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Update: why has the worst recession since the 1930′s had so little impact on the economy?

Larry Kummer, Editor

Summary:  The US economy continues to slow, albeit the rate of decay has slowed.  But the net damage is severe and a recovery soon is imperative — or more “black swans” will appear.   This is the third in a series of posts about the effects of basic automatic stabilizers on the economy during this recession.

(1)  Why has the worst recession since the 1930’s had such a mild effect on America?, 14 July 2009
(2)  Economists discuss the impact of the stimulus on our recession, 6 October 2009

Conservative websites are abuzz with comments about the failure of the stimulus programs.  It’s a dingbat kind of analysis, playing partisan politics during such a severe crisis.  Without these programs (poorly structured as they are) the economy would in a far worse hole, with far greater suffering. 

Of course these programs were mis-sold to the public, since our ruling elites (“both” parties) are compulsive liars.  Government aid cannot end recessions.  It serves only to mitigate the downturn and reduce the inevitable suffering.  The heavy lifting among these tools results from unemployment aid, Medicaid, and food stamps — focused on those that have suffered loss of income.  See the above 14 July post for details.

As the following graph shows, the impact of this downturn on US families would have been horrific without government assistance programs — esp as we went into this downturn with record low savings and record high debt.  The dotted red line shows BLS’s newly revised job loss estimates (corrections to their inexplicably over-optimistic monthly numbers).

 

An even broader hard number showing the loss of worker’s income is aggregate hours worked (non-farm private non-superviosory workers).  That’s down 8.5% since the recession started in December 2007, larger than the almost 6% loss of jobs.  The job market might take many years to recover, as desribed in this report:

Job losses are only one metric describing recessions.  Duration of the recession and decline in GDP are also important.   By almost every metric this recession will be the worst sinc the 1930’s — worse even than the horrific ones in 1973-75 and 1980-82. 

To compare this downturn with the 1930’s see:

Conclusion

Time and debt are the two major factors ignored by current Keynesian theory, and the econometric models built on it.   

After two years of recession, many households and businesses have drawn down their cash reserves, max’d out their credit, and cut expenses to the bone.  If it continues into a third year — perhaps due to holiday sales worse than last year’s — both business and household bankruptcies might rise even more in 2010.  Also, look for still more “black swan” events as key parts of the economic machinery break. 

We need a recovery soon.   Unfortunately we cannot know what lies ahead.  We have no close historical parallels to our situation, and have passed beyond the boundaries of conventional economic theory.  In this key respect our leaders are in a situation similar to that of the Hoover Administration in 1930.  Let’s pray they respond better.

Afterword

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To read other articles about these things, see the following:

Reference pages about other topics appear on the right side menu bar, including About the FM website page.

Posts about theft pretending to be solutions

  1. Slowly a few voices are raised about the pending theft of taxpayer money, 21 September 2008
  2. The Paulson Plan will buy assets cheap, just as all good cons offer easy money to the marks, 30 September 2008
  3. A reminder – the TARP program is just theft, 24 November 2008
  4. Stand by for action – more theft of our money being planned in Washington, 4 February 2009
  5. Update: yes, the Paulson Plan was just theft, 14 February 2009
  6. Now is the time for America to get angry, 24 March 2009
  7. America on its way from superpower to banana republic, 28 March 2009
  8. Bush’s bailout plan is now Obama’s. His quiet eloquence guides the sheep into the pen, 30 March 2009
  9. “The Greatest Swindle Ever Sold”, by Andy Kroll in The Nation, 28 May 2009
  10. More about “Government Sachs” (they own America; we just live here), 31 July 2009

Some posts on the FM website about solutions to the financial crisis:

  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. New recommendations to solve our financial crisis (and I admit that I was wrong), 23 October 2008
  9. A look ahead to the end of this financial crisis, 30 October 2008
  10. Everything you need to know about government stimulus programs (read this – it’s about your money), 30 January 2009
  11. Bush’s bailout plan is now Obama’s. His quiet eloquence guides the sheep into the pen, 30 March 2009
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