In a recent Gallup poll, one fourth of American adults thought the United States was in a depression. If asked today, I’m sure a few more people would agree.
At the same time, newspapers are running editorials arguing that the current situation is not a depression because it is not the same as the Great Depression.
I have to have sympathy with both points of view on this question. One can never just dismiss the discouragement and pessimism of a quarter of the people out there. And it is perfectly understandable that news people might want to cheer people up by explaining how much worse things could be.
But let’s be reasonable. This might be a time of broad economic difficulties with no end in sight, but that is not what depression means. This is also not the Great Depression, but that does not mean it is not a depression. (Hint to the editorialists: there is a reason they called it “great.”) Depression is a word with a specific meaning. A depression is an extended period of sharply reduced economic activity with high unemployment and widespread business failures. This is only a recession — economic activity is declining slightly, and is not bouncing right back. It is not a depression.
But it scarcely matters that the current situation does not fit the scientific definition of a depression when it would take just one massive public policy blunder, such as the “rescue” package currently before Congress, to put us in a depression. It is still useful to look at the current situation through the lens of a depression because the same kind of ideas that get you out of a depression can also help you avoid one.
A depression occurs when lots of people get going too fast in the wrong direction, and they have to stop and figure out which way to go before they can get going in the right direction again. The faster you can stop, change direction, and get going again, the better your prospects are.
Going too fast in the wrong direction means doing things that cause financial losses as you’re hurrying to keep up with the competition. When this happens broadly enough, we have a recession or a depression. The first thing you need to do when you find yourself in this situation is to stop hurrying. When you’re going in the wrong direction, hurrying just makes things go bad faster. Catch your breath, then stop doing the things that cause the financial losses.
The huge losses in the U.S. economy this year have to do with abstract securities — pieces of paper that have no simple, obvious connection to any tangible or workable property. There are smaller losses from real estate. People were caught off guard when the value of the abstract securities and real estate suddenly changed. At the same time, there are problems with SUVs and other kinds of equipment that use energy inefficiently.
If you’ve gotten yourself into a problem personally by borrowing money to buy real estate or abstract securities, I’m sure it’s painfully obvious that you need to stop doing that, and to pay back the loans somehow. It is also true that people across the economy have to do this for a broad recovery to be possible. If you have an SUV, I am sure you have already told yourself to check the fuel efficiency rating of the next car you buy. The big auto makers need to shut down the SUV factories in the meantime. In a similar vein, it would help things if the home builders could take a two-year vacation.
When depressions hit, why do they last so long? In a word, the reason is stubbornness. People keep trying to do what worked in the past, or they try to go back to past ways of doing things. When you experience a loss, it is natural to want to cling to the past, to try to bring it back, but when enough people do so at the same time, that is what causes a depression or keeps it going.
The solution to a depression is resilience, or the willingness to leave failures behind you and take a new approach. When the economy has enough resilience, depressions are impossible. It is only when the economy broadly accumulates high levels of brittleness and stubbornness that depressions can develop.
Of course, when you say stubborn, the current White House comes to mind. Do you remember the line, “Failure is not an option”? That is exactly the kind of brittle thinking that causes depressions. When you don’t want to admit that things are breaking down, you don’t adjust, and things just keep getting worse. The administration honestly believes that the decline in real estate values and the various problems with abstract securities are all some kind of bad dream that we will wake up from before the election. And as long as they keep thinking that way, they are not looking for the solutions we need.
Some of the biggest sources of abstract securities have been the major brokerage houses on Wall Street, Fannie Mae, Freddie Mac, and AIG (American International Group). We would be better off, and could easily avoid a depression, if we could shut these companies down. Even better, of course, would be if we could get them to change their approach so that they stop creating the risks that caused the current problems. But when companies are committed to doing things in a way that causes trouble, it is better to let them go under when the losses pile up high enough to do them in. The administration had the chance to let Fannie Mae, Freddie Mac, and probably AIG go out of business, and they muffed it. They were clinging to the past, not willing to admit that things had gotten off track. And now, they are pushing for fast action on the most disastrous “relief” package ever conceived, a plan that could destroy the U.S. dollar and bring down most of the banks. This is what happens when you keep rushing while going in the wrong direction. When everything is going right, speed is what keeps you a step ahead of the competition. But when everything is going wrong, speed just makes things go wrong faster. You need to stop and figure out the right direction. Direction, not speed, is the answer to a depression, or to any other economic crisis brought on by a systematic pattern of failures or losses.
This week’s drama in Washington would work as a classic tragedy, or at least a trashy novel. A compulsive gambler from Wall Street finds himself in charge of a house (the U.S. Treasury) that is already mortgaged to the hilt, but he keeps on gambling with whatever money he can get his hands on. When he gets together with an angry old rancher who is in denial about his cocaine addiction, things only get worse. The addict encourages the gambler, telling him he’ll win the next one. In the end, the two can’t stop themselves from selling their souls to get one last roll of the dice before everything finally falls apart.
A compulsive gambler or an addict usually won’t stop until there is no money left. Of course, Bush and Paulson are not an addict and a compulsive gambler, but they are making policy decisions as if they were, and the money will run out pretty soon. Paulson almost came out and said in yesterday’s hearings that he intends to spend the entire $700 billion in a matter of days, then return to Congress to ask for more. The Treasury could be empty before the election.
But even if policymakers in Washington make terrible choices, the rest of us can still approach the economic challenges we face in a healthy way. The keys to avoiding a depression or minimizing its impact on you are:
- Find the right direction.
- Get going in the right direction.
I do not believe we will have a depression, mainly because I see little chance that the “rescue” package will get through Congress, but if we do have one, it will not be something to sit around worrying about. It will be a time when action matters more than ever. I think most people think of a depression as a kind of train wreck, and they want to stand around looking at the damage and shaking their heads. If you instead think of a depression as a transition that just needs to get back on track, it is easier to see the action that is needed.