Bill Conerly raises an interesting question on his blog, Businomics, today.
I wholeheartedly agree that the words "This time it's different" are some of the most dangerous words in economics. Like Conerly, I'm trying to make the case that it's not all that different. In fact, in my comments to this post, I converse with my readers about some of the ways that this is just nothing like a Great Depression and that it is more like pre-1990s recessions.
Also, while we're on the subject of trying to communicate about the recession, the stimulus, and other matters to the general public, here's an observation. Non-economists (including politicians) tend to fall into two camps regarding the stimulus. One camp maintains that we have to act quickly to create jobs building roads and bridges because this is the worst recession since the Great Depression and if we don't do something quickly we'll be in another depression. The other camp says government is too large, so cut taxes.
I am not finding much in the way of middle ground.
Mark Thoma also suggests that opposition to the stimulus is driven by opposition to big government rather than belief in small multiplier.
I think that much of the discussion in the economics end of the blogosphere has been a little more nuanced. I imagine that there are a lot of economists out there who acknowledge that the spending will have some multiplier effect, but that the efficiency of that spending may leave a lot to be desired. Those of us that are predisposed to that sort of thinking may then also get our hackles up a little when we think about how some of the spending creeping in could come with a lot of strings attached that might actually stifle growth.
It's not different this time.
For as long as I can remember, I have heard pundits say that the American economy is in decline for one reason or another. Depression has always been right around the corner. Such predictions sell books. So the fact that there are some people who are predicting complete collapse of Depression-like proportions is not surprising. Those undercurrents have been with us for the last few recessions. It's not different this time. But by the same token, this recession is not the beginning of a prolonged decline in the long upward trend of economic growth. At least, it does not have to be.
The U.S. economy is always in a state of flux--dynamic and ever-changing. We face challenges today. But so has every generation, and some of their challenges were much more serious. Things are not perfect. We have kids going to school in 100 year old buildings. Access to broadband Internet lags behind Europe. I could go on. Government can and should take on these challenges, but not for the sake of short-term stimulus. Take on the challenges that will lead us to a more dynamic and prosperous 21st century economy.
When we conflate the short-term stimulus with the long-term dyanamism of growth we get confused policy that does not serve our citizens well. Further, we run the risk of constructing policies that are so ill-advised that we could end up slowing our growth. It does not have to be that way.
I admit to being at a loss as to how to solve this problem. Only a proper understanding of the economic history of this country will open people's eyes to what is happening.
Only a proper understanding of economic history will make people realize that it's not different this time. Where we go from here depends on that understanding.
A good question asked yesterday: Is this recession different from others in degree or in kind? No recession hits the historic averages smack in the middle, so this one would have to be at least a little different in degree of severity or duration. But might it be fundamentally different from the types of recession we've seen in the past?
...Now we are in a bust and we hear "This time it's different." Those are the most dangerous four words in economics. I don't think this recession is different. Oh, it's different in magnitude and duration, it's different in the specific combination of factors that led to the recession, and its different in the level of panic that policy-makers have expressed. But the fundamental process of recession and recovery? I think it will prove to be pretty much like the rest.
I wholeheartedly agree that the words "This time it's different" are some of the most dangerous words in economics. Like Conerly, I'm trying to make the case that it's not all that different. In fact, in my comments to this post, I converse with my readers about some of the ways that this is just nothing like a Great Depression and that it is more like pre-1990s recessions.
Also, while we're on the subject of trying to communicate about the recession, the stimulus, and other matters to the general public, here's an observation. Non-economists (including politicians) tend to fall into two camps regarding the stimulus. One camp maintains that we have to act quickly to create jobs building roads and bridges because this is the worst recession since the Great Depression and if we don't do something quickly we'll be in another depression. The other camp says government is too large, so cut taxes.
I am not finding much in the way of middle ground.
Mark Thoma also suggests that opposition to the stimulus is driven by opposition to big government rather than belief in small multiplier.
I think that much of the discussion in the economics end of the blogosphere has been a little more nuanced. I imagine that there are a lot of economists out there who acknowledge that the spending will have some multiplier effect, but that the efficiency of that spending may leave a lot to be desired. Those of us that are predisposed to that sort of thinking may then also get our hackles up a little when we think about how some of the spending creeping in could come with a lot of strings attached that might actually stifle growth.
It's not different this time.
For as long as I can remember, I have heard pundits say that the American economy is in decline for one reason or another. Depression has always been right around the corner. Such predictions sell books. So the fact that there are some people who are predicting complete collapse of Depression-like proportions is not surprising. Those undercurrents have been with us for the last few recessions. It's not different this time. But by the same token, this recession is not the beginning of a prolonged decline in the long upward trend of economic growth. At least, it does not have to be.
The U.S. economy is always in a state of flux--dynamic and ever-changing. We face challenges today. But so has every generation, and some of their challenges were much more serious. Things are not perfect. We have kids going to school in 100 year old buildings. Access to broadband Internet lags behind Europe. I could go on. Government can and should take on these challenges, but not for the sake of short-term stimulus. Take on the challenges that will lead us to a more dynamic and prosperous 21st century economy.
When we conflate the short-term stimulus with the long-term dyanamism of growth we get confused policy that does not serve our citizens well. Further, we run the risk of constructing policies that are so ill-advised that we could end up slowing our growth. It does not have to be that way.
I admit to being at a loss as to how to solve this problem. Only a proper understanding of the economic history of this country will open people's eyes to what is happening.
Only a proper understanding of economic history will make people realize that it's not different this time. Where we go from here depends on that understanding.
Essentially every recession since WW II has been engineered by the Fed and the Fed was confident that it could end the recession and start growth by easing monetary policy. And so far that confidence was justified. But now the Fed has been easing for over a year and Fed Funds and T-Bills are near zero and yet this has not had the normal impact of ending the recession.
If you want to argue that this recession is not different than other post WW II ones you need to explain why the normal response to a Fed easing is not happening and why we should not be concerned by that.
The second point behind this is that for the last 50 years it was easy to do market timing by making the stock market a function of Fed policy.
But again, we now have had months of Fed easing that did not generate the normal positive stock market rebound.
But every economic recovery has been preceded by a stock market rebound-- stocks even bottomed in 1932 about six months before the economy bottomed in 1933.
The wealth effect of a rebounding stock market is one of the main avenues that easier fed policy worked through to get the economy to rebound.
So, with the market now testing new lows it further implies that the normal pattern of how economic downturns end is not working this time.
Let's cut to the chase, Spencer. Do you think we're on the brink of a long-term decline in economic growth, the likes of which have not been associated with any post-war recession? Put your cards on the table.
That's what I'm hearing from people who say that it's different this time. If you're in that camp, then let's have the discussion. If not, then let's move on.
Recession all have different causes, different lengths, different policy responses that help or hurt. That's not the point. I'm talking about the kinds of fundamental differences that have people questioning the future of capitalism.
Is that where you stand?