There is little doubt that the economy is not healthy. I have used the term “Managed Depression” to describe it, claiming that we are in a long-term slowdown that is more severe than most officials and prognosticators are willing to admit. I glibly defined the term “Managed Depression” some time ago, but many people have asked me for a more rigorous one. Here is the case stated as simply as possible.
What’s in a word? Why is there value in calling this a “Managed Depression” or anything else using the dreaded “D Word”? There are two reasons. The first is that a sense of urgency has been missing as our politics and news analysis has been easily distracted by side issues that seem expedient. The second is that while a Depression is an unusual event historically, it’s not without parallel. We’ve learned a lot along the way and know something about how to handle it. But we won’t get past it until we’re honest and tackle it directly.
What is a “Depression”? There is no generally accepted definition of the term, which dates back to at least 1819 when President Monroe used the term. The best we have is a long “Recession”, lasting 2 or more years, or a decline of real Gross Domestic Product (GDP) of more than 10%.
The chart below explains how we’ve fared over the last decade. Data is taken from the St. Louis Federal Reserve’s excellent site whenever possible.
The green line is the official change in real (inflation adjusted) GDP from year to year, which shows how there was a Recession in 2001-2002, some robust growth before the big crash in 2007-2008. Take out Federal deficits over the same period we have the blue line. Taking away the net change in home equity withdrawals, which peaked in 2006 at 2.7% of GDP, and the red line shows that real growth hardly became positive over the last decade.
This means that all of the rest of the economy – everything except Federal deficits and home equity cash-ins, has not been growing for a decade. Both general definitions of a “Depression” would have been met in turns over this last decade.
Here is another chart, showing the percent of the population that is in the workforce, taken directly from the St Louis Fed. The shaded areas are the “official” recessions.
Peak labor force participation was 64.5% of our population, but in the last decade fell to 58.5%. The first “Recession” shows a substantial drop, but employment as a percentage of the population continued to drop even after the official end of that event. It scratched up a bit by 2007 before falling dramatically.
There are many more ways of telling this story, but these are the most dramatic. They link the two Recessions into one larger event, a Managed Depression where the only real growth came from Federal policy. The government itself ran a large deficit while the Federal Reserve kept interest rates low, encouraging refinancing. Without those policies the two Recessions would clearly have combined into one very clear Depression.
That is what makes this Managed Depression different from the Long Depression of 1893 or the Great Depression of 1929. In a sense, our system worked perfectly. As President Obama said, “Our action prevented a second Great Depression”, and that is very much backed up by the data.
A cynic would say that rather than providing clear management the government has done little more than “paint the tape” – manipulate the economy so that the right numbers come out at reporting time. That’s the pitfall of a Managed Depression.
If the system worked to technically prevent a Depression, what’s the problem? Why worry about whether we call it a Managed Depression or a Great Recession or a banana? A Democratic-Republic requires engagement in politics, the operating system of a government by the people. The illusion that this Managed Depression is under the control of those in charge has allowed us to be distracted away from the seriousness of the problem.
History shows that the economy that emerges from a Depression is very different from the one that collapsed at the start. Resources are allocated to a new reality and everything comes back to life. Some of the greatest periods in US history came the Restructuring after a Depression.
The charts shown above show that there was a distinct change in 2001, right about 9/11. With the death of Osama bin Laden and the tenth anniversary of this event coming up it is time to focus on what really happened to our economy since that time. The Managed Depression should not be blamed on a particular president because the system worked exactly as it was supposed to.
That means that this particular Managed Depression has not been like the many others in US history. We learned something and did not make the same mistakes. But we may have made a new mistake – allowing our population to be easily distracted away from the seriousness of what has been happening. Calling this what it is – a Managed Depression – may be the first step towards getting our politics back into line with what is needed to emerge from this historic event with a new economy, possibly one that is stronger than ever before.