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Why has the worst recession since the 1930′s had such a mild effect on America?

14 July 2009

One of the oddities of this recession is the widespread opposition to government actions mitigating its effects.  Doing almost nothing (except tax cuts) has almost become the official policy of the Republican Party, and libertarian sites such as the Instapundit frequently run articles mocking the government’s stimulus programs.

A related conundrum is the stability of spending by US households during a severe recession — despite falling employment (graph and graph), a collapse in hours worked (graph), stagnant wages (now negative YoY for the first time in 50 years; article).  And rising savings (graph)!  How is this possible?  As one economist notes:

In a research note, Carson says job losses in prior downturns have been roughly proportional to the decline in gross domestic product. But in the current recession, the proportion of jobs lost is running about a third greater than the drop in real GDP. (source)

The answer is government aid:  the automatic stabilizers and the stimulus programs.  The government enacted these programs faster than in previous recessions and on a larger scale.  They have buffered the longest and by most measures deepest recession since the 1930′s  (vividly shown by this graph).  Without these measures by now we might have rioting in the streets demanding more government action – instead of “tea parties” protesting high taxes.  (see comment #3 for more about this)

This is sad, people protesting the government actions that mitigate what would otherwise be a horrific downturn.  That does not mean the stimulus was well-designed (it was childishly poorly done), or that the accompanying theft was good (bailing out fat cats in the financial sector).

Looking ahead:  almost anything can happen in the next year.  There are no strong historical precedents for our situation, and we are beyond the limits of conventional economic theory.  We might have a strong recovery, or a dramatic collapse — or anything in between.

Even if we get the expected recovery later this year, unemployment will continue to stagnate through 2010.  If we get only a brief bounce — or don’t even get a bounce — I expect conditions to deteriorate.  Rapidly and severely.  Those tea parties will disappear, as people demand fast, large government action.   Wise or not, that’s what will happen.  Unfortunately, after years of feckless borrowing it will be difficult for the government to meet these expectations.  I’ll discuss that scenario on another day.

(1)  Automatic stabilizers

This graph show the number of people receiving unemployment insurance as a percent of US population.  It’s from Mish’s Global Economic Trend Analysis (although he misinterprets its significance).

20090710-claims

There are several programs paying unemployment claims.  Unemployment insurance pays 26 weeks; now paying 6.0 million people NSA.  During recessions there are other programs enacted, such as the Emergency Unemployment Compensation — now 33 weeks, paying 2.5 million people NSA.   (There are other programs, now paying aprox 400 thousand people but not included in these numbers:  Federal Employees, Newly Discharged Veterans, the Railroad Retirement Board, and Extended Benefits).

The total number now receiving benefits is aprox half again higher than the peak of the horrific 1980-82 recession (3.1% of pop, vs. 1982 peak of 2%). Yet today’s unemployment rate is 14% less (now 9.5% vs. 1982 peak of 11%).

There are many reasons for this, but probably the major one is the longer eligibility for benefits.  Today’s unemployed can receive up to 79 weeks (varying by State and eligibility).  The maximum was 65 weeks in the 1975-78 downturn, and 55 in 1982-1985.  Also supporting household income:  now unemployment benefits automatically qualify families for food stamps.

(2)  The government stimulus

This is well-known, and so needs little explanation.  As an illustration, see this analysis from the government’s most recent Personal Income report (26 June 2009):

Real disposable personal income (DPI) increased 1.6% in May, compared with an increase of 1.2% in April. The May change in DPI was boosted as a result of provisions of the American Recovery and Reinvestment Act of 2009. Provisions of the Act reduced personal current taxes and increased government social benefit payments. Excluding these special factors, which are discussed more fully below, DPI increased $20.6 billion, or 0.2% , in May, following an increase of $101.3 billion, or 0.9%, in April.

For more information

  1. Short-Term Responses to the Recession: The Extension of Unemployment Insurance Benefits“, Congressional Budget Office, February 1991
  2. The Economic Recession of 2007-2009: A Comparative Perspective on Its Duration and the Severity of Its Labor Market Impacts“, Andrew Sum, Ishwar Khatiwada, and Joseph McLaughlin (Center for Labor Market Studies, Northeastern U), April 2009
  3. An Update on State Budget Cuts“, Nicholas Johnson, Phil Oliff, and Jeremy Koulish, Center on  Budget and Policy Priorities, 29 June 2009 — “At Least 39 States Have Imposed Cuts That Hurt Vulnerable Residents; Federal Economic Recovery Funds and State Tax Increases Are Reducing the Harm”
  4. Correcting Five Myths About the Stimulus Bill“, James R. Horney, Nicholas Johnson, and Lawrence J. Haas, Center on  Budget and Policy Priorities, 10 July 2009

For more information from the FM site

To read other articles about these things, see the FM reference page on the right side menu bar.  Of esp interest are:

Some of the posts on this site about solutions:

  1. A happy ending to the current economic recession, 12 February 2008 – The political actions which might end this downturn, and their long-term implications.
  2. How should we respond to the crisis?, 24 September 2008
  3. A solution to our financial crisis, 25 September 2008
  4. The last opportunity for effective action before disaster strikes, 3 October 2008 — How to stabilize the financial system.
  5. Effective treatment for this crisis will come with “The Master Settlement of 2009″, 5 October 2008
  6. Dr. Bush, stabilize the economy - stat!, 7 October 2008
  7. The new President will need new solutions for the economic crisis, 9 October 2008
  8. The G-7 meeting was the last chance for action before the global recession, 12 October 2008
  9. New recommendations to solve our financial crisis (and I admit that I was wrong), 23 October 2008
  10. A look ahead to the end of this financial crisis, 30 October 2008
  11. Everything you need to know about government stimulus programs (read this – it’s about your money), 30 January 2009
  12. Bush’s bailout plan is now Obama’s. His quiet eloquence guides the sheep into the pen, 30 March 2009

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67 Comments leave one →
  1. Alex permalink
    14 July 2009 1:21 am

    If rioting of 1930’s we call rioting then OK. They were prevented. The price? One-two trillion dollar additional debt a year from now on. Why from now on? Because not only rioting were prevented, but also correction of market.

  2. zivbnd permalink
    14 July 2009 3:27 am

    Unemployment is 9.5%, which is considerably lower than the 1981-2 recession. The Depression was much worse. This is not the worst recession since the 1930′ies, so the reaction to it is obviously more pragmatic. It is also possible that the public’s reaction to it is calmer due to the fact that we can see that Obama doesn’t think that the economic stimulus is really needed in the near term, which is why 90% of the stimulus package won’t kick in until 2010.
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    Fabius Maxmius replies: Ours is a large complex economy, and one number cannot describe its condition. To mention two key metrics: this is the longest recession since the 1930′s, and the percent of jobs lost is the largest (excluding the post-WWII demobilization; graph).

    The “unemployment number” is a complex calculation, depending on definitions which have changed over time — and hence is of limited used for historical comparisons. Some believe that the broadest measure of unemployment (the U-6, now 16.5%) is closer to the way unemployment was calculated during the 1980-82 recession. I prefer to use jobs lost and continuing claims — hard numbers — as metrics of employment changes.

  3. Thomas Jackson permalink
    14 July 2009 3:45 am

    This is the most ridiculous and laughable analysis I have ever seen. Please explain the rioting that occurredin the prior panics, as depressions were called priuor to 1929. Widespread rioting simply didn’t occur.

    Government intervention has always been mistaken. late, and misguided.
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    Fabius Maximus replies: Is the 19th century the basis for all your forecasts? Odd, very odd. For example, how many race riots were there in the 19th century? There were many more in the 20th, even before the late-1960′s “days of rage” (76 in 1913-1963). Often with troops called in to maintain order.

    Social disorder such as riots are a staple of US history, with many causes. Often in waves with mixed causes, such as the 1834-35 period. Unions were outlets for much of the economic stress in the period between the Civil War and WWII (rational violence), with strikes among the most violent episodes during this period. The military was repeatedly used, as in the 1892 Homestead Strike, the 1894 Pullman Strike, and the Colorodo Labor Wars of 1903-05.

    “Government intervention has always been mistaken. late, and misguided.”

    Preventing disorder was a major concern during the 1930′s, one spur of the New Deal relief programs. We came close many times, such as during the 1932 bonus march. Again, much of the economic stress was channeled through unions — often with violent results.
    * The 1931 UMW strike in Harlan Country, a gunfight in which 3 deputies and 1 miner died (about which an excellent documentary was made).
    * “Bloody Thursday” in the 1934 West Coast waterfront strike, 2 strikers killed.
    * Memorial Day massacre of 1937 — Chicago Police killed 10 demonstrators during a US Steel strike.

    As many economists have warned, a long recession might produce levels of bankruptcy and foreclosures like the 1930′s, due to our higher household debt levels. Also, unlike the 19th century people today expect government aid — perhaps unrealistically. Nobody can say what might result.

    To assume that this pattern of millenia cannot occur here is bizarre, although the form it takes will reflect the unique aspects of our time — as it did in earlier times.

  4. 14 July 2009 6:05 am

    In the Depression, FDR challenged the oligarchs, which almost got him deposed by a coup, followed by a move toward socialism, followed by WWII, followed by recovery. We don’t know what happens when the politicians start out by giving the oligarchs everything they want, as seems to be happening now. I suppose if Russia is any example, they quickly end up owning everything, followed by emergence of a strong man, who quickly takes it all away, with social disintegration , depopulation, and rule by threat and intimidation. For sure, leadership matters. What Obama does, and when, will be highly determinative. It’s past time for him to publicly abandon his policy agenda, announce the economy is his only priority, and take on the oligarchs.
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    Fabius Maximus replies: Please, rein in the exaggerations. The Butler conspiracy did not “almost depose” FDR.

    Second, Obama has shown himself to be a cautious center-left guy. Unless forced by events, I doubt he will “take on” any US power center.

  5. Tibby permalink
    14 July 2009 7:12 am

    Government action will put the country deeper in the hole.

    What is different now from the great depression is immigrants are still allowed to flood into the country. They are still handing our H1-B visas. They just announced a huge number of Palestinians living in Iraq will be resettled in the US (“Risking Israel’s ire, US takes 1,350 Palestinian refugees”, CSM, 7 July 2009). Does it sound like a government that cares about its unemployed?
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    Fabius Maximus replies: There are 300+ million people in the US. What difference does another thousand make? As for immigration, the weak economy is reducing that problem. There are even indications many are going home (remittances in May down 20% YoY).

    “Government action will put the country deeper in the hole.”

    That sounds you’re speaking ex cathedra. Certainly not based on any economics — or concern about human suffering. That reply to a post about unemployment insurance payments is one of the most callous comments I’ve seen on this site.

  6. pluto permalink
    14 July 2009 11:55 am

    Excellent post, FM.

    One of the (apparently) little-known facts about the Obama “stimulus” plan is that 2/3 of the program was spent on extending benefits for the unemployed and other non-stimulus funding. I am sure that this has done much to avoid the Depression-like conditions that everybody rightly fears.

    The current conservative complaints about the stimulus package are pure politics and devoid of facts (to be fair, so was the hype that Obama used to get the package passed). The primary tool of the stimulus portion of the package is the states infrastructure-related projects. This is a good idea but the states move SLOWLY and the bulk of the stimulus won’t be spent until next year.

    If you want to better understand why the states move so slowly on infrastructure projects, consider the scale of the average bridge. You’re ordering tens of thousands of tons of specialy shaped steel, enormous quantities of specially formulated concrete (both of which need to be stored someplace until they can be used), hire hundreds of workers with special skills, and put an appropriate oversight and regulatory system in place for the project to ensure that the taxpayers money is spent as intended and that the bridge is safe to use.

    When you place the orders for the supplies your are competing with 49 other states for the attention of your recession-stung suppliers (who are trying to decide whether to risk hiring laid-off employees that they may have to lay off again if the economy continues to be dicey).

    Your contractors and architects request extra time to put in their bids because they are desperate and are trying to figure out how low they can bid and still make money (contractor bids are coming in 20-30% below bids that were made a couple of years ago). A number of contracting firms are actually bidding slightly below cost because they need the money so desperately (and are probably hoping for cost overruns).

    The states can tackle additional projects because the contractors and architects are bidding their work so much cheaper but that involves further planning and the state legislatures to set priorities. Well, you get the idea from there.

  7. 14 July 2009 12:07 pm

    There’s a huge hole in this analysis: this “crisis” was almost wholly created by “government action.”

    Even Congress’ own report shows that the precipitating factor in the housing crisis was government mandates on banks to issue bad loans to people who were never going to be able to pay them back. Combined with the myriad other distortions in the marketplace created by ill-advised government regulations, and your argument for more government action becomes not just silly, but downright dangerous. Perhaps a whole lot more economic knowledge and a whole lot less Leftist ideology would serve your analysis skills in the future.
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    Fabius Maximus replies: First, you refer, I assume to “The Role of Government Affordable Housing Policy in Creating the Global Financial Crisis of 2008“. It was not “Congress’ own report.” It was a report of the Republican members of the House Oversight and Government Reform Committee. It also contradicts the findings of every other study of the subject, most done by far more impartial and expert groups. For links to some of these, click here.

    Second, this post does not discuss causes (that’s done in other posts on this site; see the links at the end). It discusses responses, fire-fighting. If you disagree, perhaps you should organize demonstrations against the extended unemployment insurance. Perhaps urge your candidates to campaign to abolish it! That would be a service, taking you all out of the American political mainstream — so the rest of us can get on with the tasks at hand.

  8. JCD permalink
    14 July 2009 12:22 pm

    Totally, completely wrong from start to finish, what a complete joke! There will be NO recovery until the debt is defaulted or paid back – period. It’s the debt, stupid! Why don’t you read what real market analysts are saying, not the bubblevision crew on CNBC and all the other assorted liars.
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    Fabius Maximus replies: Another comment by someone who did not read the report. This discusses the past, and does not predict the future. Looking forward, all I said in this post was “almost anything can happen in the next year. There are no strong historical precedents for our situation, and we are beyond the limits of conventional economic theory. We might have a strong recovery, or a dramatic collapse — or anything in between.”

    Also, debt deflation is rare and not well understood — so there is no basis for certain forecasts like yours. For more about this read this intro to debt deflation: Debt – the core problem of this financial crisis, which also explains how we got in this mess.

  9. LarsPorsena permalink
    14 July 2009 12:45 pm

    “One of the (apparently) little-known facts about the Obama “stimulus” plan is that 2/3 of the program was spent on extending benefits for the unemployed and other non-stimulus funding.”

    The only fact about stimulus bill is that no one knows what’s in it. Rushed through without review or debate because without it unemployment would exceed 8% ,or so we were told. How’s that working? It’s a thousand page pork-packed gnostic gospel for the dirigiste.
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    Fabius Maximus replies: Total nonsense. Although that was so when it was voted upon, since then it has been subject to extensive analysis. Wikipedia has a brief, clear analysis.

    “or so we were told.”

    All economic forecasts are unreliable, as the global economy is too large and complex. People insist on them, so economists write them. These don’t provide a useful benchmark for anything.

  10. Boca Condo King permalink
    14 July 2009 12:54 pm

    Has anyone calculated the effect of underground (illegal immigrants and other cash only workers) employment and it’s effects? A tremendous percentage of the construction work done during the bubble was done by underground workers. They are not applying for unemployment and may have moved back to their home countries. Never in the system then, not in the system now.

    Funniest part about the grapes of wrath is that the ag work the Joads were so ‘exploited’ with, was held by legal guest workers from Mexico who were sent home to provide jobs to Americans. (who then whined about it) Perhaps if we really did control our borders, immigration could be used as another buffer to help workers during downturns.
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    Fabius Maximus replies: It’s a great question, and I’d like to see such an analysis!

  11. Frew permalink
    14 July 2009 12:57 pm

    Stimulus spending is helping the situation? How and where? You don’t really make a case for the stimulus spending or its effectiveness per se. You credit unemployment insurance with stabilizing the situation, which is fair enough. But that extending unemployment benefits was in the stimulus bill does not make it stimulus spending, and conflating unemployment insurance (which was largely already in place) with stimulus spending is misleading. Conflating opposition to stimulus spending with opposition to unemployment insurance is dishonest. Believe it or not, it’s possible to be happy with one government spending program and be critical of another that doesn’t look like it will work.

    Even the most ardent fan of government programs will admit that unemployment insurance is a temporary, stop gap measure. If the economy does not improve then we’ll just be in a bigger pickle. With a government so hostile to business, so eager to raise taxes, so ardently in favor of regulating everything out the wazoo, I don’t expect the economy to get better in the foreseeable future.
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    Fabius Maximus replies: In the dozens of articles I’ve written about the crisis I’ve clearly said that government efforts mitigate the downturn and reduce the resulting suffering. That’s all, but that is important. You seem to feel that anything less than a full cure is not worth doing. I’ll bet you have a different view when talking with your doctor.

    “I don’t expect the economy to get better in the foreseeable future.”

    Since the best economists, with massive econometric computer models, cannot reliably forecast the economy — why do you believe that you can?

  12. LCTSI permalink
    14 July 2009 1:06 pm

    Point #2 seems to utilize some very narrow measurements. PDI increased 1.9% in May 2008. Just looking, it seems as if it increases *every* May. Even then, the 2009 DPI increase is down almost 25% when you look at it from YoY. Not really mild at all.
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    Fabius Maximus replies: First, DPI is seasonally adjusted. You cannot infer patterns without some heavy statistical analysis. Second, a 25% change in YoY percent change is common, hence mild. For example, going from 4% to 3% inflation or GDP is routine.

  13. Steve permalink
    14 July 2009 1:18 pm

    This article is just another variation of Obama’s “I know that the economy is swirling around a toilet bowl since I became President, but things would have been a lot worse if I hadn’t bailed out the fat cats at Goldman Sachs, and saved the automotive unions by destroying the secured creditors. Oh… hey… and don’t forget the $700MM that went to Asia for those digital TV signal converters boxes. How would poor people get the state-run media disinformation if I hadn’t done that? Huh?”

    How would it be worse? Obama’s ratings would be in the toilet. Oh, the humanity!
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    Fabius Maximus replies: I suggest reading the post, which you obviously did not. To give just one proof: in this post the bank bailouts are called “theft”, “bailing out the fat cats on Wall Street.”

  14. CleanthesBrule permalink
    14 July 2009 1:23 pm

    We’re walking in the air, floating on the moonlit sky. As long as the air conditioning and video games last, there won’t be riots. Once either of these fails, there will be riots. The “stimulus” has little to do with it one way or the other. Government sclerosis continues willy nilly and regardless of party.

  15. 14 July 2009 1:36 pm

    Wasn’t the Stimulus Supposed to Create jobs? Oh, wait, here the the new memory hole bulletin from Big Brother… The Stimulus was never about creating jobs or affecting unemployment rates, it was about funding unemployment insurance ( yeah, yeah, thats the ticket!) anyone who fails to say so will be shot in the streets.

    So do we get riots when the stimulus money for funding unemployment runs out and Obama’s political cronies spend their spoils, and there still are no jobs because the people who would have created those jobs are now paying higher taxes to pay for those unemployment checks and corrupt payoffs? Just asking…
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    Fabius Maximus replies: Most of the stimulus spending to date was tax cuts, social benefits (e.g., extended unemployment benefits), and aid to States (whose budgets have been trashed by the downturn).

    Little has been new program spending, which ramps up very slowly. The future effect of such spending, which is the “stimulus” part of the stimulus bill, is unknown. For an analysis of the different theories see “Fighting Downturns with Fiscal Policy“, Economic Letter of the Federal Reserve Bank of San Francisco, 19 June 2009.

  16. smitty permalink
    14 July 2009 1:37 pm

    “Doing almost nothing (except tax cuts) has almost become the official policy of the Republican Party, and libertarian sites such as the Instapundit frequently run articles mocking the government’s stimulus programs.”

    The last hundred of years of Progressive centralization should have been fought tooth and nail on Constitutional grounds. Diminished moral hazard could have mitigated much of the current crap (e.g. Fanny Mae/Freddie Mac, SSA, Medicare). A strong Tea Party bulldozer may yet save the future.

  17. hoipolloi permalink
    14 July 2009 1:39 pm

    The only thing I get out of this is the extended unemployment benefits have mitigated the immediate effect of higher unemployment. However I am not at all convinced that means the recession is having a “mild effect.” It all depends on the duration of the recession and whether the unemployed find jobs before their benefits run out. Obama has attempted to spread out the recession over the course of the next decade+. That works if hte recession is short. We’ll see.
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    Fabius Maximus replies: Then you must not have read it well. Government action — mostly extended benefits — have mitigated the downturn in consumption (and more broadly, GDP).

  18. 14 July 2009 2:14 pm

    FM note:

    Many people making comments do not understand the role or operation of government spending as an economic stabilizer. For a briefing on that please see Everything you need to know about government stimulus programs (read this – it’s about your money).

    What is driving this recession? For a brief description see Debt – the core problem of this financial crisis, which also explains how we got in this mess (22 October 2008).

  19. 14 July 2009 2:16 pm

    I don’t want to make these decisions. But the possibility remains that you have to let things get worse so it can get better. If the problem is too much debt, government borrowing to sustain an economic level that can’t be sustained seems like it is delaying the inevitable. It seems the pre-Great Depression pattern was financial meltdown, a lot of pain, and then return to growth. We may just be extending out the pain over a longer period to make it less extreme in the short-term.
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    Fabius Maximus replies: Why not put your theory into action? Go to you local unemployment office, put down a soapbox, and preach your theory of “cure through pain” economics!

    Government spending is a palliative, mitigating the downturn and reducing the inevitable suffering. Do you refuse painkillers during surgery?

  20. Marker permalink
    14 July 2009 2:21 pm

    Ummm, wouldn’t the fact that the increase in unemployment is outpacing the decrease in GDP compared to previous recessions be a sign that maybe the recovery legislation has screwed things up worse than usual?
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    Fabius Maximus replies: The decline in US unemployment is consistent with the magnitude of the global recession. The stimulus spending to date is too small to have “screwed things up.”

  21. MattJ permalink
    14 July 2009 2:31 pm

    This is a very odd post. Usually, I think of you as one of the more pessimistic long-term thinkers I read. And yet, you seem surprised by the widespread opposition to the government actions mitigating the effects of the recession. I do not believe that the government is doing anything to actually fix our long-term problems; what they are doing is keeping the masses pacified while shifting the losses from those who deserved to take them to the taxpayer and dollar asset holders in general.

    Eventually, the government will be forced to stop the actions that have been mitigating the effects of the recession, and then all the pain that they have been delaying will come upon us; the difference is that we will have massively increased our national debt and reduced the value of the dollar, with little to show for it.
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    Fabius Maximus replies: Lots of hard-hearted people commenting here, very unrepresentative of America.

    “keeping the masses pacified while”

    I think few Americans would classify aid to the unemployed in this manner. Fortunately. Perhaps you should stop by your local church this Sunday.

    “the government will be forced to stop the actions that have been mitigating the effects of the recession”

    That is possible, as I briefly mention in this post.

  22. William Crim permalink
    14 July 2009 2:35 pm

    One added benefit is 2-income families. Whereas a one-income family falls down hard if the father loses his job, a two-income family can limp along on one income(or one income + Unemployment). More, and more useful credit helps also. Now you can use credit cards and line of credit to purchase a wider range of services. Also, most places let you pay your bills on credit cards. I calculated that I could cover all my “bills”, including my mortgage payment, for almost 9 months based on the credit I have available. Previously a family would only get into debt using store credit or installment payments, which is more like a gift certificate to Wal-Mart.
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    Fabius Maximus replies: This is backwards, as work by the Levy Institute clearly shows. In 1980 when one spouse lost {his} job, both could seek work. Even low income part-time would help. Also, they had high savings and low debt — which allowed a longer period of reduced income before bankruptcy.

    Also, as many are learning today, credit lines get cancelled during a recession — both credit cards and HELOC. Gone when they were most needed.

  23. 14 July 2009 2:35 pm

    FM: “This is sad, people protesting the government actions that mitigate what would otherwise be a horrific downturn. That does not mean the stimulus was well-designed (it was childishly poorly done), or that the accompanying theft was good (bailing out fat cats in the financial sector).

    I have never seen anyone at a tea party protesting unemployment insurance. Maybe there was a crank or two but mostly they were protesting what you rightly called “bailing out the fat cats on Wall Street.”

    Ironically, things are likely to get worse because it is the stimulus that is holding up the market. If Republicans make significant gains in the House then there will be no more stimulus and the economy will correct the excesses it has built up rather quickly. (Whether this is good or bad is debatable.) Obama will not win reelection if the economy tanks in 2011. In summary, the Republicans will accelerate deflation if they win in 2010 and it will cost Obama the presidency. Bwahahahahaha.
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    Fabius Maximus replies: Perhaps you did not ask. Since there are few or no statements of the tea party program, who can say what they’re protesting. But look in these comments and you’ll see lots of people protesting unemployment insurance.

  24. LCTSI permalink
    14 July 2009 2:36 pm

    If a significant YoY drop is simply normal, how is it that selecting a shorter time frame illustrates the efficacy of the stimulus programs? Somehow the YoY drop doesn’t illustrate anything, but the .2% month-to-month statistic does? I was even giving the benefit of the doubt and including the tax incentives and social programs into the YoY drop, and the increase was still down 25% YoY.

    Furthermore, some accounts of the stimulus spending put it at 3% of the 787B in mid-May. That’s only $23.61B in 3 months. How could that amount of money have such a profound stabilizing effect on the economy?
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    Fabius Maximus replies: The recession started in December 2007. The first major stimulus programs was signed on 13 Feb 2008: the Economic Stimulus Act of 2008 (aprox $150 billion, mostly tax rebates; see Wikipedia). There have been many new programs at the State and Federal level since then, of which the bill Obama signed on 17 February is just one. Also — I don’t understand what you are saying about DPI; the BLS analysis seems quite clear.

  25. 14 July 2009 2:38 pm

    The problem with the “stimulus package” is that it’s name was a false advertisement. Had they simply called it a “bridge package,” many of the criticisms would never have been levied. Was spending on unemployment, Medicare, and Medicaid necessary to prevent widespread misery and larger downstream problems? Of course. But is the administration’s plan an efficient & timely way to light a fire under the private sector and create jobs? Not so much.
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    Fabius Maximus replies: You must be new to America. Almost all legislation is mislabeled and oversold. Aso for the creating jobs, I have discussed this dozens of times on this site — and on this thread. That misses the point.

  26. 14 July 2009 3:06 pm

    I agree with what geoff said. The stimulus package doesn’t seem to be doing much stimulating these days, but there are plenty of job openings in DC! Maybe we should all move there.

  27. T J Sawyer permalink
    14 July 2009 3:13 pm

    Some great charts and analysis. Now, look at those unemployement claims again and think about this. State unemployment “insurance” (it’s actually a tax, not insurance) rates are set for next year based on the experience this year. In early December, most businesses are going to be receiving notice of a large tax increase to be assessed beginning in January. Some will see their rates go from 3-4% to 8-10% (of the first $20,000 of annual wages). Think this might make a difference to the economy in the first quarter of next year?

    Can you say “double-dip”?
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    Fabius Maximus replies: You might be too optimistic. We might not get a bounce from which to dip again.

  28. mtjy permalink
    14 July 2009 3:15 pm

    A concern jumped out to me when looking at the graph “Percent Job Losses in Post WW2 recessions” most of the job losses & recoveries where U or V shaped in recessions before 1990. Are slower recoveries a by-product of shifting from an industrial economy to an information/consumer based economy? In this recession many of those “soft” industries have been wracked by job losses with little or no outlook for recovery any time soon. If you look at the 2001 recession job recovery took almost 30 months before trending back upwards. I did a little quick back of the napkin projections and job recovery time for this current recession is anywhere from 90 to 150 months (7.5 – 12.5 years!) from the start of the current losses before a major shift upwards. Let’s hope not.
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    Fabius Maximus replies: This is not a recession like any since WWII, which were caused by excess inventory and/or Fed action to fight inflation. This is debt deflation, which creates a very different set of dyanmics.

  29. screwthegov permalink
    14 July 2009 3:39 pm

    I think this article is the economic equivalent of “well, no one I know voted for that guy”. In certain circles people seem to be wondering what all the fuss is about, since no one they know is getting shafted.

    Roughly 90% of the people I have more than a passing aquaintance with are unemployed. Friends and from high school, undergrad, graduate school, and former jobs. This is roughly 80 people from various fields.

    A lot of us have student loans. We keep getting letters in the mail informing us that, because Maximum Leader Obama passed some new “guaranteeing education for Americans” act or some such bullshit, that our loans have been purchased by the Dept. of Education. Instead of dealing with my regular loan servicer, I now have to deal with a nightmarish DMV-like bureaucracy to repay my loans. The Dept. of Ed. puts far more restrictions on forbearances and deferments, so that as a recent graduate I have no job and a massive student loan payment I cannot possibly meet, with no ability to defer while I try to find work.

    Normally changing the terms of a loan after the fact would be illegal, but apparently it’s not illegal when the government does it. A lot of us are very screwed and very, very angry – and to add insult to injury, the entire loan-buying program is nothing but a tool to let the government hemorrhage more money. This benefits no one, save for possibly the banks.

    These people need to be taken out back and shot. I am not the only one nearing the point where this bullshit will cost me everything.

  30. 14 July 2009 3:50 pm

    “Aid” mitigated problems? What “aid”? Do you mean the additional loans provided by the Chinese and OPEC?
    Umm – dont those loans have to be paid back? The problem is obvious – we no longer create WEALTH – and that is done by mining, drilling, farming, and manufacturing. The so called service economy is our demise.
    .
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    Fabius Maximus replies: “Aid” in the context of this post means support for the unemployed. For further information I suggest going to your unemployment insurance office and talking to the people in line.

    This is also a small fraction of government expenditures, and probably the part with the largest impact. Hardly the cause of our government deficits. Your last sentences are incorrect, but beyond the scope of this post to correct. But if we “no longer create wealth”, how can our exports have increased as a % GDP for the past 30+ years (see here)?

  31. geoff permalink
    14 July 2009 4:00 pm

    FM: “Almost all legislation is mislabeled and oversold.

    And derided when it fails to live up to its advertising. But in this case, the Obama administration pitched it as a jobs creation bill (as they have with the C&T bill). In that regard, they have earned the abuse they are receiving.

    FM: “Aso for the creating jobs, I have discussed this dozens of times on this site — and on this thread. That misses the point.

    At least part of your point was questioning why conservatives & the GOP are so harshly criticizing the stimulus. Job creation is the reason.
    .
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    Fabius Maximus replies: All good points, with which I agree! They should bear the consequences of mis-representing their legislation. Still, the Republicans are moving into demagogy, dangerous territory, with criticism so broad as to include necessary support measures for the unemployed. They’re acting as did the gay activists who fought necessary public health measures to limit the spread of AIDS.

  32. 14 July 2009 4:22 pm

    I think this post should be modded as a troll. You concentrated on two small portions of the stimulus bill and said that the government was doing a good job reining in the recession. As someone who reads a bit of economics on the side I realize that the government probably has to run a deficit during times of a recession. However passing a stimulus bill that spends the majority of the money after we will have likely have recovered is not the way to go. Tax cuts offer a much better way to grow the GDP, and to recover jobs. If you want to look at unemployment look at what happened after Regan cut taxes and what happened after FDR spent a lot of government money. The tax cut created more jobs for Regan and FDR eventually had a double dip. Yes this is an over-simplification but no more so than your post.
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    Fabius Maximus replies: A very odd comment. For starters, this is my site. I can write whatever I please, without being a troll. If you don’t like it, go away.

    “said that the government was doing a good job reining in the recession”

    Do you have supporting quotes? I’ve been very critical of the Bush and Obama policy measures (they’re almost identical).

    “spends the majority of the money after we will have likely have recovered is not the way to go.”

    Talk to the other folks commenting, who believe (know!) that the recession will continue a long time. I lack the certainty of both you and them, as I said in this post. At the very least, most economists believe that unemployment will continue to increase into 2010.

  33. Frew permalink
    14 July 2009 4:23 pm

    Also spracht FM: “You seem to feel that anything less than a full cure is not worth doing.”

    Unemployment insurance is worth it, but we are in a jam if the economy doesn’t pick up in a reasonable amount of time is my point. Effective action to promote recovery would seem to be in order.

    Also spracht FM: “Since the best economists, with massive econometric computer models, cannot reliably forecast the economy — why do you believe that you can?”

    Can I at least point out that with the government beating up the business community with populist rhetoric, throwing up obstacles in the way of regulations, and threatening to increase taxes that a recovery is made more difficult? It seems like a common sense thing to say.

    According to Keynes, the whole point of stimulus spending is to inspire investors to invest. All things being equal that probably works, but with the government going about the above the investors aren’t going to be doing anything but hiding under their beds.
    .
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    Fabius Maximus replies: Your first point mirrors what I said in this post. What’s your point? Your second point seems quite exaggerated, and is unrelated to my point about your forecasting ability. Your third point misrepresents Keynes. Maintaining aggregate demand during a downturn is the key point, not “inspiring investors to invest.”

  34. ian permalink
    14 July 2009 4:24 pm

    So the stimulus plan only looks like a collosally expensive failure because without it the recession would be soooo much worse? That’s original. Is their a silly latin term for hack that you can change your name to?
    .
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    Fabius Maximus replies: Unlike video games, economic policy measures take anywhere from 2 to 4 quarters to take full effect. Your comment is absurd.

  35. BunnyMomRocks permalink
    14 July 2009 4:36 pm

    “The answer is government aid: the automatic stabilizers and the stimulus programs. The government enacted these programs faster than in previous recessions and on a larger scale. They have buffered the longest and by most measures deepest recession since the 1930’s (vividly shown by this graph). ”

    The graph you link to shows data since WWII. It has no data from the Great Depression and the comment you make of “longest and by most measures deepest recession” are not substantiated. I understand the need to compare the current recession to the big boogie-monster of the Great Depression to scare the rubes. However saying that the current recession is the largest since the Great Depression speaks nothing of the magnitude of the two events. It merely says they adjoin each other on a list. But are they even of the same magnitude? No. The current recession is on the order of magnitude of recessions since WWII – as substantiated by the graph you linked to. The Great Depression was an order of magnitude LARGER. There really isn’t a comparison but how will you scare someone when you compare the current recession to one from 1948 (which most people don’t know about)?

    As the old saying goes, “There are three kinds of lies: lies, damned lies and statistics.”
    .
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    Fabius Maximus replies: This comment makes no sense at all. First, I link to five graphs to substantiate my point. The graph shown in the post is not one of these. Second, to show “worst since the GD” I do not need to show the GD.

    “But are they even of the same magnitude?”

    No, they are not. ‘Worst since the GD’ does not mean ‘similar to the GD.’

  36. Tatterdemalian permalink
    14 July 2009 4:41 pm

    Nothing like posting something the regular readers don’t want to hear to bring out the drama. Personally, I still think the Obama stimulus package is a big mistake, tied as it is to policies that ensure the policies that led to this receession are not changed and thus the market does not correct itself, as opposed to the Bush stimulus which required that its recipients change their policies.

    But that’s my opinion, and hopefully I’m wrong about it, because it sure looks like the current administration is going to head in that direction even if it’s straight over the edge of a cliff. Obama is the President, and apparently that means we must obey him.
    .
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    Fabius Maximus replies: While I agree with your first sentence, to what Bush policies do you refer? The Obama measures are broadly similar to those of Bush, esp in their focus on bailing out the banks.

  37. Kevin permalink
    14 July 2009 4:46 pm

    Well, I read your post and went back through some of the supporting documents, and I still don’t get your point. Extending aid to unemployed is laudable, which I support. Protesting at Tea Parties the waste built into the stimulus (and future deficits envisioned by this Administration) is also laudable.

    You yourself make the case the stimulus was poorly concieved and implemented, why you would choose to mock those who express those thoughts in the public square is beyond me.

    Mellon was right. The system you are supporting is an unsustainable mess of political corruption and financial greed. It is stripping away the entrepanurial(sp) base of the country (re: Schumpeter) and replacing it with the socialized interests of the monied and well connected.

    Yes, extend unemployment. Yes, allow the debts to be expunged, paving the way for deflation. The end result will be better then the narcoleptic future your cure seems to leave in store for us.

    Asserting that ‘politicians’ won’t make these changes out of self interest is meaningless. That does not mean the policies they come up with are either ‘right’ or ‘good’. It means they are acting out of THEIR SELF INTEREST. And the interests of those who pay to have them installed.
    .
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    Fabius Maximus replies: I don’t understand any of this. You obviously don’t like our “system”, whatever that means. But the rest is a rant, wild unconnected statements. What does it mean “debts expunged”? Who expects politicos (or anyone) to act on a basis other than their self-interest? And, best of all, you’re saying “Andrew Mellon was right”? Whatever, dude.

  38. Michigan Man permalink
    14 July 2009 4:50 pm

    The stimulus is not being spent now because it was passed with an eye to buying votes in 2010 and maybe 2012. As for doing nothing tax cuts work and work better than gov’t payments. Unemployment may be padding consummer spending but the cost will be inflation and chronic debt.
    .
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    Fabius Maximus replies: It’s absurd to say that the cost of unemployment benefits will cause inflation and chronic debt. Total food stamps is roughly $44 billion/year (32 million at $111/month). The cost of unemployment benefits is roughtly $100 billion/year (6+ million people with average weekly benefit of $300). Pocket change to the US government — and to America’s $13 trillion/year economy.

    “The stimulus is not being spent now because it was passed with an eye to buying votes in 2010″

    Do you have any evidence for this? In America infrastructure programs take time to plan and execute.

  39. 14 July 2009 5:48 pm

    The depression didn’t have a huge horrific effect on America immediately either. It was more than a year before some parts of the nation even noticed black Friday; if you weren’t a huge investor or businessman it didn’t touch you for a while. Economies have a lot of momentum, they take time to really take effect. People have savings, businesses have some resources they can dip into, you can still get loans and keep going a while. The depression we know and saw took a year or more to really start to impact peoples’ lives in most areas, it started out awful for some (see Michigan today, for example), but it hit everyone but the most rich and the federal government, eventually.

    Get back to us this time next year and tell us how light the effect on America is.
    .
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    Fabius Maximus replies: Nice of you to agree with me (assuming you read the post). If we do not get a recovery in the 2nd half of 2009.

    “Get back to us this time next year and tell us how light the effect on America is”

    OK, I was wrong. You obviously did not read the post.

  40. LarsPorsena permalink
    14 July 2009 6:00 pm

    “Maintaining aggregate demand during a downturn is the key point, not “inspiring investors to invest.” I’m sure Secretary Geithner whispers that in the President’s ear every day. And he will keep whispering it, until unemployment hits 13%.
    .
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    Fabius Maximus replies: This makes no sense, either as economics or political criticism.

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