http://www.nytimes.com/2009/01/05/opinion/05krugman.html?_r=1&ref=opinion
I largely disagree with his statement of current economic conditions, as is clear from my recent blog posts.
First, he says, "The fact is that recent economic numbers have been terrifying not just in the United States but around the world. . . . Let's not mince words: This looks an awful lot like the beginning of a second Great Depression."
No Dr. Krugman, it doesn't. Not as of yet, anyway. I am focusing exclusively here on the US and not the world economy, as Krugman does in his opinion piece. If you look closely at the US economic numbers in recent months you will find an economy clearly suffering just about its worst stretch in decades, but, contrary to what Krugman said, you will find highly similar numbers from the 1981-82 recession and the almost equally severe 1974-75 recession.
Specifically, if you look at the economic numbers which have been released (and not credit or financial market conditions, which do look uncomfortably like the beginning of a second Great Depression) you would be pretty much forced to agree that while the US economy is doing quite badly, it is well within post World War II norms for a steep recession, as opposed to a second Great Depression (which I will loosely define as at least several years of both massive unemployment, and economic output well below what the economy is capable of).
There are many economic statistics I could use to make my case. I will pick two, Christmas season retail sales figures for 2008 (because they are both recent and comprehensive) and the recent November employment report (which I chose because it was particularly awful, and was very widely (and correctly) reported as having been particularly awful. I believe other statistics would support my case equally well.
Item 1: Christmas season retail sales:
As you have likely heard, the retail sales figures over the holiday season were awful. But if you look closely, they appear to be standard recession level figures rather than something worse. I think.
According to MasterCard, a statistic that nearly everyone uses, "total retail sales, excluding automobiles, fell over the year-earlier period by 5.5% in November and 8% in December through Christmas Eve."
http://online.wsj.com/article/SB123025036865134309.html?mod=rss_whats_news_us
Now those headline numbers are godawful, and support Krugman's case more than they do mine. However, look more closely.
"When gasoline sales are excluded, the fall in overall retail sales is more modest: a 2.5% drop in November and a 4% decline in December. A 40% drop in gasoline prices over the year-earlier period contributed to the sharp decline in total sales."
Does a decline of 2.5%, or 4%, sound like a second Great Depression to you? I think not, although I haven't done the research to be sure. There is no doubt the numbers were awful, but not historically awful. And that should be the standard if you are saying, as Krugman did, that, "recent economic numbers have been terrifying," and that the numbers look like the beginning of a second Great Depression.
I note that simply excluding autos altogether may give a misleadingly positive picture. I am 100% sure that if you included autos the numbers would be significantly worse. But auto sales were artificially high for years and are now artificially low. While clearly relevant in determining whether we are headed for a second Great Depression, I wouldn't put too too much stock in autos as a leading indicator about now. I think using retail sales excluding autos and gasoline is in fact the appropriate measure.
In summary, the various quotes I read when googling this matter were similar to the one in this article, "This will go down as one of the worst holiday sales seasons on record." No doubt it will. But I read, "worst in many years," "probably the worst since 1970" and the like. I did not read, "Much worse than anything we've ever seen," "worse than anyone's worst nightmares" or anything like that. In short, bad but not historically awful.
Item 2: Employment numbers:
December's numbers come out this Friday, and everyone is expecting a whopping job loss, somewhere north of 500,000 jobs, possibly as many as 650,000; a huge monthly loss to be sure. But let's look at November's numbers.
According to the New York Times, the 533,000 jobs lost in November were the most since December 1974. "Not since December 1974, toward the end of a severe recession, have so many jobs disappeared in a single month — and the current recession, far from ending, appears to be just gathering steam."
http://www.nytimes.com/2008/12/06/business/economy/06jobs.html
The Times piece then argues that whereas the 1974 numbers came at the end of a severe recession, this recession is just gathering steam. I point this out, but don't address it, because I don't know for sure if this recession is just gathering steam, and neither do you. I do note a crucial point that the New York Times and most other media outlets miss when throwing history around:
The number of jobs lost in December 1974 was a massively higher percentage of the overall labor force than the 533,000 lost in November 2008.
As the Heritage Foundation put it, "In percentage terms, the number of establishment jobs declined by 0.4 percent. In comparison, the December 1974 job losses of 602,000 were twice that number—a 0.8 percent decline from the previous month. The size of the decline in percentages is the same as the peak job losses in the 1981-82 recession but twice that as compared to peak job losses in the 1990-91 and 2001 recessions."
http://www.heritage.org/research/economy/wm2157.cfm
In short, looking solely at November's employment report, and ignoring all other economic indicators, one would conclude that we are in a bad recession, but nothing more. Well, I don't doubt for a second that we are in a bad recession. Hell, the stock market has crashed, unemployment is zooming upward and huge famous companies have failed or been rescued as they were about to fall into the abyss. That's not the question. The question instead is whether this is anything more systemically severe than a bad recession. And the clear answer, based on the data currently available, is no.
In fact, given the fact that the credit markets are easily at their worst since WWII, that the other financial markets have suffered the biggest losses since WWII, the shattering loss of confidence by consumers, financial institutions, and non financial businesses, the fact that as of now we have only seen really bad numbers, as opposed to historically terrible numbers, strongly supports my argument, and not Krugman's, in my opinion..
Two more points before I shut up:
First, I think Krugman's piece was meant as much for advocacy as to describe current conditions. He concludes the piece, "So this is our moment of truth. Will we in fact do what’s necessary to prevent Great Depression II?" I certainly have no problems with this advocacy! Even I would agree that the risk of a Great Depression II is the highest since 1945, probably by a significant amount. I don't think that can actually be seriously debated! So a huge stimulus package, which I have advocated for weeks (see my companion post on my big disappointment with the details Obama has released recently about his plans for the upcoming stimulus package) is a fine idea, and I'm glad Krugman is lending his Nobel prize name to the effort again.
Second, everything I have said here is backward looking. That is, I have concluded that the risk of a second Great Depression is minimal based upon the data already released (and the huge government response, which I have discussed in earlier posts). Should data over the next 3-4 months come be substantially worse than the date released in recent months, I could be forced to revise my view. However, even if this occurs, it would likely point to a steeper recession than I and others expect (which I freely concede is possible) rather than a years-long slump, where recovery doesn't occur for years, and then is massively too weak to get the country back to near full employment. I still believe that in order for a bad recession to turn into a second Great Depression, government policy response must be inapt, inadequate, or both. And given that Obama takes office shortly, future policy is likely to be neither. And federal reserve policy under Bernanke is quite certain to be neither.
I agree with the conclusions reached by Ben Bernanke and others: bad federal reserve and fiscal policy caused the slump of the late 1920s to turn into the Great Depression. Despite huge problems with the Treasury Department's response, the federal government has made an absolutely massive response this time around, and it is precisely this response which I think will both prevent this recession from spiraling into a truly terrible state, where unemployment say reached 15%, and also will prevent a many-years long slump that would constitute a second Great Depression.
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