Our Present Crisis: Recession, Depression, Or Something More Fundamental?
The world is likely to get worse before it gets better.
In a post over at his own place, my colleague Dave Schuler brings attention to an Op-Ed by Judge Richard Posner arguing that, regardless of what the economists call it, we are in the middle of a depression:
The American economy currently has both a short-term problem and a long-term problem. The short-term problem is that the economy is depressed; it is growing more slowly than the population, with the result that per capita income is declining. The high rate of un- and underemployment is a factor, but is itself the product of other factors, having mainly to do with the reluctance of over-indebted consumers (over-indebted in major part because of loss of equity in their houses, the major source of household wealth) to spend, the reluctance of the impaired banking industry to make risky loans, and the reluctance of businesses to invest and to hire, which is due in part to weak consumer spending and in part to profound uncertainty about the nation’s economic future.
The roots of this catastrophic situations lie primarily, I think, in the incompetent economic management of the Bush administration and the Federal Reserve. The persistence of the depression, however, is due in part at least to surprising failures of the Obama administration—poor leadership, poor management, the sponsorship of incomprehensibly complex health care and financial regulation laws that have created widespread uncertainty that has discouraged consumption and investment, and the inability to explain the nature of the economy’s problems to the general public. These failures caused the stimulus enacted in February 2009 to be botched in both in its design and its administration, resulting in the discrediting of deficit spending as a response to depression.
Posner goes on to argue, as others have recently, that there doesn’t seem to be much we can do about the short term economic problem at this point. More spending is out of the question politically, and also out of the question fiscally because of the growing long-term deficit problem. As for the long term problem, Posner is even more sanguine:
It’s not clear that we have enough years. Suppose that the economy recovers by the end of 2012, and in 2013 and subsequent years grows at a 4 percent annual rate. (The long-term growth rate is about 3 percent, but growth is usually more rapid when it starts from a low level.) The public debt won’t continue to grow at 17 or 18 percent a year, but suppose it grows at 7 percent a year. Then the already very large federal deficit will continue to grow, and indeed, to compound: At a 7 percent annual growth rate, our public debt in 2012, estimated at $12.4 trillion, will grow by 40 percent in five years if none of the reforms designed to limit that growth are implemented before the end of that period. Yet if they are implemented while the economy is still struggling, the result may actually be to increase the deficit by driving tax revenues down (because incomes will be depressed) despite the elimination of loopholes, and by increasing transfer payments to the unemployed and others hard hit by the economic crisis.
Over at Reuters, Felix Salmon finds problems more fundamental than the economic ones that Posner points to, and if he’s right then it makes the prospect of solving the economic problems even more unlikely:
[W]hat I’m seeing as I look around the world is a massive decrease of trust in the institutions of government. Where those institutions are oppressive and totalitarian, the ability of popular uprisings to bring them down is a joyous and welcome sight. But on the other side of the coin, when I look at rioters in England, I see a huge middle finger being waved at basic norms of lawfulness and civilized society, and an enthusiastic embrace of “going on the rob” as some kind of hugely enjoyable participation sport. The glue holding society together is dissolving, whether it’s made of fear or whether it’s made of enlightened self-interest.
[C]ountries and institutions can ultimately survive only with the will and consent of those they govern — and that consent is evaporating around the world. Europeans have no love for Europe’s institutions, be they the euro or the ECB or the EFSF. Unemployment, in much of Europe, has reached the point of no return — the point at which it becomes endemic, stubbornly immune to attempts to tackle it. In turn, that results in broad-based cynicism and disillusionment when it comes to politics and politicians generally.
Salmon points to Rick Perry and his comments about Ben Bernanke and the Federal Reserve Board, both in his recent campaign appearance and in the book he released last November, as an example of that phenomenon reaching this side of the pond. However, I think limiting the analysis to Perry misses the point significantly. The political movements that have sprung up in the United States in the last five years or so, on the left and the right, seem to express a profound distrust of government at it’s most fundamental levels, and a willingness to believe the worst about the motives of politicians one happens to be opposed to. The Tea Party movement specifically has tapped into a strand of distrust in government that has run through American politics since the Colonial Era, and created a mass movement that more resembles the rhetoric you would’ve heard in the era when the states were parties to the Articles of Confederation than the type of political discussions we would’ve been having even five or ten years ago. Call them crazy if you want, but ignoring what the Tea Party represents is a mistake, because it’s revealing serious fault lines in our political culture that won’t just be repaired with a single election.
Salmon sees this political breakdown, which seems to be happening around the world in different fashions, as the next step in a process that began with the 2008 financial crisis:
It looks increasingly as though we’re entering Phase 2 of the global crisis, with 2008-9 merely acting as the appetizer. In Phase 1, national and super-national treasuries and central banks managed to come to the rescue and stave off catastrophe. But in doing so, they weakened themselves to the point at which they’re unable to rise to the occasion this time round. Our hearts want government to come through and save the economy. But our heads know that it’s not going to happenS. And that failure, in turn, is only going to further weaken institutional legitimacy across the US and the world. It’s a vicious cycle, and I can’t see how we’re going to break out of it.
Salmon is largely on the nose, I think. It may not lead to regime instability, for the reasons that Ezra Klein points out in his response to Salmon, it seems pretty clear to me that continued slow economic growth, combined with the consequence of failing to deal with our long term debt problems, is likely to lead to social instability and more Americans concluding that there’s no point in putting any hope in the government. What the consequence of that might be I don’t know, but I doubt they’ll be good.