Greater Depression Looming?

Another great and timely piece by Tom!

......" What happens when the checks stop?".......

I think we are going to find out fairly soon!

WC

The Greeks of today as well as the Greeks of 2,500 years ago can teach us much.

Tom said "What will it look like? We’re about to get a preview in Greece. As one pundit put it, Greeks expect Germans to work until they’re 67 so they can retire at 50. "

You could replace Greeks with public employees and Germans with private sector employees.

I believe many people in the private sector who are faced with ravaged 401k plans or no retirement plans and what little SS and Medicare benefits they have been promised are threatened with reductions along with the prospect of retiring at an even older age than they thought are wide awake about the inequality of the public employees over generous benefits..

Having grown up and experienced the Great Depression I too was curious as to what could have caused such an upheaval. Let me hazard a guess. After WWI much of Western Europe was in a state of chaos. Millions in wealth were wasted on the battlefield not to say lives. When it was over refugees fled to the U.S. as our economy was actually enhanced by the war since we provided much of the wherewithal that was wasted on the battlefield. It took the 1920s to recover Europe during which the U.S. economy mushroomed to make up the losses. When Europe final recovered they had fewer people to support and no longer needed the U.S. to replace what they lost. The consequence to the U.S. was overcapacity and loss of markets with the result being unemployment.

It took another war to get us out of it but the idiotic policies of the Roosevelt Administration were in place. These policies still prevail and our later mini-wars in Korea, Viet Nam and now Iraq and Afghanistan are not deep enough to offset these failed polcies which are being made worse by the current administration. The most agregious of these are the Fair Labor Standards and Taft Hartley Acts which give unions the power to coerce employers to give inflationary increases to labor for no increase in labor productivity. Add to this Social Security and Medicare and you see that improvement is unlikely under our current system.

pnconusa said: "It took another war to get us out of it but the idiotic policies of the Roosevelt Administration were in place. These policies still prevail and our later mini-wars in Korea, Viet nam and now Iraq and Afghanistan are not deep enough to offset these failed polcies which are being made worse by the current administration."

Really? You think the reason we're in the economic fix we are in is because we don't have enough wars going on? WW II never brought the US out of Depression and tripling down in Afghanistan, Syria, and Iran isn't going to revive the US economy either. It will just cause more debt, more money printing by the Fed (buying bonds), and more waste of scarce resources, including young men we can't afford to lose. We need to cut the Defense budget, not expand it.

For an alternative to this wacky theory I would suggest reading economist Murray Rothbard's 1963 (and revised 1972) work, "America's Great Depression". It was the Federal Reserve that got us into the Depression. Milton Friedman came to pretty much the same conclusion but offered different remedies. The WSJ's Amity Shales work, "The Forgotten Man", gives a pretty good synopsis of why nothing FDR did, including his "pump priming" by his Keynesian wizards and make-work programs, didn't pan out either.

When FDR decided to transform himself from Mr. End the Depression into Mr. Win the War, described well by Thomas Fleming in his book "The New Dealers' War: FDR and War Within World War II", that action was based on political considerations and really didn't do anything except conscript millions of young men into an army at low pay, forcing many women and the remaining men into making war equipment with borrowed money, while rationing basic goods. A few sharpy contractors (the Liberty Ship scandel) did well.

The cost of doing so, economically, physically, and socially, was horrific. Even in "victory", with our great ally, "Uncle Joe Stalin", enslaving half of Europe for 45 years, America was never quite the same country and the final bill may have come due during LBJ's destructive Great Society/Civil Rights sixties, modeled after Roosevelt's failed 1930s efforts.

The Great Depression really didn't end until about 1946-47, when the government released its grip on running a command/war economy. But the Fed's manipulation of interest rates, money expansion, and boom or bust cycles continues to this day. These help finance undeclared stupid wars, via inflation and crony captialism to politically connected contractors, but wars don't revive economies. They distort and destroy them unless the wars result in booty and slaves from the conquered states. The Romans did this for centuries; we don't. We get nothing out of most of our wars of the last sixty years but needless death, more debt, displaced people, shattered families, and de-stabilized countries who now will hate us forever.

Tom: What happens when the checks stop?

Updating to the 21st century: What happens when a swipe of the EBT card results in "declined"?

Really? You think the reason we're in the economic fix we are in is because we don't have enough wars going on?

Jeffersonian -

Good post. Thanks.

Like other disasters natural or manmade, wars reduce unemployment, but they are destructive of capital. It's easy to "create jobs" if when lives, tools, and factories are destroyed.

Jeffersonian concludes:
"The Great Depression really didn't end until about 1946-47, when the government released its grip on running a command/war economy."

As my old door gunner used to say, "Perzackly".

I think Tom's essay is insightful, but I'm not convinced that the decline of the client-broker welfare state is likely to be more destructive than the Great Depression.

Real GDP dropped more than 25% at the outset of the Great Depression. Currently, real GDP is higher than the outset of the recent recession (2008-2009). In fact, the recession and recovery are over, if both real GDP and the value of market capitalization are considered. It's a jobless recovery, however, which is only partly explained by the fact that employment is generally a lagging economic indicator.

This graph compares job losses of Post WWII recessions in the U.S. (Scroll down to "Percent Job Losses in post WWII recessions.") It's apparent that current unemployment is unusually deep and persistent. What's missing from current events is the expansion that normally follows a recession.

Worse, the social programs he introduced which were expanded under Lyndon Johnson, George W. Bush and Barack Obama have created a huge entitlement bubble which is about to burst. The effects of that bursting will be worse than the Great Depression stories with which I grew up.

No informed person can dispute that the U.S. - along with most other industrialized nations - faces a looming fiscal crisis over entitlements.

Check out this post from John Cochrane -

The main function of our government is to write checks to middle-class and wealthy voters. And that's the reason its finances are in the toilet.

Cochrane's point is that entitlements ARE the fiscal problem, not defense, infrastructure, education, poverty programs, or interest on the national debt. The problem is the government's unfunded liability for payments to the middle class.

If we are to compare the Great Depression with the "greater depression looming" over an "entitlement bubble" we first must establish that the entitlement crisis is, in fact, a bubble. A bubble, by definition, would be a significant misallocation of resources of which market participants were unaware. If the current entitlement crisis is truly a bubble, it's the most obvious bubble in history. Everyone knows about it; the market has already discounted it.

The dynamic economy of the United States is a wonder. Even with the deadweight costs of an excess of public employees and rent-seekers, a doubling of the national debt under the current administration, a federal budget trajectory that screams "sovereign default" in seventy-two point type, the economy nonetheless lumbers along with sluggish GDP growth. The mystery is not why the economy can't recover. It has. The mystery is why the economy doesn't expand.

My point is that the entitlement crisis is likely not a "greater depression looming." If the problem of unfunded liability for entitlements isn't resolved, the result won't be a depression; rather, the result will be a lingering stagnation. This stagnation would ensue from a continuation of the same policies that currently dampen the expansion - tax hikes and the threat of tax hikes, the failure of government to pass a sustainable budget, the intimidating costs of new hiring created by Obamacare and other regulations.

The political faultline lies between the producers in the private sector and the rent-seekers in the public sector. To the degree that the producers control the political outcome, the greater the expansion and, of course, the opposite outcome with the success of the rent-seekers.

For years, the electorate of the industrialized world has seemed to succeed in the illusion that - to paraphrase Bastiat - the state is the means by which everyone will live at everyone else's expense. That era is over.

It is an irony that many, if not most, of the voting middle-class live in both camps; they are both producers and entitlement beneficiaries, typically someone employed in the private sector who expects to retire with Social Security and Medicare. I take hope in the knowledge that their interests lie in freeing themselves from burden of the entitlements that only can be paid by themselves.

Thank you, Economike, for a very cogent post.

Several points. You say: "If the current entitlement crisis is truly a bubble, it's the most obvious bubble in history. Everyone knows about it; the market has already discounted it."

It's obvious only to those who choose to look at reality squarely. It's maddening that we see it coming, but continually refuse to do anything about it. States like Wisconsin and Maine are initiating reforms and that is bound to spread. California is refusing to, electing aging hippie Jerry Brown instead of a LePage or a Walker. That state is a very large canary in the US coal mine. Cities like San Jose and San Diego are enacting reforms, but will the state do so? Will Governor Moonbeam lead a reawakening to reality? Not likely. Your point that it's an obvious bubble is well taken, but too many American are choosing not to look at it. They're willfully blind.

If the market discounted it already, perhaps it's also blinding itself to what may occur when the checks stop.

More likely there will be more municipal bankruptcies like that town in Mississippi that can't pay the promised pensions, but I'm not sure. It looks like smaller government entities like cities and states are leading the way to sanity. What worries me, though, is the possibility of violent protests. Will the "Occupy" movement get violent? Will SEIU thugs assist? Will there be a resurrection of race riots? Will Obama get desperate as his poll numbers continue to decline and instigate on all these fronts? I wouldn't put it past him, would you?

Will Greek default be the first domino in Europe? Will falling dominoes span the Atlantic? Will Israel attack Iran and cause petroleum prices to double? Triple? Will there be rationing? What would any of those triggers do to the fragile US economy?

You write: "That era is over. It is an irony that many, if not most, of the voting middle-class live in both camps; they are both producers and entitlement beneficiaries, typically someone employed in the private sector who expects to retire with Social Security and Medicare."

The middle class will adjust to change, even if it means foregoing Medicare and working until they die. It's their nature. What worries me is the underclass and it's unscrupulous left-wing-Democrat instigators. Economic growth or even sustainability won't occur in political chaos. Poorer Americans in the thirties were civil. Today's underclass is much more violence-prone. An increasing number of Americans are expecting civil unrest and are arming themselves in preparation.

That's what keeps me up at night.

The middle class will adjust to change, even if it means foregoing Medicare and working until they die. It's their nature. What worries me is the underclass and it's unscrupulous left-wing-Democrat instigators.

Tom -

We substantially agree. The political resolution to the budget/entitlement crisis is not assured. If the (cynical and irresponsible) Democratic left succeeds in holding on to power, the United States will become France - socially rigid, economically static, and chronically underemployed.

You only have to look at the inner cities to view the violence that they create even on their own people. These dependency trained mops have no clue as to civil discourse of work ethics. They only know how to take, not give. You have no idea just how violent such a breakdown in can be when the handouts are stopped.

I am afraid that many will not stop the riots until they lay in pools of their own blood and those who have access to guns will be forced to use them or die themselves. What the future holds will not be pretty and the very dark nature of mankind will be starkly obvious. We have met the enemy and it is us!

......."What worries me is the underclass and it's unscrupulous left-wing-Democrat instigators. Economic growth or even sustainability won't occur in political chaos. Poorer Americans in the thirties were civil. Today's underclass is much more violence-prone. An increasing number of Americans are expecting civil unrest and are arming themselves in preparation".......

And Gaffer nails it!

......"I am afraid that many will not stop the riots until they lay in pools of their own blood and those who access to guns will be forced to use them or die themselves"........

This is exactly the scenario that more than a few of us have been preparing for for some time now.

When the checks don't come in the mail, the EBT card is swiped and nothing happens, those who have lived upon the backs of the middle class working people, I believe, are going to be forced to riot, loot and steal, or starve to death. Not to mention all of those hooked on narcotics that all of a sudden will not be able to get them, or money to buy them.

Look at Greece and France. Despite somewhat sane immediate future economic policies, negotiated with the EU, the people have overwhelmingly said that they "reject austerity". Sarkozy was thrown on the dump heap and Greece is going to do the same shortly. And this is just for starters. Those on the wagon have indicated that they are not willing to take NO for an answer.

With governments running out of money, and no prospects for raising more in the near future. CHAOS is the only possible answer. I personally know quite a few of the underclass, subculture, or whatever you want to call this class of folks. They get PO'ed real quick when things don't go their way as, for the most part, having lived without any kind of personal responsibility for generations, they have lost all sense of civility.

If the checks stop, those on the lower end of that chain, will be, and are, those members of our society who have been committing more than 80% of all crime lately. What do you think they will do when they get thrown off the wagon?

That is a downright scary thought, as Tom has pointed out in another great column.

My dad's philosophy was to "hope for the best but be prepared for the worst". I hope we are prepared well enough!

Thanks Tom!

WC

With governments running out of money, and no prospects for raising more in the near future. CHAOS is the only possible answer.

If this is true, isn't it an argument in favor of keeping Big Government with a strong police function?

......."If this is true, isn't it an argument in favor of keeping Big Government with a strong police function?".......

I believe that BIG GOVERNMENT caused this problem in the first place. What sane person would want to keep the status quo?

I am proud to be a freeman. Free people are responsible for themselves. They are responsible for their own well being, and their own safety. I know from recent experience that the police cannot protect my family. We had an attempted home invasion in February. We ran the no-account off at gunpoint. If he had tried to come in, they would have lugged him off.

The police got here 30 mins later, just in time to have picked up our bodies if this guy had murderous intent.

There is proof everywhere you look that the police cannot protect all of us, and it is not their fault, there are just nowhere near enough of them to guard us all, and never will be!

Be Prepared, is the old Boy Scout motto.......and it has deep meaning today!

WC

Many of our National Guardsmen have experience dealing with civil unrest in Iraq. Officers and NCOs may have to put that expertise to use in cities and on campuses here.

Won't be the first time. Some of us are old enough to remember the sixties and early seventies: LA, Detroit, Newark, Kent State. The Kerner Commission said the catalyst was "White Racism." That canard lingers in white liberal guilt today - the kind that elected Barack Obama, who may try to make "white racism" an issue again and ride it to four more years of bringing down capitalism. Look what he and Holder are doing in the Trayvon Martin case. "If I had a son . . ."; Holder working with Sharpton, etc.

Woodcanoe -

I think you missed the point of my question.

If free people are responsible for themselves, doesn't it follow that chaos is not the only possible outcome to a shrinking role of government?

When the checks don't come in the mail, the EBT card is swiped and nothing happens, those who have lived upon the backs of the middle class working people, I believe, are going to be forced to riot, loot and steal, or starve to death.

Yep, as much as I hate the concept of the EBT card program, I agree its the only thing holding this country together. 1 in 7 americans is using the EBT card. I cant imagine the chaos that would ensue if it didn't exist.

......"If free people are responsible for themselves, doesn't it follow that chaos is not the only possible outcome to a shrinking role of government?".....

If one in seven of us use EBT cards, or are on welfare of some kind, that is clear evidence of a large group of people who are presently "not responsible for themselves". I interact personally with a significant number of these people on a regular basis. And the truth is that most of them are unable to ever be responsible for themselves, IMHO. So if government shrinks, as it runs out of money, which I believe is coming, what is the underclass going to do?

I believe that "chaos" is the proper word to describe what will happen to this group of people, when the "checks stop coming" as Tom says.

I do not believe it will be possible to "negotiate" or "persuade" this group of wagon riders into becoming responsilbe of themsleves....all of a sudden, especially after several generation of family dependance upon the system.

Quite frankly, if this scenario happens (govt runs out of money) I believe lots of these folks will not survive, period!

I would call that "chaos" if it happens.

WC

So if government shrinks, as it runs out of money, which I believe is coming,

woodcanoe (and others) -

The entitlement-driven budget crisis doesn't mean that the government is suddenly going to stop paying unemployment and food stamp benefits.

... what is the underclass going to do?

I admit I'm an optimist: the underclass is going to get a job. The "blood in the streets" riff strikes me as a variety of disaster porn.

......" the underclass is going to get a job".......

I will give you credit for being about the greatest optimist that I have ever met. I surely hope you are right!

But......I am personally acquainted with at least several dozen members of this "underclass" and, in my opinion they have absolutely no idea about how to do a job, or any idea that they should even do such a thing. I have been a small businessman, and employer, in Maine and can state flat out that most of the underclass that I am unfamiliar with are totally "unemployable".

Jobs for strong backs and weak minds are few and far between these days.

I am familiar with the old CCC corps taht existed in the 1930's and did lots of valuable work, and I have often thought that, for the time, it was a great program.

But in that era those young men all WANTED a job.

We have millions of unemployable, underclass Americans who do NOT WANT a job, any job, period!

If you think that these people can be made into contributing members of American society, than more power to you. But I think you are dreaming a dream not based on the reality of who, and what, these underclass folks really are.

I have believed for years that many of these people would rather steal then work. They already commit 80% or more of all crime now. The chief of the Dover PD told me that himself, in his office. If we can't make them into better citizens by "helping them" now, as the political class is fond of doing, what, pray tell, are they going to become if we stop "helping them" because government runs out of money?

Greece is trying to borrow millions of Euros right now, in order to meet Greek government payrolls next week. You don;t think that can happen here?

Just watch!

WC

I'm not going to convince gaffer, matt8888, and woodcanoe

(1) that the fiscal crisis of unfunded prospective transfers to the middle class does not threaten government's ability to send out welfare payments,

(2) that a violent, unruly, unemployable underclass - to the degree one really exists - has no dog in the political fight over middle class entitlements, and

(3) that a robust, expanding economy creates employment opportunities for a significant number of "unemployables".

Economike's points:

(1) The fiscal crisis of unfunded prospective transfers to the middle class does threaten government's ability to send out welfare payments today that are worth what they were yesterday.

(2) The potentially very violent, employable middle-class is the dark-horse in the coming fight. Sorry for the mixed metaphor. We rarely see them. Some were on display the other day in Wisconsin and, I suspect, there are many more biding their time.

(3) A robust, expanding economy cannot create "employables" to fill the new opportunities. Society will always need unemployables and will always have them. In earlier times they were called peasants.

IAC -

(1) This is a variation of the argument "If we had a can opener, we could open a can of beans, if we had a can of beans." If you want to argue that inflation is part of the fiscal crisis, why don't you state your case explicitly so the rest of us can follow along? Otherwise, reframing the discussion doesn't establish anything.

(2) Right. We agree that the threat of violence doesn't arise from a putatively violent, unemployable underclass. Any threat of political violence arises from that part of the middle class that believes itself entitled to income at taxpayer expense.

(3) Peasants aren't, and never were, "unemployables." And why do you believe that "society will always need unemployables"?

Economike said:

Mike, what would modern GDP be without the massive government spending, including transfer payments, that we have today and didn't have at the outset of the Great Depression, and how would that affect your comparison? I'm genuinely curious, and my Google-Fu is failing me in finding the answers.

Welfare reform passed in the '90s weaned people from handout programs. It worked. SSDI expanded to cover unemployables and the slicker deadbeats, but many got off welfare. Passing it to states to reform and innovate entitlement programs is a good idea. Maine has been attracting people because of generous welfare programs and sanctuary status, so there would be a shifting around of populations as different states made adjustments.

I'm with Economike when he says the underclass can be employed. Most of it can if they have to and they will. The process has to happen gradually, giving them time to adjust. I think it's doable without violence, but we have to start now. Candidates have to state explicitly that what has existed cannot continue to exist. The federal government must cut back starting now. States can do what they want. That's how the Founding Fathers intended it.

Mike, what would modern GDP be without the massive government spending, including transfer payments, that we have today and didn't have at the outset of the Great Depression, and how would that affect your comparison?

Cash -

That's an interesting question. As you know, government expenditure as a proportion of GDP is much higher in 2012 than it was in 1932.

I don't know if you're wondering if "massive government spending" increases GDP. In my view, it doesn't. If government spending is increased in a given year, that increase reduces private consumption and investment by an equal amount; GDP is unchanged. For my purposes of comparison, then, the proportion of government spending doesn't make much difference.

Of course, in looking at changes in GDP then and now, we're looking at multi-year periods.

Year-after-year government spending is as a drag on an economy. It represents a cost to the average taxpayer and reduces potential GDP over the longer-term. (Here's a link to a recent study on this topic.)

So, other things being equal, I would assume that a greater proportion of GDP represented by government spending would intensify a recession year-after-year, because the larger share of GDP taken by government reduces the capacity of the private economy to adapt and grow. In other words, I would have expected the greater share of government spending to have deepened the recent recession. I take this as evidence of the resilience of the U. S. economy.

"If free people are responsible for themselves, doesn't it follow that chaos is not the only possible outcome to a shrinking role of government?"

In the 1930s even the bums were polite. I'm reminded of the old song that went,

"Can I sleep in your barn tonight mister
For it's cold lying out on the ground?
I have no tobacco or matches
And I assure you I mean you no harm."

Today's drug riddled underclass would as soon stab you in the back as look at you as evidenced by this week's articles in the BDN.

My point about the wars was that they were but temporary reprieves from the evils created by the creation of the FED in 1913. What FDR did was to add a few more beneficiaries to the system (union members) because without their votes and the help of the power brokers in the Congress the system would be toast. A good explanation of this is in a recent book, "Its Dangerous to be Right when the Government is Wrong" by Judge Andrew Napolitano.

Economike,

I did not intend to come off argumentative or to reframe or to do anything but add a little to the discussion.

How can we not factor inflation into any discussion of a fiscal crisis? Other than, of course, the administration's insistence that there isn't any inflation. If the intent of a welfare payment is to enable the recipient to buy a can of beans, and the price rises higher than the payment, isn't that the same as the checks stopping?

A significant part of the underclass is unemployable by choice. When the checks stop, or the beans become too expensive, they will quickly, if reluctantly, decide to be employable.