Friday, November 07, 2008
What's A Moderate Depression?
Dan asked me for my definition of a moderate depression. Here's a compressed and thus lousy-quality graph of annualized GDP changes since 1930 (you can get a better image and the data at this link):
Click on this graph for a larger image. As you can see, our worst post WWII era recession had a net annualized GDP drop of considerably less than 5% (although the quarterly decline was closer to 5%). A depression lasts longer than a recesssion and so the net drop in GDP is more; I am expecting to see that annualized drop head down around the 5% range. So it would be very severe and an unprecedented event.
Most of this is going to come from a massive drop in real incomes for the lower half of the income range, which will destroy a lot of jobs and then continue to inflict damage to higher incomes.
The key to avoiding this is to subsidize the really lower income groups, dump all the effing alternative energy crap and instead do what we can now do, not try to institute any new entitlement programs, reform bankruptcy reform to something reasonable, and control the necessary tax increases to keep them moderate and beginning around the 80K range. Doing that will be challenge enough! If Obama and the Dems could pull that off they'd be doing wonderfully. However we have got to cut federal spending pretty significantly over the next few years. It's time to cut out a lot of the fluff, and Lord knows there is a lot of it.
You get much more net economic stimulus from subsidies like unemployment and energy to low income groups. They will spend it. In a recession, the higher income groups save more because they can and because they are worried.
We can't raise much in the way of corporate taxes either.
One of the factors most people are missing is that the money crunch at the local/state level is coming at the same time as the private crunch. Part of it is due to retirements, a lot of it is due to overspending, and many local and most state governments will cut some spending and raise taxes, which leaves less room for the federal government to raise taxes.
Next up, explaining what I was saying about Social Security and retirements.