Why Today Is Like 1932, Not 1982

At the NYTimes.com, David Leonhardt crunches the employment numbers:

The job market is getting ever closer to the depths that it reached in 1982. Since the start of 2008, the economy has lost jobs at a steeper rate than at any other point in 50 years . . . the decline is worse than it was at any point during the deep recessions of the mid-1970s and of the early 1980s. . . . The job market still is not in as bad shape as it was in 1982, because unemployment entering this downturn was somewhat lower than it was in 1981. But itís getting close.

[More . . .]

The governmentís broadest measure of unemployment and underemployment was 14.8 percent in February. . . . The Labor Department did not keep such a statistic in the early 1980s. But it likely would have been in the neighborhood of 17 percent back then. (Awhile back, I created a similar ó though slightly narrower, for reasons of historical consistency ó measure, with help from Labor Department economists. It peaked in 1982 at 16.3 percent in December 1982; it was 14.1 percent last month.)

So itís still too early to call this the worst recession since the Great Depression. But itís bad, and itís still getting worse at a rapid rate.

Leonhardt is an economist and I am not but I disagree with him when he says it is too early to call this the worst recession since the Great Depression. The reason is one that Krugman has taught us for a while now - during the 1981-82 recession, interest rates were relatively high and the Federal Reserve could stimulate the economy by lowering them (which it did.) Today, interests rates are at virtual zero - monetary policy simply can not help us anymore. As Krugman explained in a blog post he titled "Return of Depression Economics":

I was alerted to this Media Matters post, revealing that people still donít get why the current slump is different from the early 1980s, and why fiscal policy is necessary this time. Yes, I know, itís Joe Scarborough; but still Ö Anyway, itís the zero lower bound, stupid. . . .
What does Krugman mean by the "zero lower bound?" He explained it here:

. . . I wrote down my original liquidity trap model starting from a firm belief that the liquidity trap was nonsense: even if the interest rate is zero, I thought, increasing the money supply must raise demand. So I set out to write a model with all the iís dotted and tís crossed, so as to demonstrate that point ó and found, to my shock, that the model actually said the reverse.

What comes down to is this: once youíve pushed the short-term interest rate down to zero, money becomes a perfect substitute for short-term debt. And any further increase in the money supply therefore displaces an equal amount of debt, with no effect on anything. Period, end of story.

Now, maybe the central bank can do other things, like buying long-term debt or risky assets, which will have an effect. But thatís because the central bank is taking some risk off the private sectorís hands. It has nothing to do with increasing M, per se.

In 1981-82, Paul Volcker could and did lower interest rates by increasing the money supply and this had a very beneficial effect on aggregate demand, as expected. Ben Bernanke simply can not do the same thing. There is no interest rate left to cut (no matter what the credit card companies are charging you.)

There is only one way to raise aggregate demand, both in the United States and in the world, through government spending. Some spending will be more stimulative than others and we can argue about what type of spending the government should be doing, but there can be no rational argument (as opposed to silly Limbaughian/McCainian nonsense) about one thing - that the economy of the US and the world economy needs massive government spending right now to stave of a long economic depression.

Speaking for me only

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    In 2008 we had (5.00 / 2) (#5)
    by SOS on Fri Mar 06, 2009 at 11:11:10 AM EST
    6 marginal tax brackets topping out at $357,700. In 1954 we had 24 marginal brackets and rates ranging from 20 - 91%. Notice how when we had progressive rates on the very rich, we built the world's finest road, utility, education, space, and science infrastructure; and with that came the largest, most educated, and hardest working middle class the world had known?

    Nobody wants to go through what we are (5.00 / 3) (#6)
    by Militarytracy on Fri Mar 06, 2009 at 11:47:27 AM EST
    going to go through, everybody wants to hear some good news even though the reality of our situation is that there is no what we consider good financial news to come for a very long time.

    That's what I've been saying, (5.00 / 2) (#14)
    by BrassTacks on Fri Mar 06, 2009 at 11:29:24 PM EST
    It's a Depression, not a recession.  That's why it's so upsetting.  My economist friends think it could last 10 or 12 years.  People like us, over 60, will never be able to retire.  Young people graduating from college will be without work for many years.  We're just lucky that we have enough room for our kids, and grandkids, to live with us.  But DH will be the only one working, for a long time.  Fifty years of working hard and saving hard, and now no retirement.  It's so sad. But we're grateful, we have more than many other families.

    I don't want to hear about Obama's plans for education, or health care, or anything else, until he tells us how this Depression will end and when people will go back to work.  


    This isn't like (5.00 / 1) (#9)
    by ding7777 on Fri Mar 06, 2009 at 01:09:21 PM EST
    1932 or 1981.

    Two income families didn't become the norm until after the 1981/1982 recession; unless both have lost jobs, the family still has one wage earner and one collecting unemployment.

    Baby boomers are reaching age 62 (10,000 per day, 310,000 per month, 3.6 million per year).  Not all 62+ boomers will seek a return to full-employment if they take early SS.  And many will take part-time jobs because of what the stock market meltdown did to their 401k's.

    Fifteen years from now, economists will look back at this as a boomer transition recession

    YUP (5.00 / 1) (#16)
    by BrassTacks on Fri Mar 06, 2009 at 11:33:50 PM EST
    Boomers won't retire, can't afford to, the retirement investments have been wiped out by the market crash.

    True. Although since this is a... (none / 0) (#20)
    by EL seattle on Sat Mar 07, 2009 at 01:07:17 AM EST
    ... world-wide event, I think that in the long run it might not be identified with anything so localized as the USA "baby-boom".  

    When you think about it, though, all around the world, that first post-WWII generation is moving towards their "latter years".  And although the current economic crisis is affecting everyone, if it lingers it might become identified with that generation, who will have to face the challenges of the crisis at the same time that their health and productivity start to wane.

    It might become known as the "I'm getting too old for this sort of crud" recession, and folks will all learn how to say "I'm getting too old for this sort of crud" in a dozen languages in solidarity with their brethern across the globe.


    The baby boomer phenom is (semi)global (none / 0) (#22)
    by ding7777 on Sun Mar 08, 2009 at 08:09:07 AM EST
    USA/Canada, Western Europe, Japan/Australia/New Zealand, Russia - basically all counties who's military was involved in WW2 had a boomer generation

    I'll continue to say it (5.00 / 1) (#10)
    by Slado on Fri Mar 06, 2009 at 02:00:54 PM EST
    Government spending of money we didn't have got us in this mess.  More of it can't get you out.

    Obama keeps acting like we can spend our way out of this and talks of a high burden of government.  Wall street reacts, no money is being lent and we go deeper into recession/depression.

    Obama needs to stop spending and fix the banking crisis.   Bad banks need to fold, the rulles need to be changed and banks need to be gobbled up by the ones that are stronger.   He has addressed every issues except the key ones.  He rails against Bush (rightly so) but doens't change some of the things Bush and dems in congress pushed through that created this mess.

    To top it all off he's told Wall Street that he has no plans to fix these issues, plans to spend money we have to borrow and will raise taxes on the rich and corporations.

    Wonder why they're voting the way they are on the stockmarket.

    To quote Jim Cramer..."It's amatuer hour".

    You're wrong, (5.00 / 1) (#13)
    by NYShooter on Fri Mar 06, 2009 at 10:38:54 PM EST
    "Government spending money they didn't have" (definition: Bush spending; Congress hibernating) didn't "cause" the problem. However, it did weaken its ability to counter act the fall, once it started.

    There's a rule in the security business that an "honest" employee, left unsupervised, exposed to products he/she desires, and believing he/she will not be detected.....will, more often than not, steal.

    Replace "employee' with "Banker" and you will understand the cause of our current meltdown.  


    You're right (none / 0) (#17)
    by BrassTacks on Fri Mar 06, 2009 at 11:36:22 PM EST
    People need to go back to work, but businesses can't get money to expand, and people are afraid to invest in anything.  The President needs to help stabalize the banks and he needs to give breaks to businesses that provide jobs, NOW.  

    agreed, and well stated (5.00 / 1) (#11)
    by Turkana on Fri Mar 06, 2009 at 02:47:32 PM EST
    you socialist...

    Different (5.00 / 1) (#12)
    by koshembos on Fri Mar 06, 2009 at 05:00:45 PM EST
    The need to find parallels to previous situations call for a visit with a therapist. We are neither in 1932 nor in 1982.

    The situation is quite different and now we have a wishy washy president who doesn't bite any bullet he is encountering.

    He'd better become a leader, REAL QUICK! (none / 0) (#19)
    by BrassTacks on Fri Mar 06, 2009 at 11:39:35 PM EST
    Not a pretty picture (none / 0) (#1)
    by Steve M on Fri Mar 06, 2009 at 10:50:22 AM EST
    Eek (none / 0) (#2)
    by andgarden on Fri Mar 06, 2009 at 11:00:05 AM EST
    You know the old saying (none / 0) (#4)
    by SOS on Fri Mar 06, 2009 at 11:06:37 AM EST
    First rule: don't panic.

    There's the evidence! Depression, big time (none / 0) (#18)
    by BrassTacks on Fri Mar 06, 2009 at 11:37:18 PM EST
    Thanks for the link.  

    Were in full (none / 0) (#3)
    by SOS on Fri Mar 06, 2009 at 11:02:53 AM EST
    meltdown mode. We need to start talking about plan Z scenario. G20 central banks, finance min, political leaders & top 100 bank leaders to get a monster $50 Trillion plan ready to reflate global balance sheets and get price levels stable.

    When Need to Push For Increased Consumer Demand (none / 0) (#7)
    by gtesta on Fri Mar 06, 2009 at 12:41:12 PM EST
    within the domestic populations of China, India, etc.  And one way to do that will be for wages to increase in those countries.  When they do, then internal consumer demand will increase and the pressure to import all this crap in the U.S. will decrease.
    Also, "all this crap" will not be as cheap anymore, helping to spur more manufacturing in the U.S.
    Government spending will only go so far.

    Government "spending" is the only (5.00 / 0) (#8)
    by Militarytracy on Fri Mar 06, 2009 at 01:04:00 PM EST
    thing that we can do though that will have a short and a long term positive affect.  The rest of it will just take time, but as far as what we can do for our tomorrow and our next year that we will all share together.....we can invest in ourselves, our infrastructure that will support the new economy, and in the new techs needed that will create the new jobs of our futures.

    Jobs in the future? (5.00 / 1) (#15)
    by BrassTacks on Fri Mar 06, 2009 at 11:32:28 PM EST
    We need jobs now!  We need jobs, and we need the market to stop the free fall.  

    Obama should be talking about this EVERY. SINGLE. DAY.  


    I'm not going to disagree with you about how (none / 0) (#23)
    by Militarytracy on Sun Mar 08, 2009 at 10:07:04 AM EST
    persistent Obama "should" be in addressing our economic crisis, there is so much work to be done.  He isn't taking that course though.  Even if he did we would still have a hard couple of years.  His lack of serious tending means though that instead of a hard two years we are going to have a hard five years or seven years.

    Does it matter? (none / 0) (#24)
    by bettym47 on Sun Mar 08, 2009 at 09:56:16 PM EST
    I'm not sure if the unemployed care if it's like 1982 or 1932. I graduated in 1982 and I couldn't find a job. It was rough even if it wasn't the great depression. It seems like those on the left want it to be the great depression so that Obama can claim that he is another FDR and can rescue America. It seems like the left wants Obama to be Lincoln, Kennedy and FDR. But if he can't get people jobs, he'll be remembered more like Herbert Hoover, Jimmy Carter and George Bush who were all terrible presidents. And just think, we could have had another Clinton in the White House. When Clinton was President, I was making money. But we didn't have a Clinton, or our first female President, because the inexperienced Obama said he would be better. It's time for Barack to put up and show America why we needed one of the most inexperienced men in the US Senate to be President. So far, I'm not impressed.

    The Young will have to pay (none / 0) (#25)
    by bettym47 on Sun Mar 08, 2009 at 10:14:01 PM EST
    All the young people who are supporting Obama now, may be cursing him in 15-25 years when they are in their 40's and 50's, and are trying to pay for their kids' college, when college will be $50K a year, and at the same time paying enormous tax rates. Taxes now are probably the lowest we'll see in our lifetimes. But if the left succeeds in spinning it to say that this is a depression, and claims that as a result we need a socialist economy to get us out of our second great depression, I personally wouldn't be surprised to one day see taxes at 50%, 70% and even 90% in the future. The Republicans were great at using terror to spread fear. The Democrats are great at using the economy to spread fear.