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.