Have We Learned Enough?
Yesterday’s New York Times asked an important question that I think is worth repeating:
Have We Learned Enough?
We’re in a recession, undoubtedly. (True, the NBER hasn’t declared it officially, but they issue statements after the fact, when all the evidence is in.) Could we sink further, into a depression? With all the bad news on the horizon, with so much wealth decimated in the markets, with the fear index at all time highs, it certainly seems plausible.
But when Mankiw of the NYTimes posed this question to Olivier Blanchard, the I.M.F.’s Chief Economist, he said the chances were “nearly nil… we’ve learned a few things in 80 years.”
But have we?
In October of 1929, consumer spending made up three-fourths of the economy; today it makes up a slightly-smaller, but still large two-thirds. We know the consumer is begining to scale back pretty dramatically, which, although I believe is needed, will certainly have negative ramifications for the overall economy.
After September 11th, George Bush asked the country to go shopping. Regardless of the effectiveness of this in uniting the country, it was a proclamation based on an economic truth: consumer spending is vital for our economy.
We can’t spend our way out of this one; in fact, that’s exactly why we’re here. We’ve lived beyond our means as individuals, corporations, and as a nation for too long. (At least as consumers we can’t; according to Keynes, deficit spending during a recession is actually quite important…but this is a topic for another day).
The similarities Mankiw outlines between now and the Great Depression are unsettling, but perhaps more so is the fact that no one seems to have a firm grasp on what is happening. He writes that “even if another Depression were around the corner, you shouldn’t expect much advance warning from the economics profession.”
Maybe so. But in another section of the NYTimes, they noted that the “financial pundit class now seems compelled to out-gloom the next guy.”
A little awareness can go a long way.
