Richard Florida
by Richard Florida
Wed Mar 18th 2009 at 10:50am UTC

Are Bailouts Saving the U.S. from a New Great Depression?

In a word - no.

Citing Justin Fox’s terrific chart of unemployment then and Kevin Drum’s comments, the always-insightful Matt Yglesias writes:

Populists on the left and opportunists on the right have taken to condemning the series of “bailouts” the government has undertaken since the fall of Lehman Brothers. And certainly I think these situations have been mishandled in a number of respects. And beyond that, I think these situations are inherently problematic in a variety of ways. But there’s a strong case to be made that the policy response to the recession has made things better than they might otherwise have been. When I say something like that, people tend to pester me in response for specifics: What, exactly, would have happened if we’d just let AIG and Citi and Bank of America and others collapse? The problem is that it’s impossible to say, in detail, what would have happened.

Yglesias is right: It’s hard to say exactly what might have happened without the bailouts and stimulus.

But something much bigger is at work today then in the 1930s. It’s the structure of our economy that’s the key – and that dwarfs the effects of government bailouts, stimulus, and related policy.

Our economic class composition and occupational structure have changed dramatically over the past several decades. In the 1930s, the majority of Americans worked in manufacturing and related industries. We had an enormous working class. These industries and jobs are very vulnerable to recessions and business cycle shifts with tremendous ups and downs. Recessions – never mind bigger events like the current crisis – devastate manufacturing and working class jobs -  as Michael Mandel, Ryan Avent (which Yglesias more recently cited), and our own research at the Prosperity Institute has detailed. The creative class, which now accounts for some 40 million workers and about a third of the workforce is much more flexible and resilient. It is this changed economic class and occupational structure which are keeping us from Depression-level unemployment rates.

The bailouts and stimulus, while they may help at the margins, also pose an enormous opportunity costs.  On the one hand, they impede necessary and long-deferred economic adjustments. The auto and auto-related industries suffer from massive over-capacity and must shrink. The housing bubble not only helped spur the financial crisis, it also produced an enormous mis-allocation of resources. Housing prices must come a lot further down before we can reset the economy – and consumer demand – for a new round of growth. The financial and banking sector grew massively bloated – in terms of employment, share of GDP and wages, as the detailed research of NYU’s Thomas Phillipon has shown – and likewise have to come back to earth.

On the other hand, there is the classic question: What better and more effective things might have been done with these trillions? That’s for historians to ponder and decide. But the combination of the massively misallocated resources produced by the bubble (plus the costs of military adventures) combined with humongous bailout spending puts the U.S. behind the economic eight-ball in a way it has not been in more than a century. Having hold on the reserve currency helps, but it cannot absolve all these compounded sins.  Sooner or later the money will run out; bills will come due.

That creates a wide open structural opportunity to accelerate what Fareed Zakaria has dubbed the “rise of the rest” to accelerate. Crises are periods where the relative position of nations and regions can and do change dramatically. (Do I think the U.S. will lose its hegemonic position: Of course not. My hunch is that the U.S. is in the same position structurally as England at the onset of the Long Depression of 1873. It was not until the next major crisis – the Great Depression of 1929 and the onset of WWII that it lost its position to the United States. So worst case: The U.S. has one more long-cycle at the top of the heap). But, just think of all the ways the trillions of bailout money could be used to build the economy of the future. And while you’re doing that imagine that some other places outside the United States that have been patiently building and conserving their resources may start to figure out how to do just that.

The clock of history ticks on. Over time, it tends to leave behind those places who get stuck, get trapped, or try too hard to breathe life back into the old order, neglecting the new one that is emerging. And that’s what really worries me.

7 Responses to “Are Bailouts Saving the U.S. from a New Great Depression?”

  1. Elana Says:

    ‘He who pays the piper calls the tune.’

    With China being the cash behind United States’ “military adventures” and other funding, I wonder what their position and influence over US policy. It is in the best interest of China to keep Americans spend-happy buying Chinese products where they turnaround and lead the money they receive back to them.

  2. Mad Hemingway Says:

    Richard, the way unemployment was measured during the 1930s and today are different. They changed that back after Carter. The real unemployment rate is closer to 17%-18%.

    Obama’s failing his first big test. His proclamation about “change” remains as vague today as it did when he was campaigning. And because of that, he’ll be viewed as Bush-lite if he doesn’t change course.

    Maybe people should send Geithner and Summers the big red Bozo nose, since they’ve taken on the roles of corporate clowns.

  3. Swordsman Says:

    Hemingway is correct. U6 rather than U3 is much nearer the mark (see bls.gov). As for Obama failing some test, he’s been in office 2 fricking months and inherited two wars and the worst recession in 80 years. How about cutting him some slack?

    What we need is a paradigm shift in how we think of cities, of jobs, of finance, of government, and of transportation. We’ve let the 20th Century (and the first half of the 20th Century even) dictate to us for far too long.

  4. Kevin Carson Says:

    Totally right about the overcapacity of the auto industry. In fact, we’ve got an entire economy organized on Sloanist mass production lines, relying on planned obsolescence and consumer debt to keep the wheels turning at full capacity.

    Leaving aside the bailout issue, the main item on the plate should be 1) removing the subsidies and protections to the present centralized corporate economy, and 2) removing the barriers to a successor system coalescing out of the rubble.

    Under the heading of #1, that means especially eliminating transportation subsidies (funding the Interstate with weight-based tolls on trucks, funding civil aviation ENTIRELY from its own revenues and eliminating eminent domain power for building and expanding airports) that promote artificially large market area and firm size. It also means streamlining the tax code to eliminate special tax advantages for firms engaged in capital-intensive, high tech production and mergers and acquistion (e.g. the depreciation allowance, R&D credit, subsidies to technical education, the interest deduction for corporate debt, the exemption of stock swaps from capital gains, etc.).

    Under #2, fall–especially–zoning and “safety” regulations that impose mandatory minimum overhead costs on microenterprise, and thus effectively criminalize low-overhead, small-batch production in the household and informal sectors using “spare cycles” of ordinary household capital goods most people already own. We need to elminate all the regulatory barriers to people running microbakeries with ordinary kitchen ovens, unlicensed cab services with a car and cell phone, etc. And we need to eliminate the barriers to providing liquidity for barter between such producers through LETS systems, organizing networked microcredit through mutual banks and crowdsourcing, etc. We also need to eliminate “intellectual property” as the main bulwark of many corporate walls against self-managed peer production by their own “human capital,” and as a legal barrier to modular design and generic replacement parts and other prerequisites of repair-and-recycling product design.

  5. Swordsman Says:

    Damn, Kevin, where have you been hiding? Good thoughts.

  6. T-Rock Says:

    Found this blog after Matt Yglesias linked to it.

    I don’t know where you learned your economic history, but there was never a point in the American economy when manufacturing constituted a majority of the labor force – in the 30s about as many people worked in agriculture as in manufacturing.

    If you define the “creative class” as “people in high-value added growth industries”, which seems to be the case, of course they’re not going to be fired during recessions to the same extent as people in “low-value addded declining industries”. That’s tautological, not insightful.

    And what on Earth do you mean that countries outside the US have been “building and conserving their resources” to invest? China is not sitting on $2 trillion in reserves because they’re biding their time – they were already investing such vast amounts of money that their economy couldn’t absorb more. If you think Japan is biding its time for something better to come along, you’re crazy – that country is desperate for good ideas now. Who else is saving money? That’s just feel-good pablum that doesn’t reflect economic reality.

  7. Mad Hemingway Says:

    I voted for Obama, but based on what he’s said, he’ll continue the war in Afghanistan (increasing troops to 400K and keeping the Defense industry in business) and some of his cabinet-level picks like Geithner, Summmers, and keeping Bernanke, means that he’s going down the road is Republican-lite. On the health insurance front, single payer is off the table, so the insurance industry is still keeping health insurance artificially expensive.

    Considering the deep financial hole that the US in, winding down Afghanistan is the first big area for savings.