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Moving the Economy Forward

When the economy isn’t showing any signs of movement, you might think that economists don’t have a lot to talk about.  However, that point of view neglects one very important part of the ol’ dismal science –economists always have to make work for themselves in order to remain employed.  That gets us to some arcane debates over things most people I know think are pretty obvious.

Paul Krugman often gives us a good popular entry point into these debates, and his last column is no different.  Longtime readers will note that I have never been a fan of Krugman (putting it kindly), but I want to note that in this article he is actively promoting the handle “Depression” for our economic state.  But I want to take issue with him over three main topics:  The length of this Depression, the nature of Keynsianism, and the simple fact that my term “Managed Depression” is way cooler than his “Lesser Depression”.

I believe that the length of this Depression is critical to understanding its context, and thus how we get out of it.  Krugman refers to the “prolonged era of high unemployment that began with the Great Recession of 2007-2009”, a reference that can only be made to the headline unemployment rate, which is so full of fudge that it should never be taken seriously.  Take a look instead at this data on median term of unemployment in weeks, from the St Louis Federal Reserve:

Note that after the recession of 1990 the duration of unemployment slowly dropped back below the 60 year average of about 14 weeks, a typical response to a recession.  After 2001 we see a drop in unemployment duration, but never even close to the mean before leveling off.  That is unique in postwar recoveries, underlying a significant restructuring.  Note that the major flaw in the headline unemployment rate is that it removes “discouraged workers”, or those unemployed so long they have supposedly given up looking.

That may sound like a quibble, but it isn’t.  The real debate is what we should do about this situation, and Krugman is an old-fashioned Keynesian.  His belief is that government spending, nearly any kind, will help raise demand and thus get people spending.  It’s a minority view contrasted to the majority Friedmanite belief that increasing the money supply will boost economic activity generally (ie, “supply side”).  Both of these are being met with another view increasingly being called “Fisherian” after economist Irving Fisher.

The Fisherian view is that credit bubbles cause economic downturns, and that the most important thing that government can do is to have a steady hand at the tiller without running up a large deficit or injecting money into the economy through Fed policy.  Variations of this are taking hold across the world, particularly in the US, which explains some of the call to reduce deficit spending immediately.

For my own taste, all of this is far too academic to be taken completely at face value.  I think that Krugman and his followers need to seriously think what a Keynesian stimulus looks like after more than a generation of incredible debt has been run up constantly goosing the economy.  The Friedmanites have to explain their more recently lousy track record of expanding the money supply only to see bank reserve bloat out beyond reason – with almost no increase in economic activity.  But the Fisherians pose the biggest threat of all by essentially saying that backing government out of the economy is essential just as the duration of unemployment is reaching historic peaks.

It is true that overall national debt is reaching a crisis stage that gives us little room to operate.  Caution about deficits is at least reasonable.

A more practical view is that we have experienced one big credit bubble, washing first over the stock market in the 1990s and then seeking a stable return by plunging into the once conservative real estate sector.  That implies that Fisherians are right, but people still need to eat and move forward into the developing new economy, and the sooner we can get everyone thinking beyond the next meal the sooner we’ll have opportunities in the private sector that are worth investing in.

In short, it’s not the absolute level of how much the government spends to “prime the pump” and get the economy moving, it’s what it does to move forward that counts.

Some of this may sound like a quibble when I take on Krugman.  It isn’t.  This debate, a bit subtle at times, is between the old left that has been looking awfully tired lately and a new, more engaged progressive left.  I’m happy that Krugman is using the term “Depression”, but it’s a Managed Depression that has an intelligent role for government built into it.  The nature of that role is the heart of it all.

29 thoughts on “Moving the Economy Forward

  1. I’m with you on this. You’ve explained it very well and I think the message is getting out there. Good to see Krugman calling this a Depression which is what most people are calling it lately anyway. He was right to cite popular views that the deficit is not the most important thing and I hope that he and everyone else can start listening to what ordinary people have to say. If we’re all wrong about things then they should explain it to us like you do. I don’t think this is as hard as they make it sound.

  2. Excellent post, as always. I am also glad to see the term “Depression” get out there in any form. I don’t remember you taking on Krugman before and I’d love to see it. I think your points here are very valid and very realistic.

  3. Jim: Normally I’d say that a debate about whether this is a “Depression” or not would be a major snooze that has no connection to reality. But major policy makers are having a debate over what this is and what to do about it at a level that is very academic at times and always far removed from what most people talk about. I think nearly everyone I know calls this a “Depression” based on their gut instinct – and that this intuition is right. If we can’t get the popular sentiment somehow in line with and/or influencing the bigger policy debate we have a problem as a Democratic Republic, IMHO.

    Dale: I guess it’s been about 3 years since I really took on Krugman, so perhaps that doesn’t count. It’s a holdover from the old system before I had good inline links, and what’s there is probably all broken:

    I still say that his thinking is mired in the past and we have to overcome it if we are going to rejuvenate the left and make it relevant again. I just said it much nicer this time. 🙂

  4. Also, one of the things that was trimmed in a futile attempt to get this below 800 words was thanks to Kevin Andrews, a sometime commentor here, who gave me the link to the original Krugman article. Thanks, Kevin!

  5. I never really heard of Krugman before so forgive me if I am going over old ground. I think you raised some excellent points as always but I can’t help but see most of what you were talking about as a quibble. Is he really talking about spending money recklessly as you imply or does he have an agenda like you do which might be expensive but necessary?

    I’m not saying that I disagree, I just want more background before I take sides in this. I do think you have a good plan but I would want to hear his plan as well. I don’t think I’ve heard any real plans on the left and suspect that’s because they are getting shouted down by the Tea Party people.

  6. Well, well, capital is thriving and labor is suffering….how hard is this to notice?

    Is this not because most all state and federal policies, at least since Ray Gun, have been aimed at increasing the freedom–especially the mobility–of capital while limiting the resources available to humans? The balance of power has gotten so out of whack that one wonders whether our political system is robust enough to make the needed course changes.

    I’m an old fart lefty who things human welfare is an end in itself, whereas capital structures are only tools–ones way out of control in the US of A. China is thriving–at great cost in other ways!–because it is markets economics but keeping them in harness to larger goals. On a more sustainable scale, the Nordic countries have struck a workable balance.

    “Fisherian?” This is just nibbling around the edges. Need to recognize the fundamentals of what’s happening to us. There are schools of thought really applicable here…associated with names like Engels.


  7. Anna: I don’t want to say that Krugman is “reckless”, just a lot less concerned with the details than I think is prudent. Perhaps that’s his role, and I understand that. But I think this is a time for real innovation and highly targeted action by the government – and Krugman is generally not as concerned with that.
    Here’s an article with some good links, if a bit old: http://www.businessinsider.com/heres-the-problem-with-paul-krugmans-plan-to-fix-our-massive-debt-and-deficit-disaster-2010-6

    Alan: I think the point that the systems of our world need to be put into the service of people, not power, is what we’re both talking about here. And on that we completely agree. Yes, that’s a bit old-fashioned Marxist in a way but I can’t see any other reason for it all other than people. Right now, people are justifiably scared and hunkered down, not thriving. That’s where the term “Depression” crosses economics and psychology. We have to break out of it. You’re right – go back to fundamentals constantly and say, “This has to work for our people!”. I try to do that a lot but didn’t here.

    That long-term unemployment graph is one that I really want to highlight, however. People can’t be out looking for work for over a year without losing all connection with society as we know it. Useful and joyous work defines a happy people generally – and we ain’t anywhere near having that.

    I’m a progressive – I believe in progress. We can’t have that while most people are huddled in a corner desperately holding on.

  8. I started to write a response but I am going to edit and start over. Yep, it is a DEPRESSION. And has been for awhile. I’m mostly shocked so few people saw this coming. I guess if you were already poor because of the Bush years and being an artist, well, you already saw the depths of poverty. Now there are more and more people in my club of “poor”.

    I will also say that whatever job creation happens, it better be MORE than just manufacturing factory work or physical labor jobs or jobs relating to things like new football stadiums. NONE of that stuff applies to me and MOSTLY that sounds like work for young buff strong men. Who cares. I am not one of them and I do not rely on one of them and I do not ever want to rely on one of them anyway. I can’t lift heavy crap in extreme temperatures with a hard hat or stand for hours on end (bad back/neck). I did heavy labor for a bit. It was called “retail”. Heavy labor in “retail” you ask? Yes, it’s called “truck day” for almost minimum wage. Imagine standing in a hot nasty semi-truck and lifting heavy heavy boxes over and over again in assembly line fashion with little regard to OSHA laws and your obese crabby manager is screaming and yelling at all of you to hurry up and then hurry up some more. Imagine later on in the week your same obese crabby rude “boss” starts screaming and barking orders for your thin as you with as bad of a back as you co-worker are FORCED to carry (with-OUT a cart/dolly/etc.) this ugly table that is covered in mirror and weighs about 400 pounds from one end of the store to the complete OPPOSITE end of the store, you’re sweating, about to pass out, trying not to drop the stupid thing but not really caring if you do; meanwhile you’re doing ALL of this while your fat boss (yes fat) is screaming and yelling at the two of you to hurry the F up with this already while all your fat boss is doing is spending 10 hours re-arranging 1/2 pound decorative Christmas boxes on a shelf. My knee is still messed up from that job. Nope, never filed for workman’s comp but maybe should have.

    Anyway, THOSE types of “jobs” do not count in terms of boosting the economy. We need REAL jobs and not JUST physical labor crap pay “jobs”.

  9. Kris: Manufacturing jobs aren’t all heavy lifting. Having worked in manufacturing for a couple of years I can tell you that a lot of the jobs were filled by older women. These include quality control, design, research, supervision, and a few forklift operators here and there. Generally, hard work is done by machines these days – and it does seem to me that retail jobs rely more on human muscle (possibly because people are paid less in retail).

    The great thing about manufacturing jobs is that there are a lot of entry positions that require only minimal skill but a lot of room for advancement as people learn more specialized skills. That’s a lot of the reason that they traditionally pay better, I think. But there are a lot of highly skilled manufacturing jobs anymore that do require education (vocational and not) that would require a lot of recruitment if they started expanding. But who is going to go to school for these things unless they know there is a job? So matching that up can be a valuable function of government.

    It still wouldn’t be for everyone, of course, but before 2000 a lot of our economy relied on well paying manufacturing jobs – 18 million of them. We lost about 6 million since then, which is to say the vast majority of the job loss that marks this Managed Depression:

  10. I guess that economists have to have frameworks for understanding things but I don’t understand how they get so academic about it. Thanks for the insite.

  11. That graph is amazing! The average length of unemployment is almost a year now? Why isn’t anyone talking about this kind of thing? Of course it is a depression when you see things like that, how could it be anything else?

  12. Sheryl: They have to put it into the “frameworks” to take a step back. It’s a valuable exercise, but I think they get to “into it” to be any damned good at times. I not sure how I really feel about this overall.

    Audrey: It is telling, isn’t it? This is why the headline unemployment rate is pointless. You can see that there’s a big change in the nature of unemployment, at least. That means we can’t compare today’s data to yesterday’s. It’s one of my biggest beefs with those who talk about things as if there wasn’t a huge chance that occurred – there obviously was. What do you say about it?

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