Must read from Dean Baker: Disaster Not Averted

[flpoljunkie]

Emphasis mine

Disaster Not Averted
The latest jobs numbers and the very real chance of another Great Depression.

Dean Baker
June 6, 2011

When the financial system was on the edge of melting down back in the fall of 2008, there was much talk in the punditocracy of a second Great Depression. The story was that we risked repeating the mistake at the onset of the first Great Depression: allowing a cascade of bank failures that both destroyed much of the country’s wealth and left the financial system badly crippled. Instead, however, we acted, and these days the accepted wisdom is that the TARP and other special lending facilities created by the Federal Reserve Board prevented a similar collapse that saved us from a second Great Depression. But this view badly misunderstands the nature of the first Great Depression—and may, in fact, result in the country suffering the second Great Depression that the pundits claim we have averted.

Allowing the cascade of financial collapses at the start of the first Great Depression was a mistake. However, there was nothing about this initial collapse that necessitated the decade of double-digit unemployment that was the central tragedy of the Great Depression. This was the result of the failure of the federal government to respond with sufficient vigor to mass unemployment. Indeed, the economy only broke out of the Depression when the federal government undertook massive deficit spending to fight World War II. Deficits peaked at more than 25 percent of GDP. This would be the equivalent, in today’s economy, of running annual deficits of $4 trillion.

There was no economic reason that the government could not have spent on this scale in 1931, as opposed to 1941; the obstacles were political. Then, as now, politicians in Washington were obsessed with the budget deficit. They never would have countenanced such spending, apart from the threat to the nation posed by Hitler and the Axis powers. The New Deal deficit spending helped boost the economy and bring the unemployment rate down to single-digit levels, but fear of deficits limited the scale of New Deal programs and caused Roosevelt to reverse course and cut back on spending in 1937, just as the economy was gaining momentum.

Unfortunately, the country seems destined to follow the same course in the current slump as it did in the 30s. The May jobs report should have provided the sort of stiff kick that is needed to revive discussion of additional stimulus. Instead, it seems to have barely shaken Washington’s ongoing obsession with deficits.

more...

http://www.tnr.com/article/politics/89460/jobs-may-umemployment-second-great-depression

[marmar]

1. I wish the powers that be would spend a little more time listening to economists like Dean Baker....

...... ones who actually have a clue and aren't just going to tell them what they want to hear.

[ProSense]

2. It is political, and

the Republicans don't care what happens to the economy. In fact, they're determined to see it stall for what they believe will be their political gain.

Baker's number are off here:

<...>

All of this suggests a bleak picture for the unemployed. The economy must create 90,000 jobs a month just to keep even with the growth of the labor force. To be sure, the dismal 54,000 job performance for May was partly an issue of timing, with jobs showing up in April instead of May. But even taking the last three months together yields an average growth rate of just 160,000. At this pace, it would take more than a decade to get back to normal levels of unemployment.

<...>

Private-sector job growth was 83,000 in May, offset by about 28,000 job losses at the state and local government levels.

The number that's commonly used as the break-even point is 125,000 jobs. The number Baker quotes would mean that average job creation is almost double the amount needed to keep pace.

Also, with 160,000 jobs being created on average, there is cause for concern, and May is alarming, but that is not going to lead to a depression. It would have to continue along this track for another few years. Not saying that's not possible, especially if the GOP succeed, but May is one month. April's numbers were good.

[flpoljunkie]

4. The 54,000 figure is net jobs--private sector gain minus government sector loss--the latter which is

only going to grow worse with so many Republican legislatures and governors like ours in Florida--the Medicare fraudster Rick Scott. And, it is scary to contemplate what will happen to the unemployment numbers when the payroll tax holiday expires at the end of this year and extended unemployment benefits run out in 2012. Both these things stimulate the economy and create jobs.

Republicans know this. They intend to make things worse. It is the only rational conclusion one can draw.

[Vinnie From Indy]

3. One aspect of our current situation that rarely gets discussed is

that the US pulled itself out of the first depression by creating jobs. This time around it will be infinitely more difficult due to globalization of labor.