Sunday, November 23, 2008

It’s Not a Depression, But Like One

I continue to see financial reporters offering harsh criticism of economists for comparing the current recession to the Great Depression. I think these reporters just don’t want people worrying that the current situation could turn into the Great Depression all over again. It couldn’t. But ridiculing economists is not the right way to make that point. Economics, despite its problems, is a science, and when people start saying, “There is no reason to worry, because science is all a bunch of hokum,” it not only does not reassure people, it makes the person offering that assessment look like a moron.

So let me try to explain what’s going on, why it is now necessary to draw Great Depression comparisons. Economists and other serious-minded people are comparing this recession to the Great Depression not because we expect it to be as prolonged or as troublesome as the Great Depression, but because the current recession has much of the dynamic of a depression, and the Great Depression is the most recent depression we have to look back to. There were other depressions before the Great Depression, but many of our modern institutions did not even exist back then, so they don’t offer us the same kind of guidance we can get from the Great Depression.

An ordinary recession ends on its own, and the government can perhaps speed up that process by stimulating the economy so that the recession ends sooner. A depression is different. No amount of economic stimulation will pull a country out of a depression. The current recession is also different. The efforts at economic stimulus to date have been tragically counterproductive. This is reason enough for economists to look at the current recession and say that it is not like the recessions of the past half-century.

There are also multiple technical reasons why it makes good sense to compare the current recession to the Great Depression. By some technical measures, it is already worse. For example, the value of financial assets that have been destroyed this year alone is orders of magnitude greater than anything that got blown up in the Great Depression. In a way, this comparison is a sign of strength. There is so much money in the world today that we can lose an awful lot of it and still keep going. But the loss of such magnitudes of money still has repercussions, and we cannot learn much about that from any of the recent recessions, because nothing of the kind happened during those recessions. We have to look to a depression to see what might happen. And the Great Depression, as I mentioned, is the most relevant depression to study simply because it is the most recent.

At the low point of the Great Depression, Franklin D. Roosevelt famously said, “We have nothing to fear but fear itself.” That is not something that could be said about the current recession. Fear is a problem, but a far greater problem is complacency. The greatest risk comes from corporate executives and others who think we can just keep going along doing what we’ve been doing, and the recession will work itself out in less than a year. It is this stubborn mindset that is behind the note I got from General Motors yesterday, which read, “As a Chevy owner, you know first-hand the strides we’ve made in producing some of the most highly acclaimed vehicles on the road. The 2010 Camaro will be no exception. Camaro is not just a sports car but bold emotion sculpted in sheet metal. Its powerful and efficient projected 300-hp 3.6L V6 engine offers an astonishing available 27 MPG hwy.” I am not a Chevy owner, but that is not the point. A car maker on the brink of bankruptcy who, during the current crisis, still thinks that “bold emotion sculpted in sheet metal” is the solution to the world’s problems or that a fuel efficiency of 27 miles per gallon is “astonishing” is demonstrating the kind of pig-headed obstinance that is adding to the severity of the recession. It is the same thing at faltering banks that resist the bold reshaping their companies need to survive and at homebuilders who have cut back the pace of homebuilding by only half when it was obvious enough a year ago that it would take at least two years to sell off the homes that had already been built. We are fortunate, at least, that very few politicians imagine we can just keep going the way we’ve been and everything will be fine.

Business as usual is a mindset that is useful for a company to weather a run-of-the-mill recession. It will work fine for most companies in the current recession too — but companies in industries that need to change, need to change as quickly as possible to improve their chances of surviving. Many of them are resisting these changes and will fail in the coming year. That is what makes this recession so different from all the recessions I have seen in my lifetime. It is what forces us to draw some comparisons from the Great Depression. And it is long past time for financial reporters who don’t know the first thing about economics to stop criticizing economists for using the resources at hand to try to find a way through the situation we now face.