April 22, 2010

(3rd Update) The Problem With Staving Off A Great Depression

...is that about half the people will conclude that since there isn't another great depression (so far), that this means that one wasn't going to happen.

Using the same presumptions, many will decide that the depth of the recession we've had proves the stimulus (the $787 billion American Recovery and Reinvestment Act, or ARRA) didn't work.

To help them fall into this circular logic (no depression + deep recession proves stimulus didn't work), they'll be aided by ideologues who know little about business or economics, and offer utter nonsense as their own brand of economics, such as: "The stimulus hasn't created one single job."

This intentionally ambiguous statement might be taken to assert either that no extra jobs have been created on net when we include the public and private sectors together, or alternatively that no private sectors jobs were created on net versus what would have happened without a stimulus.

But jobs in an economy depend on the total demand in the economy for goods and services. And that total demand depends on all spending, public and private.

Because the stimulus increased the total spending (versus the situation without a stimulus), the simple result is that private businesses in the U.S. have had more total demand for their products than they would have absent this stimulus.

Therefore, inevitably and absolutely, there are now more private sectors jobs in America than there would have been without this stimulus.

(2nd Update: There are not only simply more private sector jobs than would have been without the ARRA stimulus, but private sector employment has been increasing some lately.)

But a bigger situation is at hand than only net job results.

The U.S. has experienced something unusual -- the collapse of a major bubble of house prices and consumer debt.

Such collapses do no result in ordinary recessions.

As Rogoff and Reinhardt have shown, such collapses result in deep, long recessions. Great recessions. Sometimes called depressions.

Worse, we know that when the bubble is large, as ours was, the result can be a great depression that continues to deepen for years.

A downward spiral that doesn't let up, if no Government stimulus intervenes.

Now, it would be one thing for a modest minority of Americans to believe such nonsense as thinking the ARRA had little or no positive net effect on jobs, but the problem of economic/political perceptions is bigger here.

Many people can't truly conceive of immense events.

Essentially, they think overwhelming events are mostly just movies, and distant history.

It can't happen here....

The unconscious mind rationalizes to make this seem true:

-- Really bad catastrophes are...things that happen to other people, and...we're an unique nation with freedom...so, if something bad once happened economically to us, then it must have been due to a governmental mistake, since our system (free market) is naturally without flaw, therefore such a governmental mistake must explain the great depression.


-- The Great Depression must have been caused mostly by one-time events like the Smoot-Hawley Tariff.

-- The Black Plague (the Black Death) was a once-in-history thing, a one-time event in the Universe, like Noah's flood.

-- Or simply: It can't happen here.

Knowing vaguely that there was an American and international Great Depression, or that maybe some American earthquake once might have killed more than a few hundred just isn't enough for many people to comprehend that indeed....

It can happen to us.

Instead, many people believe, despite living in fire territory and watching fires on television, that fires happen to other people.

Some simply will not believe a wildfire can burn their house down, until, literally, they see it burning, collapsing in flame, or come back and are shocked that indeed, it burned.

This isn't all bad. Some people could not handle the stress of knowing that such things happen more often than we think.

And besides, it usually doesn't happen here.

These are the "show me" people.

But an even larger group of people have beliefs that are carefully protected from any contradicting evidence. Such information is ignored or discounted. Beliefs which are independent of reality, in short. We often call this "ideology," but in America an even deeper force than mere ideas is at work. (more on this in a coming post)


Obama's position is far more difficult than that of FDR (President Franklin Roosevelt).

FDR entered office in March 1933, after the Great Depression had so ravaged the nation that 1/5 of jobs had disappeared and a general bank run was progressing. True fear was becoming widespread.

FDR took office closer to 4 years than to 3 into the economic collapse.

People believed it could happen.

Because it had.

Obama has the vastly more difficult situation of having staved off a great depression, starting only a year in, before it could truly reveal itself.

1930 wasn't so bad yet. It was '31-'33 that really made it the "Great" Depression.

Many people will never know what Obama has helped to save them from, unless more economic shocks (perhaps from overseas, such as debt crises (Greece et al)) reduce confidence and abort the tentative recovery (for which confidence is one of three legs).

Fires are not always under control when "mostly contained."

The wind can shift. The fire can "blow up."

If that happens, we might do little under our current politics, and have some extraordinary real-world learning coming our way.

When an adult refuses to believe that fire burns, it may be necessary to simply stand back and remind them one last time of the idea:"fire burns." Mentally, at such a final juncture, one just makes a plan of how to respond after the fact.

This contingency is why it's so crucial for the U.S. to have truly long-term investments under way. We may end up in a great depression, and if that happens, those long-term investments, like education and science and technology -- that pay off 6 and 8 and 10 years later -- will be our salvation, just as the innovations of World War II helped propel the American economy through the 1950s.

It also would help greatly to replace taxes on domestic production (corporate taxes that raise the costs of American manufacturing and services) with taxes on consumption (sales taxes), as other nations do -- so as to help level the playing field for American workers competing against foreign workers. Such a good change in tax law could significantly reduce the export of American jobs. It would mean your job and mine are more secure, and would pay more, than under our current tax structure.

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