GD 2.0

While I claim credit for offering an early and comprehensive vision of how the next Great Depression -- GD 2.0 -- might play out, others have since had a stab at it.

Not surprisingly, most seem hesitant to take matters to their logical conclusion.

Nonetheless, I believe we can always benefit from hearing alternative views about the future, even if they only serve to validate our original perspectives.

The latest example is a Wall Street Journal article by Justin Lahart, entitled "How a Modern Depression Might Look -- If the U.S. Gets There."

In the wake of the biggest financial shock since 1929, economists say the odds of a depression are less than 50-50 -- though still uncomfortably high. But even if a depression comes to pass, a 21st-century version would look very different from the one 80 years ago.

There is no consensus definition for "depression." Harvard University economist Robert Barro defines it as a decline in per-person economic output or consumption of more than 10%, and puts the odds of a depression at about 20%. Many economic historians say the line between recession and depression is crossed when unemployment rises above 10% and stays there for several years.

Recessions and Recoveries

See a graphic to compare the current recession -- and the eventual recovery -- to other downturns and to put the current crisis in perspective.

The current recession, though severe, is not at depression levels now. Unemployment in February was at 8.1%, not as bad as in the early 1980s -- the last time the idea of a depression was being kicked around seriously, when it remained over 10% for 10 months. In the Great Depression it reached 25%

"When you get an unemployment rate of 25%, it's everywhere," recalls economist Anna Schwartz, who is 94 years old and best known for her analysis of the causes of the Great Depression with the late Milton Friedman. "Everyone is conscious of that and fearful. We're not talking in that league at all."

Using the Barro definition, economists in a Journal poll conducted in early March put the odds of a depression at 15%, on average. But there was wide disagreement. John Lonski, chief economist at Moody's Investors Service, put the depression odds at 30% in early March, but better-than-expected news recently has led him to put it closer to 20%. In contrast, Paul Kasriel of Northern Trust put the odds of a depression at just 1% because of the aggressive lending by the Federal Reserve and the fiscal stimulus just beginning to hit the economy. "There are just too many powerful countercyclical policies in place that will prevent the worst-case scenario," he says.

Today's government response is a far cry from the early 1930s, when the Fed raised interest rates, the infamous Smoot-Hawley Tariff Act crushed trade and Treasury Secretary Andrew Mellon's prescription for the economy was "liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate."

"The Great Depression was a mass of policy errors that made it worse," says historian and investment consultant Peter Bernstein, 90. "This time we have our fill of policy errors, but at least they're not making it worse."

Mr. Bernstein lived on Manhattan's Upper West Side during the Depression. "You were conscious of it all the time when you were out in the street," he says. "People looked so threadbare."

The different structure of today's economy means that a modern depression would differ from the Great Depression of the 1930s. Fewer than 2% of Americans working today have agricultural jobs, compared with one in five in 1930. Three-quarters of today's workers are in service-related jobs, which tend to be more stable than manufacturing, compared with fewer than half in 1930.

And then there are the social-safety-net programs that emerged after the Great Depression to blunt the blows. "There were no unemployment insurance, no food stamps, none of the automatic things that maintain some income for people who are out of work," says former Massachusetts Institute of Technology economist Robert Solow, a Nobel laureate. Mr. Solow, 84, grew up in Brooklyn, N.Y., and remembers his parents' constant worry about the next month's money.

With spending on food accounting for a little less than a tenth of a typical family's disposable income today, compared with a little less than a quarter in 1930, a modern depression wouldn't hit people in the stomach as the Great Depression did. Growing up on a Wisconsin farm, Catherine Jotka, 89, remembers taking dried corn meant for animal feed out of the granary and sifting dirt out of it to make corn bread.

Today's cutbacks would be for more discretionary purchases -- cable television, iTunes songs and restaurant meals. And there's plenty of room for trimming, says Victor Goetz, 81, a retired engineer who lives outside Seattle. "This has a whole different feel than anything we had in the 1930s," he says.

Even if the downturn isn't deep enough to be called a depression, the restructuring that it needs to go through means that even after the economy bottoms out, there could be a "lost" four or five years of sluggish growth, says Nobel laureate Paul Samuelson, 93.

As a University of Chicago student during the Depression, Mr. Samuelson remembers attending economic lectures that seemed completely out of step with the times, based on laissez-faire principles that stopped making sense after the 1929 crash. "I was perplexed because I could not reconcile the assignments I got from these great economists with what I heard out the windows and I heard from the street," he says.

Starting in the 1980s, the U.S. saw an extraordinary period of economic quiescence, where growth was steady and policy makers dealt with financial crises handily. Economists began to doubt the possibility of a financial crisis so severe it would upend the economy. And that left them as blindsided as their counterparts when the crisis came 80 years ago.

Comments

[Fu]

I don't understand what's up with the last set of graphs.

Real GDP contracted at a 6.3% annual revised rate in 4Q08. David Rosenberg is projecting an even steeper decline for 1Q09 (-7.2%). Why isn't the line on the graph falling more?

Nonfarm payroll employment is currently 8.1 percent. Rosenberg is projecting 8.6% unemployment for March. Why isn't the line on the graph falling more?

[The Real Deal]

The worst way to understand what's happen now is to listen to economists.

The best way to forecast the economic future is NOT to listen to economists.

And the best way to fix a busted economy is to do EXACTLY OPPOSITE to what economists say.

So economists are useful after all!

[scottt]

Depression on a personal human level is IMHO the result of deprivation of needs to a sufficient degree
that one becomes disfunctional towards meeting other needs that should be attainable , this is where the spiral
starts and reinforces itself .

On a national level of depression , you would think that simultaneous apathy from a significant portion of
the populace would be negated by stronger members of the society who would pick up the slack , and thus , those ppl who's deprivations have caused them to become mal-productive should defer to the less apathetic .

What we need is audaciously hopeful ppl to be allowed to be creative towards deprivation solutions .

Change !

[John Anderson]

One thing I take issue with in the quoted article is the implication that Mellon's advise to, "liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate", was actually followed. It was not followed, far from it, the government became incredibly interventionist and, in my layman opinion, this was one of the most important reasons the Depression went on for so long.

[John SIPAHI]

We shall not go back and check the current situation with the past depression. We can make mistakes easily. Because there is not enough data.

If there were 10 or more depressions in the past,which had similarities, then we could, bu we dont have it, so best way to predict future is to find different approaches and imagine what it might look like..

[nevket240]

Q(Three-quarters of today's workers are in service-related jobs, which tend to be more stable than manufacturing, compared with fewer than half in 1930.)unQ

Where does this Red Nosed Circus Performer think the money the service related jobs steal, comes from???
From the Ag & manufacturing sectors which are not doing to well. Good grief

regards

[Rick]

Did the method of calculating unemployment during the Depression better compare with today's headline number (U-3) or the more comprehensive U-6? While U-3 is only 8.1%, U-6 is already 14.8%. Additionally, were the unemployment numbers during the Depression seasonally adjusted each week?

[Davos]

GDP vis a vis imputations, Hedonics and a bogus deflation factor is off by 30%-40%.

Unemployment is about 19.8% or 19.2%, can't recall, if you listen to John Williams of Shadow Stats.

Why any real economist would use bogus numbers to predict something is beyond stupid.

[DougK]

Comparing unemployment figures between now and the great depression is an apple to banana comparison because the counting criteria has changed.

Also suspect and misleading is the claim that a "typical" family spends less than one tenth of it's "disposable" income on food

[dearieme]

"Victor Goetz, 81, a retired engineer who lives outside Seattle. "This has a whole different feel than anything we had in the 1930s," he says". How would he know? The 30s ended when he was 11. Bah!

[Hambone]

I would say that different areas of the country are experiencing different levels of pain.
It is mostly an agricultural area around here and we did not have the bubble in housing as they have elsewhere.
I still have difficulty getting a table in a good restaurant here and the fast food places still have help wanted signs in the windows.
At this stage of the game if someone asked me if I thought it was as bad as the early 80's I would have to say no.
Do I believe it will get as bad around here as Michael Panzner predicts?
Absolutely, but just not yet, although the local car dealers are beginning to squirm.

[rusty]

I can't say that any of those eminent economists were convincing. AT ALL.

Was there anything like the derivative beast in the late '20s?

And the fact that so few workers work in agriculture seems to me a net negative for today as compared to back then.

But it's a great question. This will be a "postmodern" depression. There is so much STUFF everywhere - it will all be used to barter.

Industry will become about making resources and goods stretch further, not in producing new goods. I think everything from abroad will be too expensive for Americans.

Throw Peak Oil into the mix and all bets are off.

Again, the biggest question mark is agriculture. If we can feed ourselves I think we can make it through this period without an outright collapse.