Home » Money » The Managed Depression – Update

The Managed Depression – Update

I recently wrote this piece for submission to a mainstream media outlet, but it was rejected.  I’d like to present it here.

Economic health, like personal health, starts with honesty.  When something is wrong a good diagnosis is the first step towards the proper cure and a strong recovery.  Our economy is been deep in what is commonly called a “Great Recession”. That strange term is a substitute for the dreaded word that most of us know is the true condition – a depression.

That “D-word” may be feared, but it should not be.  It simply points to different and more unusual treatment than we are used to.  History will eventually come to know our present economy as what I call a “Managed Depression” – unusual among similar stages in the business cycle in that this one has been carefully managed.

depressionThere is no strong definition of a “Depression”.  The most technical is a long recession (decline in GDP) lasting more than two years or a decline of 10% in GDP in one year.  Some will say it’s simply a severe recession, putting the term “Great Recession” to the test.  In popular language there often is only one Depression, the Great Depression of 1929-1938.

Officially, there was a recession in year 2001 and another from 2008-2009 in which there were downturns of 0.4% and 3.6% respectively.  The short time period between them shows how easily they are linked in critical ways that suggest they were actually one event:

•    Gross Domestic Product (GDP) – Between 2000 and 2008 the total GDP expanded by 1.8 trillion dollars in real (inflation adjusted, constant 2005 dollar) terms.  Yet in that time there was an accumulated Federal debt of 2.1 trillion dollars.  The short contraction in 2001 was met with unusually slow growth afterwards despite the deficits run – showing that the private sector continued to shrink the entire time.

•    Jobs – In 2000, 64.4% of the population had a job.  In 2002 (after the first official recession) that shrank to only 62.7% – and never exceeded 63.1% (2006) in the “recovery” period afterwards.  What little job growth occurred after this official recession barely kept up with population growth.

•    Poverty – From 2001 to 2008 the number of people on food stamps increased from 17.3 million to 27.7 million.  But even more striking are the most comprehensive figures for those living in poverty as compiled by the National Academy of Science (NAS).  They found that those in poverty jumped from 12.2% of the population to 13.4% in 2002 and never went back down before spiking dramatically in the next official “recession” to 15.8%.

Once these two official “recessions” are linked, it is hard to call the resulting single event anything other than a depression.  If that is not reason enough to believe this is a depression, the total contraction in GDP without a federal deficit would have exceeded 10% in 2009.  Without Federal intervention, first one definition of a depression would have been met, then the other.

This is highlighted by the character of this depression and how it has been managed.  Back in 2002 it was common to talk of a “jobless recovery” and the specter of deflation, not inflation.  The Federal Reserve under Alan Greenspan kept interest rates low through the period – and upon his retirement Ben Bernanke was chosen to replace him, a man whose PhD thesis was on the mistakes made by the Fed in the Great Depression of 1929-1938.  This also explains Vice President Cheney’s famous remark that “Deficits don’t matter.”

As we learned in the last depression, the most important thing to do is to “prime the pump” to restart the economy.  We can see how important that is as the European economy collapses amid insistence on budget balancing.  Our leaders, in contrast, have been much freer with money and prevented the worst effects of a depression so far.

In short, the system has worked as it is supposed to.  There was a depression, or a long-term deep contraction in the private sector, but it has been carefully managed.  Government action to loosen credit and continue to spend on benefits has shielded us from the worst effects.

That is why I call this the “Managed Depression” and how it is unique as roughly the fifth depression in US history.  President Monroe first used the term depression to describe the downturn of 1819, the first such event after independence.  We learned much along the way and know how to prevent the worst effects from this phase of economic and business cycles – but not all of them.  The careful management of this depression has left out several important considerations:

•    Debt – One of the key features of this depression is that banks have not been allowed to fail.  However, bank failures are an important part of economic cycles in that they lead to write-downs or canceling of debt.  While public debt at 75% of GDP (total of all government) is chilling, the privately held debt spiked to 276% of GDP in 2010, a staggering figure.  Without traditional mechanisms for canceling it such as bank failures or a decreed period of Jubilee (as in Leviticus 25:10) that debt remains around the necks of households and businesses.  Additional “stimulus” should be used to buy that debt and cancel it.

•    Jobs – Work is increasingly done by contractors or temps, not employees.  Part of what is driving this is the overhead per employee – the fixed costs including health care, training, recruiting, taxes, and so on.  Any small business owner will tell you that is at least 30% of the salary, meaning that a worker making $40k per year actually costs $52k per year.  In larger companies that is much higher – but no one knows how much because this has never been studied.  Reducing the overhead per employee, including taxes on employment, would encourage job growth.

•    Risk – Despite a lot of money pouring into the economy from Federal deficits and Federal Reserve policies of “quantitative easing” (literally printing 3 trillion dollars), money has been shy to go into new ventures.  Any depression is highly psychological in nature, which is to say that once aggressive investors become shy and slow to take on additional risk.  From a policy standpoint it is hard to encourage more risk in the economy – but steps such as taxing passive investment such as stock trades should definitely be considered.

This economic situation is much better understood as a depression, requiring assertive action, than a long and deep recession where we simply wait for an eventual recovery.  One feature of a depression is that the economy which failed at the start has to restructure into a new one before the depression ends.  This Managed Depression needs more honesty and intervention before that can be developed.

A better definition of a depression is where not simply a few sectors of the economy slow down but instead the whole system of money fails.  That is what has happened as the credit bubble moved into a housing bubble before bursting.  Additional cheap credit, the key method of managing this depression so far, is not enough.  Cutting government spending blindly is potentially suicidal.

We are in a Managed Depression.  Honesty about this will give us the necessary sense of urgency and direction to deal with it and bring it to a much quicker end.

37 thoughts on “The Managed Depression – Update

  1. There you go again! Even though my immediate family is slogging thru these past years at wages levels that are 1/2 of what they once were, as a whole I am not 100% sure the economy is in a depression. The past weekend I looked at country’s GDP over the post WWII period and the few who are doing ok are China, India and Brazil with phenomenal growth and the U.S. with a sharp downturn but then a recovery and growth nonetheless.
    I don’t know what this means as far as domestic policy (income and wealth distribution) or foreign policy.
    One thing I would like you to write about sometime is the statement that 63% of the population have a job. Part of me just can’t imagine how some of these people are making it. I know some are wealthy, some are disabled, some have a spouse with a good income, some are desperately poor.
    This lack of full time work is a bit of an issue or my family. Both of us 56 year olds are working part time now and that is not by choice. We were both competent in our careers (3) altho the newspaper business has died for the production end of the business. I get the feeling we will stumble into retirement (the lot of many) with depleted savings. Facing a year of part time work until I get more seniority or the division grows is a significant adjustment for me on many levels. Perhaps the best thing about the upcoming summer is I am painting an elderly poor friends house for free as such has been ordered by the city.

    • This is a lot of what I mean by “Managed Depression” – the worst has been taken care of by the system we have, but there are still awful effects lingering out there. People are working and not making it all the time, which is very scary. There is a lot more barter (trade of services, like painting!) and underground cash economy going on, too. It’s very hard to quantify all of this, but I am sure that history will call this a Depression in the end. Mainstream media appears to be scared of the “D” word, however, for now.

  2. Longer, fewer graphs, more complete. This is a good update & I hope someone picks it up, you have a good case. As for me I don’t have an issue with the word depression but the word ‘managed’.

    • Thanks – I could stuff some links in here at least – I have them handy. Graphs … well, they are a bit more bulky.
      LOL on the word “Managed” – I do see what you mean. 🙂

  3. Yeah I get it. I imagine you have heard the new expression this week coined by Dept. of Justice head Eric Holder. The upper level managers of the 5 gigantic banks are “too big to jail” as punitive action would likely result in a further contraction of the world wide economy. 2 or 3 of my close confidants (who are doing well by the way) are really mad about some of the things that are going on (the vikings stadium, corporations not paying taxes, Ceo pay). Maybe part of me is too scared to get angry as I know it could result in some further psychological harm to myself. A bit hunkered down.
    And I gotta admit some of the mainstream media really really sucks. It is the 10 year anniversary of the invasion of Iraq and very few pieces are being written

    • Too big to jail is something I am still struggling to get a handle on. We are so screwed if this holds. I wrote about it briefly, but … this is really becoming policy? Wow.
      The media today is very conservative and cautious. I don’t know what to do to reach the middle class with my difficult message.

    • We never revisit anything in the media, and everything has to be topical to “right now”. I am very upset about this. I heard someone just the other day refer to a “housing bubble” as if it was something on its own, not part of a credit bubble, and I couldn’t believe it. We’re so deliberately stupid as a collective people, yet individuals aren’t this dumb. How can we demand better?

  4. Who rejected this and why? That’s just crazy. Although it is good to see you back from being Mr Sunshine all the time and talking about how bad it is. 🙂 Seriously this is a great piece and I can’t see why it would not be welcome. Everyone knows this is not a great recession and wants the truth more than anything.
    The lamestream media is really doing us all a disservice.

    • I won’t say who, but the why is easy – it isn’t “punchy” enough. It’s too dull. So there.
      I like being in balance, so don’t call me Mr. Sunshine. 🙂 This is a tricky thing and it could still go bad on us, but there is reason to be hopeful. Besides, have you seen the “New Deal” proposal from the Progressive Caucus? Finally, a real proposal for tackling the problem!

  5. Keep at it, you have a convincing argument. People will listen to you, at least the ones that matter.

  6. There was an interesting writer on MPR this morning. He is a democrat I think and he wrote “gun guys” about the tribal politics and how certain voters got alienated from democratic politics. Somewhat novel altho I don’t buy all his argument.
    What’s with the Pioneer Press lately? They have been including Krugman on the editorial page twice and are having a good lengthy series on the drought and our declining aquifers. Its good to read the paper again!

    • I think there is a resurgence in alternative thought. People are looking for new ideas – given that the old ones appear to have hit a lot of dead-ends. It’s a good sign, IMHO.

  7. ok after a little researching and soul searching ( by the way when you google managed depression one of the first things to come up is wiki’s the great depression in the cities). If then as we do now have two big markers in the GDP as construction and automobiles. How do we as a country or a region respond to falling consumption and hence production of homes and automobiles? The recovery act helped individuals in replacing appliances and aging automobiles. Which helped the supply chain in Ohio. Getting construction workers and building supply back on the job could have been helped by more updates to energy saving in older homes. We still probably have a oversupply of commercial buildings. I drive by a beautiful new empty office building every day. We have construction on rail systems.
    Some of the older construction workers are now doing what I do. Driving the elderly to their appointments. Its easier than hauling newspapers or climbing ladders. With the affordable care act hopefully more poor people will be visiting their health care providers and that will help in job creation. What could be the next big thing? And I am not talking about the leisure industry with its expensive travel. In a sense without a growing population (need for homes and transport)and robots taking over more jobs there is a stasis building in the employment picture. I apologize if some of my writing here is not too clear. But population growth is a big driver of GDP.

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  10. If the recession were over — I’m not saying it is, but for the sake of argument let’s say it is — if it were over, we are now in a period of reconstruction. After the Civil War, the south didn’t bounce back overnight. It went through a period of reconstruction, of simultaneous poverty and speculative wealth. Fast forward 200 years. Our economy was nuked and it can’t bounce back overnight, either.

    • I largely agree with that. I call this a “restructuring”, which is to say that we have to build a new economy more or less from scratch. One feature of Depressions historically (this is about the 5th in US history) is that the economy that emerges is quite a bit different from the one that collapsed. I think we can expect that again.
      Note that half of the job growth is coming form companies with less than 50 employees. They are the driving engine of the future – they are doing something different. The restructuring is slow, but it’s progressing.
      I see this ending around 2017, largely because each phase of the cycle lasts about as long as the previous and the last boom period was about 1983-2000. It looks like we are more or less on track for that year – barring another meltdown, of course.

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