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A 5 percent chance of another Great Depression?

Brad Delong thinks so, and despite the improving economy, that estimate is up from a few months ago:

For 2 1/4 years now I have been saying that there is no chance of a repeat of the Great Depression or anything like it -- that we know what to do and how to do it and will do it if things turn south.

I don't think I can say that anymore. In my estimation the chances of another big downward shock to the U.S. economy -- a shock that would carry us from the 1/3-of-a-Great-Depression we have now to 2/3 or more -- are about 5%. And it now looks very much as if if such a shock hits the U.S. government will be unable to do a thing about it.

Importantly, DeLong isn't concerned by changes in the country's economic condition. He's scared by the revealed constraints on the political system's ability to respond to changes in the country's economic conditions. The issue isn't that some storm will unexpectedly slam into the economy and there will be nothing anybody can do, but that the storm will hit and Congress will choose to do nothing.

The biggest danger America faces is not rising health-care costs or global warming or the budget deficit. It's the political system's inability to act on these issues, even though the solutions are generally quite clear. As any uninsured person will tell you, the fact that medicine exists doesn't do you much good if you can't get any of it.

By Ezra Klein  |  November 17, 2009; 1:30 PM ET
Categories:  Budget , Government , Senate  
Save & Share:  Send E-mail   Facebook   Twitter   Digg   Yahoo Buzz   StumbleUpon   Technorati   Google Buzz   Previous: Lunch break
Next: Robert Reischauer's bright idea


Your last comment suggests that drugs are a yes/no question. Yet for many, many people, there are generic alternatives to the drugs that they are taking. Even if there is no generic equivalent for the drug one is taking, there may be a generic alternative that is not quite as good, but is far and away superior to no drug at all. It would be interesting to see how many people could be effectively treated using the Walmart $4 dollar/month list of generic drugs.

Posted by: gpw123 | November 17, 2009 1:38 PM | Report abuse

I don't blame him for thinking that way. If we had it to do over again I am certain we would let all the banks fail and cut taxes on the richest 1/10 of 1% of Americans and be looking at depression and 25% unemployment. And Michele Bachmann and Ron Paul would marry each other and abolish the Fed during their honneymoon.

And if we had it to do all over again I think Democrats would go for a pure stimulus rather than that bastardized 1/3 1/3 1/3 bipartisan "stimulus" we got.

Coincidentally I have read about 143 very very bearish commentaries from places like NRO and Bloomberg to Marketwatch and beyond today. So I am thinking there is a saturation in the permabear camp which might, short term, signal bullishness! Though personally I am increasing cash reserves.

Talk about conflicted!

Posted by: luko | November 17, 2009 1:42 PM | Report abuse

If we know it's a five percent chance, surely the US government can construct some kind of derivative instrument that it can sell in order to hedge against the possibility of a depression! What could go wrong?

Posted by: constans | November 17, 2009 2:27 PM | Report abuse

Even a minority of republicans


The filibuster


Inability to act strongly positively

So, the fact that smart scientific economists know how to prevent a depression and how to get out of a severe recession relatively quickly may not be enough.

Ezra, I've never seen Brad DeLong take a position on the filibuster. If he hasn't, why don't you ask him why?

Posted by: RichardHSerlin | November 17, 2009 2:50 PM | Report abuse

I've thought on this a few times, as readers at my blog know I think this is a very open question.

Can the fed stop a deflationary spiral? In most ways the answer is no, unless people choose to borrow. We know most don't want to for specific reasons (saving more, etc.).

What's left is fiscal stuff, and there's a lot of possibilities.

A lot of people don't even know what the real lever are!

Posted by: HalHorvath | November 17, 2009 3:00 PM | Report abuse

I should be more explicitly accurate so as not to mislead; I should have put "very often" before "inability" after the equals sign. Reconciliation still often allows passage with just 50 votes plus the VP to break a tie.

In fact, I think a great way to get through a big new stimulus after health care is this:

To use reconciliation a stimulus must be deficit neutral (or improving), which makes it hard to be a stimulus, except that it must just be deficit neutral (or improving) over a 5 year period. So, you put in the about $700 billion in spending in the first 3 years, and the tax cuts to pay for it (or more than pay for it) in the last two years when the recession should be over (and if it's not over then, you just do another one of these to push the deficit paying out further).

It might be really strong to put in about $700 billion in spending (hopefully heavy on high social return investments like alternative energy and education) the first three years, and then permanent tax increases (on the rich) after that, so that the bill actually reduces the deficit like $100 billion in the first 5 years, and over $1 trillion in the first 10 years.

This might be very strong politically. You get a strong economic stimulus, perhaps turn deficits into surpluses in 10 year budget projections, and pay down over $1 trillion in debt.

And every time the Republicans say, tax raising, the country will be destroyed, and life as we know it will end, you say Clinton.

Posted by: RichardHSerlin | November 17, 2009 3:04 PM | Report abuse

Sounds like we need to make the system more responsive. How do we do that? Maybe we could find a professional journalist who would explore that question, and write up his findings.

Posted by: SamPenrose | November 17, 2009 3:14 PM | Report abuse

Meridith Whitney - that is the name Ezra needs to quote. This Billion dollar property made the 'double deep / W recession' call yesterday and it has been echoing in some form. CNBC web site had good summary where many arguments were listed, why she thought so.

She got her 'bearish' call late last year correct. She kind of missed this March / Summer call of Bank share pop up. But another guy who got both these calls correct - Doug Kass of Seabreez Partners; is similarly bearish like her for the next year.

JJ Cramer is up in arms fighting these bearish calls. There are high wire arguments going on and I wish Washington Wonks take into account those things.

Essentially Cramer is banking on Ben Bernanke. Tim Geithner is a spent force (that sucker actually needs to resign after it is becoming official how AIG over paid all the bets at full value in late Fall of last year... Proprietary demands that Obama sacks Geithner, same scale as like Tom Daschle mess...) not relevant here; but it is all about Bernanke and in some sense Summers.

I am in Bernanke camp today. I think he has got better smarts than Meridith Whitney. Also Buffett call of buying Burlington Railroads is also in the 'bullish' camp. That is the reason why Crammer and so many are bullish here. Anyways, ‘freedom is another name for nothing to loose’; those of us who are on road or just hanging on; we only have hope for future; we are bullish by definition.

Of course dollar going down making American assets cheaper is true too, regardless how much people deny that. The real core currency commentary was by Krugman (even though Drezner pulled his legs there...) and by Niall Fergusson. Notwithstanding Obama preaching Yuan to devalue and Media reporting his failure in that; secretly it seems as if USA and China are implicitly up to crush rest of the world in taking the trade share due to cheap currencies. As a result Korea, Japan, India, Taiwan, Brazil all are complaining and that will result in increased Trade Friction. As like in past (before WWI), the question is will that result in conflicts; in a way solace for Americans to get out of Great Recession as like how WWII took it out from Great Depression?

That is one heck of a conspiracy theory worthy of Drudge Report...

Posted by: umesh409 | November 17, 2009 3:25 PM | Report abuse

Meridith Whitney is no Nostradamus. And you can find a gazillion talking heads on CNBC for any given point of view - usually they are shilling for their book "How To Survive and Prosper in the Coming Catastrophe Which is Sure To Happen Soon."

But yes, there are potential bumps on the road and if we get to, say, Q3 2010 and hit a snag all we will hear will be "OMG Mugabe Hussein Obama's plan didn't work let's cut capital gains tax to zero and lower the top marginal rate to 25%!"

Posted by: luko | November 17, 2009 5:14 PM | Report abuse

Kass is in Florida and all hee sees around him are falling real estate prices and people going under from excess debt. So he is bearish, concentrating on the consumer not coming back any time soon. M. Whitnmey is looking from New York at banks not lending, among other things. People in parts of the Midwest see things tanking with high unemployment and don't see the consumer coming back.

OTOH, there are signs that upper middle consumers are buying and Costco and Target are doing ok. Inflation is not a problem unless you work for a conservative think tank, given the high unemployment.

The whole picture is a composite of many different pieces, and very few people can see the whole. Most people are swayed by conditions in their milieu, about which they may be right, but it still isn't the whole.

I think it isn't as bad as the bears think nor as good as Cramer thinks. And conditions are very uneven, worse as you go down the scale, and very bad in some parts of the country. The really troubling thing is that so one seems to know how to improve things for anyone but the already very rich.

Posted by: Mimikatz | November 17, 2009 5:29 PM | Report abuse

"The issue isn't that some storm will unexpectedly slam into the economy and there will be nothing anybody can do, but that the storm will hit and Congress will choose to do nothing."

But the history of the past year, with the quick passage of the TARP and the stimulus, renders this concern nonsensical, right?

Posted by: tomtildrum | November 17, 2009 5:54 PM | Report abuse

This is another example of why economists have no credibility. Why a 5% chance? Or a 10% chance, or a 1% chance? It's total conjecture.

What's not conjecture is that financialization--now with the explicit backing of the government--is causing an unsustainable over-harvesting of the real economy. Unless technology saves us first, the collapse of civilization is inevitable. Ask the Mayans.

Posted by: bmull | November 17, 2009 8:33 PM | Report abuse

Why is it always assumed that the Fed can't stop deflation if it really wanted to? They just have to increase the money supply until they overpower falling velocity - then you have inflation, lower debt burdens and lower/negative real interest rates.

If it's too difficult, give these guys a call - they were able to generate insane inflation in a cratering economy:

Posted by: justin84 | November 18, 2009 4:40 PM | Report abuse

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