I'm cutting and pasting today's post from a little back-and-forth from my favorite football message board, where, during the boring off-season, we tend to talk about anything and everything and even nothing. (Though I will say that my beloved Gorillas had just a killer recruiting season - gotta love a sophomore 340-lb. DL who originally signed with Miami, reshirted there, then played a year of juco ball - woo hoo!)
Anyway, here's the guy's question, which was in response to my continued assertion that our best course of action is to NOT throw money at this recession, but just let it run its natural course:
"What was the unemployment rate back during the Depression when Hoover kept insisting that everything was okay and didn't do anything? It was at least 30%.
The unemployment rate is on a fast rise now. IF we let everything fail like you say we should...what DO YOU think the unemployment rate would be and how do you help those people?
This is why I see this as one big vicious circle."
And my response, wherein I alluded to an earlier response regarding Hoover by another poster; the original questioner had also asked another proponent of letting free markets correct themselves whether he'd be willing to let those who lost their jobs if we "do nothing" pitch tents on his lawn, hence my final comment:
"First, Jake's right - Hoover did try some things, but he didn't want to throw the New Deal at the situation. He was right, as the New Deal prolonged the Depression for at least 8 years. We'll never know how long it truly could have gone, as WWII saved FDR's bacon (pun intended). We don't want that to happen again, or at least I don't.
Second, unemployment peaked in 1933 at 25%. And yes, it's on the rise now. But it's alarmist to think that it would go anywhere near that rate if we didn't pass the spending bill. We're at 7.6% according to this morning's BLS report. We could hit 9%, maybe 10% if we left things alone. But let's not forget that the labor force has grown by 30% over the last couple of decades, as I noted in another thread. Right now, accounting for that growth, this isn't even as bad as the early 90s recession in terms of the labor market, let alone those of the prior three decades. So to suggest that we're approaching Great Depression conditions is just buying into the fear-mongering coming out of Washington this week in an effort to rush to judgment on a trillion dollars worth of pork, which will not save those jobs we wish to protect.
As I also noted in another thread, it is indeed a vicious circle. IF we pass this bill, the cycle will spiral out of control, and then we are indeed at risk of seeing another Great Depression, with the joblessness associated with that one. A key difference between then and now is that in 1933, FDR's first year in office, the deficit was 4.6% of GDP, thus FDR had some wiggle room to deficit spend without totally killing the US economy (at least, we think - again, we'll never know what would have happened if WWII hadn't saved the day).
The FY09 deficit - even before the spending bill - is going to be a trillion dollars, or about 7.2% of GDP, assuming it only contracts 3% from 4Q08 levels, which is a generous assumption. With the spending bill (which likely isn't the end of the failout mania) you can double that - yes, double it - to about 14.5% of GDP. True, we hit nearly double that in 1943, but 14.2% would be nearly double the highest rate of deficit to GDP in a non-war year. It was 7.1% in 1946, when we were still recovering from the war spending buildup, but by the next year we were running a surplus.
We don't have a world war to bail us out this time - at least, I hope we don't. We don't have the government encouraging US citizens to fund the debt build-up by buying war bonds, etc. And - another real key difference - we were far and away the dominant player, by an order of magnitude, in the global debt game. Now, the field of play is significantly more crowded, and there is much keener competition for a dwindling number of investment dollars. I don't think anyone in Washington has the first bloody clue what will likely happen to interest rates in the current global environment if we go to 14% of GDP for the deficit. And, a final key difference: back then we were on the gold standard. There were tangible assets backing our currency. Now, there is not.
Our national debt is now about $10.7 trillion. The spending bill would take it to more than $12 trillion, with interest (at today's rates - again, they're going higher fast if this thing passes, so the funding costs are underestimated). GDP is going to be less than $14 trillion by year-end, again assuming just a 3% drop from 4Q08. That puts debt-to-GDP at nearly 90%. Add another trillion in spending, or shave another trillion off output, and we are insolvent. We were nowhere near these levels during the depression, so continued spending, while proving ultimately disastrous to the economy, didn't pose the risk to economic sovereignty that it does today.
Let's also take a look at FDR's full response. In 1937, when GDP had risen 63% from FDR's first year in office due to his massive spending (remember that government spending is a component of GDP, so it was purely debt-funded growth), he had to raise taxes to try to bring down some of the deficit he'd built up - it reached $4.3B in 1936, or a then-unmanageable 5% of GDP. But remember, that GDP figure was inflated by government spending, which was a whopping 15.6% of output, so the deficit was really more like 6% of GDP. So raise taxes he did, with catastrophic results: GDP actually fell in '38, and by the next year was only back to '37 levels. So his tax hike created the "Depression within the Depression," choking off growth for two years.
Well, guess what? Today government spending already contributes more than 20% to GDP. That means that a tax hike is already due. With the spending bill, government's share will rise for '09 to about 30% of GDP. So if this bill passes, a massive tax increase is forthcoming, probably within two years. The peak tax rate during the Depression was 79%.
So to answer your original question, yes, anyone who loses their job in this economy, assuming we drop the spending bill, is more than welcome to camp out on my lawn, so long as you are equally willing to pay my interest charges and my tax bill, until the budget is balanced, if it passes. Deal?"
I should have added that while the employment situation is nowhere near Great Depression levels, our debt situation is, possibly even worse. That is precisely why, this time, it's best to let the economy suffer while we reduce the debt burden, rather than increase the debt burden to save the economy. From the starting point at which we find ourselves today, it will have quite the opposite effect.
Finally, regarding my "vicious circle" reference to another thread, here it is:
"Talk about vicious circles:
1. Spend a bunch of money we don't have on stuff that won't solve the credit crisis we're in.
2. Float a couple trillion in Treasury debt in a single year - that would far and away be a record, you know - to fund said spending.
3. Watch long-term interest rates go up when inflation gets factored into the bid, not to mention the crowding out concept since every other country in the world will be doing the same, and the pool of investors is shrinking dramatically since every country is borrowing, none are lending through buying bonds, and the banks that might otherwise buy the debt are broke. And, not to mention the higher risk premium when suddenly the US Treasury is in hock up to its eyeballs and the national debt exceeds GDP.
4. When long-term Treasury yields go up, watch credit card, auto loan and mortgage rates go up.
5. With nobody able to afford a mortgage, watch home prices fall further.
6. Watch foreclosures and auto loan and credit card defaults go higher still.
7. Watch more banks fail.
8. Watch credit get even tighter.
9. Lather, rinse and repeat."
I can't wait until football season.
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