Archive for February 16th, 2009

Obama should not call this crisis as Depression

February 16, 2009

Bradley R. Schiller, Professor at American University has written an interesting article (HT Greg Mankiw) . He says Obama should not create  more chaos by calling this crisis a depression. 

He cites stats saying we are far off from Great Depression days:


Consider the job losses that Mr. Obama always cites. In the last year, the U.S. economy shed 3.4 million jobs. That’s a grim statistic for sure, but represents just 2.2% of the labor force. From November 1981 to October 1982, 2.4 million jobs were lost — fewer in number than today, but the labor force was smaller. So 1981-82 job losses totaled 2.2% of the labor force, the same as now. Job losses in the Great Depression were of an entirely different magnitude. In 1930, the economy shed 4.8% of the labor force. In 1931, 6.5%. And then in 1932, another 7.1%. Jobs were being lost at double or triple the rate of 2008-09 or 1981-82.

This was reflected in unemployment rates. The latest survey pegs U.S. unemployment at 7.6%. That’s more than three percentage points below the 1982 peak (10.8%) and not even a third of the peak in 1932 (25.2%). You simply can’t equate 7.6% unemployment with the Great Depression.


Real gross domestic product (GDP) rose in 2008, despite a bad fourth quarter. The Congressional Budget Office projects a GDP decline of 2% in 2009. That’s comparable to 1982, when GDP contracted by 1.9%. It is nothing like 1930, when GDP fell by 9%, or 1931, when GDP contracted by another 8%, or 1932, when it fell yet another 13%.

Auto Production

Auto production last year declined by roughly 25%. That looks good compared to 1932, when production shriveled by 90%

Banking Failures

The failure of a couple of dozen banks in 2008 just doesn’t compare to over 10,000 bank failures in 1933, or even the 3,000-plus bank (Savings & Loan) failures in 1987-88. Stockholders can take some solace from the fact that the recent stock market debacle doesn’t come close to the 90% devaluation of the early 1930s.

These statistics are well-known by now. See this research by Minneapolis Fed and St Louis Fed which also says the same - we are still far away from 1980-81 crisis. 

Schiller adds:

Mr. Obama’s analogies to the Great Depression are not only historically inaccurate, they’re also dangerous. Repeated warnings from the White House about a coming economic apocalypse aren’t likely to raise consumer and investor expectations for the future. In fact, they have contributed to the continuing decline in consumer confidence that is restraining a spending pickup. Beyond that, fearmongering can trigger a political stampede to embrace a “recovery” package that delivers a lot less than it promises. A more cool-headed assessment of the economy’s woes might produce better policies.

The q is why would Obama and his team do the same? He has the brightest team of economists one could have (Though Niranjan saysthis could be a big problem as well). They surely know economics and history (some have initiated most of the research on the same) better than most. Infact, Harvard University already is sufferingfrom depleted faculty as quite a few have joined Team Obama.

And it isnt about Obama alone. You keep hearing this from quite a few economists and policymakers (though policymakers have desisted using the D word so far, apart from IMF) as well- this crisis is unprecedented and they could never imagine facing a crisis as deep as this. I recall postingabout a paper from Bordo et al which categorised crisis as pseudo or real. The 2007 crisis looked like pseudo earlier but has become a real crisis especially post Lehman.

However, this crisis is surely real but is it as bad as others? The economic data is not as bad as it is suggested.

What would also be interesting is to see countrywise data in each of the crisis. The analysis continues to be US centric. For instance the economic data in Europe and others during Great Depression,  economic data in crisis which have been specific to regions , say  UK (1980, 1992), South East Asian crisis (1997-98) , Mexico (1994), Brazil (2000), Argentina (2001) etc. This would help us understand how the current numbers compare with the numbers in these regions in previous recessions. It would then give us some idea of how we have fared currently.

Time to do some hunting for such research .

PS.  Back to the original article. Though, Mankiw does not agree Obama’s words can be  influential, the public is beginning to use the  D word more regularly. We don’t know what is driving these opinions, but surely the usage is increasing and change in perception is happening.

Assorted Links

February 16, 2009

1. Krugman points to debt in wartime.

2. WSJ Blog points use of depression to summarise  eco conditions picks up

3. NB points to a nudge to push children into homework

4. Mankiw points to quite a few areas  where economists agree. He also points to dilemmas for policymakers on exec compensation restriction

5. Fin Prof points to PE ratio puzzle

6. BS points Citi was insolvent many a times

7. Stephanomics points crisis countries are not really innocent victims

8. EAP has an East Asia roundup

9. CTB points to World Crisis Index

10. Econbrowser points former Bernnake home in foreclosure :-)

11. Econbrowser points Japan continues to slump

12. Move over Greenspan put/ Bernanke put, Urbanomics points to Geithner put. Also readthe summary of ARRA


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