Current Economic Disagreements: Recession & Stimulus

Today's statement by the NBER that the US entered a recession at the end of 2007, based upon a consistent pattern of monthly job losses.

On CNBC this afternoon, Larry Kudlow clarified the NBER definition of a recession. As echoed in this article,

"According to the NBER, a recession is "a significant decline in activity spread across the economy, lasting more than a few months, visible in industrial production, employment, real income, and wholesale-retail trade". Those are the four measures it will be examining forensically as 2008 progresses, and it puts employment data at the top of its list of influences since it is the broadest monthly indicator."

Therefore, today's announcement by the NBER conflicts with a quarterly-GDP-based measurement of a recession, but is, evidently, within the NBER's own definitional framework.

As such, this weekend's article by Amity Schlaes, entitled "The Krugman Recipe for Depression," has become much more relevant. With an official seal of approval on the current recession, political powers that be, or will be, are sure to demand more and larger stimulus packages.

Ms. Schlaes begins her piece by noting,

"Paul Krugman of the New York Times has been on the attack lately in regard to the New Deal. His new book "The Return of Depression Economics," emphasizes the importance of New Deal-style spending. He has said the trouble with the New Deal was that it didn't spend enough.

He's also arguing that some writers and economists have been misrepresenting the 1930s to make the effect of FDR's overall policy look worse than it was. I'm interested in part because Mr. Krugman has mentioned me by name. He recently said that I am the one "whose misleading statistics have been widely disseminated on the right." "

The argument between the two highlights the two opposing views of what should be done, or not done, by Congress in the current economic situation. The two camps each base their current recommendations upon their reading of the results of FDR's massive, never-before-or-since equalled, society-changing spending programs of the 1930s.

Krugman, a newly-anointed Nobel Laureate in Economics, has used this position to launch intensely nasty attacks upon the current administration's approach to economics. With his gleaming, newly-minted medal, Krugman is sure to be an oft-quoted and -cited 'expert' for those wishing to pass legislation to spend hundreds of billions of taxpayer dollars in the months ahead.

As Ms. Schlaes puts it,

"Mr. Krugman is a new Nobel Laureate, teaches at Princeton University and writes a column for a nationally prominent newspaper. So what he says is believed to be objective by many people, even when it isn't. But the larger reason we should care about the 1930s employment record is that the cure Roosevelt offered, the New Deal, is on everyone else's mind as well. In a recent "60 Minutes" interview, President-elect Barack Obama said, "keep in mind that 1932, 1933, the unemployment rate was 25%, inching up to 30%." "

Will any of it work?

Schlaes continues in her piece,

"The New Deal is Mr. Obama's context for the giant infrastructure plan his new team is developing. If he proposes FDR-style recovery programs, then it is useful to establish whether those original programs actually brought recovery. The answer is, they didn't. New Deal spending provided jobs but did not get the country back to where it was before.

This reality shows most clearly in the data -- everyone's data. During the Depression the federal government did not survey unemployment routinely as it does today. But a young economist named Stanley Lebergott helped the Bureau of Labor Statistics in Washington compile systematic unemployment data for that key period. He counted up what he called "regular work" such as a job as a school teacher or a job in the private sector. He intentionally did not include temporary jobs in emergency programs -- because to count a short-term, make-work project as a real job was to mask the anxiety of one who really didn't have regular work with long-term prospects.

The result is what we today call the Lebergott/Bureau of Labor Statistics series. They show one man in four was unemployed when Roosevelt took office. They show joblessness overall always above the 14% line from 1931 to 1940. Six years into the New Deal and its programs to create jobs or help organized labor, two in 10 men were unemployed. Mr. Lebergott went on to become one of America's premier economic historians at Wesleyan University. His data are what I cite. So do others, including our president-elect in the "60 Minutes" interview.

Later, Lee Ohanian of UCLA studied New Deal unemployment by the number of hours worked. His picture was similar to Mr. Lebergott's. Even late in 1939, total hours worked by the adult population was down by a fifth from the 1929 level. To be sure, Michael Darby of UCLA has argued that make-work jobs should be counted. Even so, his chart shows that from 1931 to 1940, New Deal joblessness ranges as high as 16% (1934) but never gets below 9%. Nine percent or above is hardly a jobless target to which the Obama administration would aspire."

The evidence Ms. Schlaes cites is pretty unequivocal. One wonders on what Krugman bases his objections. But, there's more.

Schlaes asks why so much Federal 'stimulus' and intervention, for nearly a decade, accomplished so little in terms of employment. Her response,

"What kept the picture so dark so long? Deflation for one, but also the notion that government could engineer economic recovery by favoring the public sector at the expense of the private sector. New Dealers raised taxes again and again to fund spending. The New Dealers also insisted on higher wages when businesses could ill afford them. Roosevelt, for example, signed into law first his National Recovery Administration, whose codes forced businesses to pay an above-market minimum wage, and then the Wagner Act, which gave union workers more power.

As a result of such policy, pay for workers in the later 1930s was well above trend. Mr. Ohanian's research documents this. High wages hurt corporate profits and therefore hiring. The unemployed stayed unemployed. "If you had a job you were all right" -- the phrase we all heard as children about the Depression -- really does capture the period.

Why does all this matter today? Because lawmakers are considering new labor legislation containing "card check," which would strengthen organized labor and so its wage demands. Because employees continue to pressure firms to spend on health care, without considering they may be making the company unable to hire an unemployed friend. Piling on public-sector jobs or raising wages may take away jobs in the private sector, directly or indirectly."

Ms. Schlaes hits the nail on the head. In order to avoid a rerun of the failed economic (and social) policy mistakes of the 1930s, we have to acknowledge what worked, and what did not.

Perhaps, before we get to that stage, we should heed Fed Chairman Ben Bernanke's response to a question after his prepared address in Texas this afternoon. When asked how the current economic situation compares with the Great Depression, Bernanke said they are not even close, and not at all comparable at this time. He then continued by reminding us that, prior to and in the Depression:

-unemployment rose to 25%
-money supply fell by 10% per year for several consecutive years
-GNP fell by roughly a quarter
-about 1/3 of the nation's banks failed

We are nowhere near any of those benchmarks. Thus, Ms. Schlaes' important closing paragraph,

"We know that the new administration is going to spend. But how? It can try to figure out a way to do that without hurting the private sector. Or it can just spend, Krugman-wise, and risk repeating the very depression we seek to avoid."