The Third Great Depression; Krugman

By PAUL KRUGMAN

Published: June 27, 2010

           

Recessions are common; depressions are rare. As far as I can tell, there were only two eras in economic history that were widely described as “depressions” at the time: the years of deflation and instability that followed the Panic of 1873 and the years of mass unemployment that followed the financial crisis of 1929-31.

Neither the Long Depression of the 19th century nor the Great Depression of the 20^th was an era of nonstop decline — on the contrary, both included periods when the economy grew. But these episodes of improvement were never enough to undo the damage from the initial slump, and were followed by relapses.

We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.

And this third depression will be primarily a failure of policy. Around the world — most recently at last weekend’s deeply discouraging G-20 meeting — governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending.

In 2008 and 2009, it seemed as if we might have learned from history. Unlike their predecessors, who raised interest rates in the face of financial crisis, the current leaders of the Federal Reserve and the European Central Bank slashed rates and moved to support credit markets. Unlike governments of the past, which tried to balance budgets in the face of a plunging economy, today’s governments allowed deficits to rise. And better policies helped the world avoid complete collapse: the recession brought on by the financial crisis arguably ended last summer.

But future historians will tell us that this wasn’t the end of the third depression, just as the business upturn that began in 1933 wasn’t the end of the Great Depression. After all, unemployment — especially long-term unemployment — remains at levels that would have been considered catastrophic not long ago, and shows no sign of coming down rapidly. And both the United States and Europe are well on their way toward Japan-style deflationary traps.

In the face of this grim picture, you might have expected policy makers to realize that they haven’t yet done enough to promote recovery. But no: over the last few months there has been a stunning resurgence of hard-money and balanced-budget orthodoxy.

As far as rhetoric is concerned, the revival of the old-time religion is most evident in Europe, where officials seem to be getting their talking points from the collected speeches of Herbert Hoover, up to and including the claim that raising taxes and cutting spending will actually expand the economy, by improving business confidence. As a practical matter, however, America isn’t doing much better. The Fed seems aware of the deflationary risks — but what it proposes to do about these risks is, well, nothing. The Obama administration understands the dangers of premature fiscal austerity — but because Republicans and conservative Democrats in Congress won’t authorize additional aid to state governments, that austerity is coming anyway, in the form of budget cuts at the state and local levels.

Why the wrong turn in policy? The hard-liners often invoke the troubles facing Greece and other nations around the edges of Europe to justify their actions. And it’s true that bond investors have turned on governments with intractable deficits. But there is no evidence that short-run fiscal austerity in the face of a depressed economy reassures investors. On the contrary: Greece has agreed to harsh austerity, only to find its risk spreads growing ever wider; Ireland has imposed savage cuts in public spending, only to be treated by the markets as a worse risk than Spain, which has been far more reluctant to take the hard-liners’ medicine.

It’s almost as if the financial markets understand what policy makers seemingly don’t: that while long-term fiscal responsibility is important, slashing spending in the midst of a depression, which deepens that depression and paves the way for deflation, is actually self-defeating.

So I don’t think this is really about Greece, or indeed about any realistic appreciation of the tradeoffs between deficits and jobs. It is, instead, the victory of an orthodoxy that has little to do with rational analysis, whose main tenet is that imposing suffering on other people is how you show leadership in tough times.

And who will pay the price for this triumph of orthodoxy? The answer is, tens of millions of unemployed workers, many of whom will go jobless for years, and some of whom will never work again.

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A version of this op-ed appeared in print on June 28, 2010, on page A19 of the New York edition.

This depression

14 states now have double-digit unemployment

New data released Friday by the Bureau of Labor Statistics showed that five more states -- Florida, Illinois, Indiana, Kentucky, and Tennessee -- had crossed into double-digit unemployment, while Michigan's unemployment rate rose from 12.9% to 14.1% in a single month. With 14 U.S. states now in double-digit unemployment and many continuing to see large increases month to month, EPI convened experts from three of the hardest-hit states -- Michigan, Ohio, and Oregon -- who discussed what these staggering job losses had meant for their local economies and shared their concerns that the pain could last long after the recession ends. Michigan's job situation, for instance, has gone from bad to worse with the recent bankruptcies of GM and Chrysler, while in Oregon, May unemployment of 12.4% represents a 33-year high.
Economic Policy Institute

Robert Reich: Its a Depression

It's a Depression
April 3, 2009, 9:51AM

The March employment numbers, out this morning, are bleak: 8.5 percent of Americans officially unemployed, 663,000 more jobs lost. But if you include people who are out of work and have given up trying to find a job, the real unemployment rate is 9 percent. And if you include people working part time who'd rather be working full time, it's now up to 15.6 percent. One in every six workers in America is now either unemployed or underemployed.

Every lost job has a multiplier effect throughout the economy. For every person who no longer has a job and can't find another, or is trying to enter the job market and can't find one, there are at least three job holders who become more anxious that they may lose their job. Almost every American right now is within two degrees of separation of someone who is out of work. This broader anxiety expresses itself as less willingness to spend money on anything other than necessities. And this reluctance to spend further contracts the economy, leading to more job losses.

Capital markets may or may not unfreeze under the combined heat of the Treasury and the Fed, but what happens to Wall Street is becoming less and less relevant to Main Street. Anxious Americans will not borrow even if credit is available to them. And ever fewer Americans are good credit risks anyway.

All this means that the real economy will need a larger stimulus than the $787 billion already enacted. To be sure, only a small fraction of the $787 billion has been turned into new jobs so far. The money is still moving out the door. But today's bleak jobs report shows that the economy is so far below its productive capacity that much more money will be needed.

This is still not the Great Depression of the 1930s, but it is a Depression. And the only way out is government spending on a very large scale. We should stop worrying about Wall Street. Worry about American workers. Use money to build up Main Street, and the future capacities of our workforce.

Energy independence and a non-carbon economy should be the equivalent of a war mobilization. Hire Americans to weatherize and insulate homes across the land. Don't encourage General Motors or any other auto company to shrink. Use the auto makers' spare capacity to make busses, new wind turbines, and electric cars (why let the Chinese best us on this?). Enlarge public transit systems.

Meanwhile, extend our educational infrastructure. So many young people are out of work that they should be using this time to improve their skills and capacities. Expand community colleges. Enlarge Pell Grants. Extend job-training opportunities to the unemployed, so they can learn new skills while they're collecting unemployment benefits.

Finally, accelerate universal health care.

What school is like for some

From the Los Angeles Times
Many South L.A. students frightened and depressed, survey finds
The report, prepared by a youth group with help from Loyola Marymount, says that the conditions of their schools is contributing to a loss of hope and drive.
By Mitchell Landsberg
Los Angeles Times Staff Writer

April 26, 2008

A survey of 6,008 South Los Angeles high school students shows that many are frightened by violence in school, deeply dissatisfied with their choices of college preparatory classes, and -- perhaps most striking -- exhibit symptoms of clinical depression.

"A lot of students are depressed because of the conditions in their school," said Anna Exiga, a junior at Jordan High School who was one of the organizers of the survey. "They see that their school is failing them, their teachers are failing them, there's racial tension and gang violence, and also many feel that their schools are not schools -- their schools look more like prisons."

The survey, released late Thursday, was conducted in seven South L.A. public schools by a community youth organization, South Central Youth Empowered Thru Action (SCYEA), with technical guidance from the psychology department at Loyola Marymount University. It suggested that many students in some of the city's poorest, most violent neighborhoods believe their schools set the bar for success too low -- and then shove students beneath it.

In fact, the student organizers said they don't like to use the word "dropout" to describe their many peers who leave school. They prefer "pushout," because they believe the school system is pushing students to fail.

"We're ignored -- our schools are ignored," said Susie Gonzalez, another Jordan 11th-grader who helped organize the survey. "They give us the short end of the stick. . . . They expect us not to amount to anything."

Only about one-quarter of the students surveyed said they felt safe at school while 35% said they don't. Just under half said their school is preparing them for college or a high-paying job, and 93% believe their school should offer more college-preparatory classes. Fewer than half could define the "A to G" curriculum that is the college prep standard in California. The youth organization, which advocates educational equality, fought for six years to push Los Angeles Unified School District to require such a curriculum for all students. The curriculum spells out the types of college prep classes and number of years they must be taken to qualify for UC and Cal State schools.

Two thirds of the students, nearly all of whom were African American or Latino, said they wanted their schools to offer more ethnic studies classes.

The schools surveyed are among the lowest performing in the Los Angeles Unified School District and are in an area where dissatisfaction with the traditional public school system is driving many students into charter schools.

The survey's findings contrasted with a February school district report in which 90% of students questioned at selected schools districtwide said they were being pushed to do their best and 80% said their classes "give me useful preparation for what I plan to do in life."

That same report was sharply critical of the district's efforts to get all students into a college-prep curriculum by 2012. "With the current school climate and instructional quality," it said, "a significant proportion of the students who enter the ninth grade in 2012 will not only fail to meet college eligibility, but will also fail to graduate from high school."

Monica Garcia, president of the Los Angeles Board of Education, said she welcomed the survey and believed the district was responding to the students' concerns. "This is energizing, this is encouraging," she said. "We need the consumers of our services to be advocates of change."

But Jordan High Principal Stephen Strachan took exception to some of the results, saying the survey was skewed to provoke negative responses. He said his school has made great strides in preparing students for college and has created a "safe haven" from a violent community.

He did not, however, dispute the findings about depression. "This morning at 10 o'clock at Simpson's Mortuary, a 16-year-old was buried. That's one of my students who was shot in the community," he said. "I hear kids say, 'Too many people are dying in our community.' And that plays on the psyche. . . . It's really hard to focus on Algebra 2 when your friends are getting shot in the community."

Cheryl Grills, a professor of clinical psychology at Loyola Marymount, said that she was struck by how many students volunteered answers to one question about why they sometimes skip school. More than half hinted at depression, saying they were tired, had trouble sleeping, felt helpless or hopeless, were bored or felt lazy, among other responses.

She compared those responses to the symptoms of clinical depression from the Diagnostic and Statistical Manual of Mental Disorders. "Much to my horror and shock, they almost completely matched up," she said.

That led her to conduct a follow-up survey among 52 students. Of them, 67% reported that they had "felt sad or hopeless almost every day for two weeks or more," and had "stopped doing some of their usual activities" as a result.

"That's clinical levels of depression," she said.

Grills said that while the initial survey did not select students randomly, she believed it was scientifically valid because of the large sample size. She said there was significant uniformity of results among the seven schools: Jordan, Crenshaw, Dorsey, Fremont, Locke, Manual Arts and Washington Prep. Students from Gardena High also participated, although the survey was conducted outside school.

Alice Rubenstein, a clinical psychologist in private practice in Rochester, N.Y., who has written widely about adolescent psychology, agreed that the survey hinted at widespread levels of clinical depression. Given the environment in which the students live, that's hardly surprising, she said.

Students in South L.A. "live in a depressive environment where they feel helpless or hopeless partly because their choices are so limited," she said. "These kids are living in an environment where this is their state much of the time. It's very much a sociological issue as well as a psychological issue."

Rubenstein added that surveys of the general adolescent population tend to show that anywhere from 15% to 30% are depressed, well below the levels suggested by the survey. She added that the survey did not include the students most likely to be depressed -- those who were not in school.

At the announcement of the survey results, at the headquarters of the Community Coalition of South L.A., students played a home-made version of Monopoly that told much the same story as the survey.

Where the familiar squares of Baltic, Atlantic and Marvin Gardens might be, the options included Drugs, Dean's Office and Drop Out. Jail was a place to go when you're pulled over by the cops for no apparent reason. Restroom was where the player was likely to encounter gang members. Where Boardwalk should have been, the square read: "Dead."

As the game began, one student landed on Liquor Store and was told that, on his way to school, "You wind up in front of a liquor store and you find one of your homies smoking a blunt." When Juan Zamora of Jordan landed on Chance, he was told that "you're one of the lucky students who actually know and see a college counselor." His choices: Go to UCLA or "stay on the block and wind up selling drugs to support your family."

And when Sam Anguiano of Locke landed on P.E. Field, he was told that shots had been fired while he was running during gym class -- should he hit the ground or run? When he answered that he'd run, he was told: "You run away and are safe, but later that evening you find out that your friend was the one who was shot."

That was about as good a roll of the dice as anybody got. The one exception was Juan, a 17-year-old junior, who hit the ultimate Chance: "Your friends and family support you," the card read. "You don't die."

mitchell.landsberg

@latimes.com

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