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Assessing the Odds of Our Depression's Shape


What will it take to get a V shape, WW shape, or L shape?

Economist Brad DeLong, of the Department of Economics at UC Berkeley, is getting increasingly pessimistic. He says the chance of Great Depression now is at 5%:

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 US 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 like, if such a shock hits, the US government will be unable to do a darn thing about it.

We could cushion the impact of another big downward shock by a lot more deficit spending -- unemployment, after all, goes down whenever anybody spends more (even though sometimes falling unemployment comes at too-high a price in rising inflation), and the government's money is as good as anybody else's. But the centrist Democratic legislative caucus has now dug in its heels behind the position that we cannot undertake more deficit spending right now because we have a dire structural health-care financing problem after 2030.

The Republican legislative caucus has now dug in its heels behind the position that the fact that unemployment is 10% shows not that policy earlier this year was too cautious but rather that it was ineffective. And the Obama administration has not been able or has not tried to move either of those groups out of their current entrenchments.

... So if another big, bad shock hits the US economy, what could the Obama administration possibly do?

Depression Debate

For starters, it's clear we're in a depression. However, this gets back to the Depression Debate: Is This a Depression?

I say it is, for reasons given in the article linked above. However, while this is a depression, this is clearly not the Great Depression. Delong calls it 1/3 of the Great Depression. For the sake of argument, let's accept that.

Who's To Blame?

DeLong is blaming Democrats and Republicans for not wanting to spend enough. He's right about the increasing odds, yet he's badly misguided as to the the reason why.

The problem is debt. One doesn't cure a debt problem by going deeper in debt. We should have let failed banks actually fail instead of making zombies out of them. We're repeating the very same mistakes Japan made, and ironically DeLong wants us to make the same mistakes only much bigger.

Sadly, that is how Keynesian economists think.

Rather than not doing enough, I claim US Facing Its Second Lost Decade.

Repeating the Mistakes of the Great Depression

We've made all the wrong policy decisions, just as Hoover and FDR did in the 1930s. Contrary to popular belief, it wasn't failure to keep up the stimulus that lead to a relapse in the late 1930s, but a rather a whole series of policy errors on top of the basic problem: Eventually stimulus will always run dry because by definition it must, and when it does, the artificial boom ends but the debt overhang still remains.

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