>October 26, 2008 / Economic View / New York TIMES >But Have We Learned Enough? >By N. GREGORY MANKIW
>LIKE most economists, those at the International Monetary Fund are lowering >their growth forecasts. The financial turmoil gripping Wall Street will >probably spill over onto every other street in America. Most likely, current >job losses are only the tip of an ugly iceberg. >But when Olivier Blanchard, the I.M.F.'s chief economist, was asked about the >possibility of the world sinking into another Great Depression, he >reassuringly replied that the chance was "nearly nil." He added, "We've >learned a few things in 80 years." >Yes, we have. But have we learned what caused the Depression of the 1930s? >Most important, have we learned enough to avoid doing the same thing again? >The Depression began, to a large extent, as a garden-variety downturn. [big >ellipsis, describing the onset of the Depression] >The banking panics put downward pressure on economic activity in two ways. >First, they put fear into the hearts of depositors. Many people concluded that >cash in their mattresses was wiser than accounts at local banks. >As they withdrew their funds, the banking system's normal lending and money >creation went into reverse. The money supply collapsed, resulting in a 24 >percent drop in the consumer price index from 1929 to 1933. This deflation >pushed up the real burden of households' debts. >Second, the disappearance of so many banks made credit hard to come by. Small >businesses often rely on established relationships with local bankers when >they need loans, either to tide them over in tough times or for business >expansion. With so many of those relationships interrupted at the same time, >the economy's ability to channel financial resources toward their best use was >seriously impaired.... >Less successful were various market interventions. According to a study by the >economists Harold L. Cole and Lee E. Ohanian, both of the University of >California, Los Angeles, and the Federal Reserve Bank of Minneapolis, >President Roosevelt made things worse when he encouraged the formation of >cartels through the National Industrial Recovery Act of 1933. Similarly, they >argue, the National Labor Relations Act of 1935 strengthened organized labor >but weakened the recovery by impeding market forces....< Contradiction alert! Mankiw first blames deflation (steadily falling prices) for being a major force pushing the US economy into Depression. Then, he blames FDR for fighting deflation! Now, it may be that there's no contradiction here, but he doesn't address the issue at all. He instead seems to be assuming the standard economics BS about falling prices being a good thing at the macro level. he continues: >The three researchers show that the leading economists at the time, at >competing forecasting services run by Harvard and Yale, were caught completely >by surprise by the severity and length of the Great Depression. What's worse, >despite many advances in the tools of economic analysis, modern economists >armed with the data from the time would not have forecast much better. In >other words, even if another Depression were around the corner, you shouldn't >expect much advance warning from the economics profession. >Let me be clear: Like Mr. Blanchard at the I.M.F., I am not predicting another >Great Depression. We have indeed learned a lot over the last 80 years. But you >should take that economic forecast, like all others, with more than a single >grain of salt.< At least he's expressing modesty, something he's never been good at. -- Jim Devine / "Nobody told me there'd be days like these / Strange days indeed -- most peculiar, mama." -- JL. _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
