DeLong on the ‘Lesser Depression’

Good article by DeLong on the scale of the damage caused by the Global Financial Crisis and the subsequent recession:

In the Great Depression that struck the U.S. in 1929, the subsequent twelve years before American mobilization for World War II erased the last shadows of the Great Depression, production averaged roughly 15% below the pre-Great Depression trend, for a total depression waste output shortfall of 180% of a year’s production. Today, even if U.S. production returns to its stable-inflation potential by 2017–a huge if–we will as of 2017 have incurred a depression waste output shortfall of 60% of a year’s production.

The losses from what I have been calling the Lesser Depression will not be over in 2017. As best as I can foresee, there is no moral-equivalent-of-war on the horizon to pull us into a mighty boom to erase the shadow cast by the downturn, and when I take present and values and capitalize the lower trend growth of the American economy as a result of the shadow into the future, I cannot reckon the present value of the additional cost at less than a further 100% of a year’s output today, for a total cost of 160% of a year’s production. The damage is thus equal to that of the Great Depression, counting a 1% of production shortfall as equally painful whenever it happens.

The U.S. economy today, however, has two and a half times as many people as the U.S. economy of 1929. And the U.S. economy today is five–or perhaps more–times as rich as the economy of 1929. In terms of the sheer real value of goods and services lost due to the depression waste output shortfall, the fact that the U.S. economy today is some 12.5 times the size of the economy of 1929 means that the absolute size of this downturn looks to be some fourteen times the size of the Great Depression.

DeLong also makes a concise, empirically supported argument that the US remains a long way from its debt capacity. As he also argues here, there seems to be enormous, unmet demand for safe assets in the form of treasury bonds. But rather than prevent painful deleveraging by issuing debt to meet this demand, policy elites seem set on inducing further liquidation through austerity. If bleeding the patient fails, fetch more leeches. The mistakes of the Great Depression are blindly repeated as if Keynes had never put pen to paper. 

The obvious difference between the Great Depression and now, noted by DeLong, is that no geopolitical crisis looms to provide a deus ex machina for the economic travails of the US or Europe and the opportunity to reconstruct the world’s economic architecture.


Posted on April 2, 2013, in Uncategorized. Bookmark the permalink. 5 Comments.

  1. I expect that total world GDP has not dipped so greatly as in the Depression, due to the “rise of the Rest” – China especially. (But I do not have figures to hand.)
    Another difference: there seems to be no simple policy today equivalent to leaving the gold standard which can at a stroke have a big positive effect. (Or, with the benefit of hindsight will people in the future think there was?)

  2. Re:World GDP, yes probably.

    If one thinks of the Euro as a new gold standard… but then again leaving a single currency area is much more difficult than “going off gold”.

  3. Re “as if Keynes had never put pen to paper”: a commenter informed me that in ’04 two economists at U. Calif (UCLA) published an article arguing that FDR’s policies actually *prolonged* the Depression b/c they raised prices and wages ‘artificially’. These authors did a series of calculations intended to show that, w/o the Natl Ec Recovery Act, the Depression would have been over in the U.S. in 1936 or something like that. !!!

  4. John Quiggin on Crooked Timber took on the Cole and Ohanian Real Business Cycle theory a while ago whilst he was drafting his ‘Zombie Economics’ book: link.These issues lie out of my depth, but I’m pretty sceptical of any approach suggesting that the cause of the Great Depression was a sudden increase in laziness (preference for leisure) amongst the workforce. Absurdities aside, I guess I am just basically sceptical of the neo-classical insistence that markets clear against the Keynesian claim that in a crisis they won’t.

    • Thanks for the link to that J. Quiggin post; I guess I skipped some or most of the posts related to his ‘Zombie Economics.’

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