saving & bought stocks a high margins. When stocks dropped they experiences a 4x-5x loss. Then the "safe" saving was wiped out by bank runs.
      In the recent depression, the over-leverage was on homes & property. Never before had so many peoples worth was invested into a 10x to 100x leveraged asset. In addition, much of their "retirement" saving was in stocks, funds, index ETF's, and even greater derivative all tied to high speed trade algorithms that amplified any market action.
      While the US has been able to recovered better that Europe or Japan, I think it is less of a matter of good policies & more due to the depth of the economy being able to shrug it off & more hidden weaknesses in the other Developed Economies.

    18. CommentedZsolt Hermann

      The article asks at the end:
      "...When do we admit that it is time to call what is happening by its true name?..."

      I fully agree, and I also agree with one of the other comments demanding to go down to the root of the problem.

      I think if we want to give the situation a proper name and identify the root cause we should use the name "system failure".

      The reason the "engines" have stopped working is our illusorical, artificial human system that we tried to build "outside of", despite the natural system we exist in.

      Humanity has been stubbornly forcing an excessive, demand based, overproduction, over-consumption system that has no natural foundation.

      And since we as any other species are just part of the vast, closed and finite natural system we have run into a dead end since the laws and principles of the natural system safeguarding homeostasis are binding to us too.

      Re-branding names, tinkering with the same tools, methods while keeping the same paradigm will not help, only take us deeper into crisis as we observe day to day.

      The only thing we can do in order to survive in a smooth, pleasant way is to adapt to the system. We have to return to natural necessity and available means based economy, lifestyle, and especially since we evolved into a global, integral human network within the global, integral natural system we have to shift from ruthless, wasteful competition to mutually complementing cooperation.

      The truth is we don't even have free choice in whether we want to do this or not, the choice we have is if we do it by ourselves, proactively, changing ourselves, or we do it by pressure, crisis after crisis, unprecedented suffering.

        CommentedPhoenix Woman

        That reminds me: The Club of Rome is not mocked, and The Limits to Growth has once again been vindicated:

    19. CommentedJason Smith

      I mentioned that the trend of EU GDP seems to be stagnating on your blog -- here is another graph that may show the US is experiencing the same effect (graph at link):

      Trend growth seems to decay over time -- maybe this is inevitable?

    20. CommentedKen Presting

      Prof. DeLong makes his case for how to name our current predicament, but we should not stop here - we should understand the causes of the problem, and how to get out of it.

      EU policy has been overtly oriented toward austerity, and US policy, while including significant Keynesian stimulus, has not approached the levels of stimulus recommended by most prominent Keynesians.

      Interest rates are low, and infrastructure needs are clearly extensive, especially in the developing world. There is no excuse for any unemployment - except that the most powerful decision-makers are worried they might not absorb all the profits of development into their private accounts.

      It was kleptomania that created our crisis. From the Ayn Rand acolytes of Washington and Wall street, to Berlusconi running Italy on bunga-bunga. And who will argue that Russia is administered any more wisely than the average African despotism?

      Perhaps the most important difference between our Great Depression and the original, is that now floating exchange rates prevent the notorious beggar-thy-neighbor competitive devaluations which destroyed global trade in the 1930's.

      The world nowadays is much more like a single city than a collection of nation-states. We all understand now that we breath the same air, and it is getting warmer all the time. World markets have taken the lead in globalising our consciousness. We need our formal institutions to grow up as well, to provide the political structure without which markets are just another destructive force of nature.

        CommentedCurtis Carpenter

        An interesting and thought-provoking contribution -- thanks!
        I certainly agree that changing the name of the thing isn't going to have any impact on "the system."

        To paraphrase, the system is in the saddle and rides mankind.