What Makes a Depression Lesser?

     Part of it depends what countries you're talking about. This Depression looks lesser when you compare the U.S. today with the U.S. in the 30s. We've heard some triumphalism from Sumner lately with the rising stock market and some healthy retail numbers he's argued this shows the fiscal multiplier is zero. After all, the  market hasn't missed a beat following the expiration of the payroll tax holiday and sequestration. Clearly, this is because of Bernanke's QEInfinity-right?

      http://www.themoneyillusion.com/?p=20364

     Today there was some triumphalism from Republicans: after all, things are looking pretty good one month into the sequester.

      http://diaryofarepublicanhater.blogspot.com/2013/03/are-republicans-winning-sequester-fight.html

       This seems to put those who oppose the sequester into the unedifying position of having to explain why things are so good. Which is hardly what I want to do. After all, I actually want things to keep getting better. Unlike the GOP I don't want the economy to tank for political gain.

        However, there is another narrative to explain why things aren't so bad: they actually are pretty bad. Again, it's all relative. Britain, for instance is in a pretty bad way, though they're in better shape than Europe. Still, even here this points out the stupidity of Britain's leadership. They imposed Greek austerity even though they're not Greece, they're nothing like Greece.

        Krugman points out that Europe's numbers don't look so good compared with the Great Depression. They didn't fall as far as in the 30s, but they're recovery has been much feebler-of course they had much further to come back in the 30s.

         "The timing is, I think, a bit off — Europe’s earlier slump began in 1929, but the later didn’t really begin until early 2008. Still, the basics won’t change. In the 30s there was a very severe initial slump, but a strong recovery after 1933 as one country after another went off gold and adopted reflationary policies. This time around, the initial slump wasn’t so bad, but recovery was hobbled by austerity policies, especially in countries on the euro, and has now stalled out completely. So Europe in 2013 is doing barely better than Europe in 1935 — and all indications are that by next year recovery will be lagging behind what was achieved in the Great Depression."

           http://krugman.blogs.nytimes.com/2013/03/29/europes-second-depression/      

          Delong makes the case that our recovery hasn't been so earth shattering either-though a lot better than  Europe-the one eyed man is king... 

       "In the 12 years of the Great Depression – between the stock-market crash of 1929 and America’s mobilization for World War II – production in the United States averaged roughly 15% below the pre-depression trend, implying a total output shortfall equal to 1.8 years of GDP. Today, even if US production returns to its stable-inflation output potential by 2017 – a huge “if” – the US will have incurred an output shortfall equivalent to 60% of a year’s GDP."

     "In fact, the losses from what I have been calling the “Lesser Depression” will almost certainly not be over in 2017. There is no moral equivalent of war on the horizon to pull the US into a mighty boom and erase the shadow cast by the downturn; and when I take present values and project the US economy’s lower-trend growth into the future, I cannot reckon the present value of the additional loss at less than a further 100% of a year’s output today – for a total cost of 1.6 years of GDP. The damage is thus almost equal to that of the Great Depression – and equally painful, even though America’s real GDP today is 12 times higher than it was in 1929."

     "When I talk to my friends in the Obama administration, they defend themselves and the long-term macroeconomic outcome in the US by pointing out that the rest of the developed world is doing far worse. They are correct. Europe wishes desperately that it had America’s problems."

     "Nevertheless, my conclusion is that I should stop calling the current episode the Lesser Depression. Yes, its shape is different from that of the Great Depression; but, so far at least, there is no reason to rank it any lower in the hierarchy of macroeconomic disasters."

     "The US bond market agrees with me. Since 1975, the nominal annual premium on the 30-year Treasury bill has averaged 2.2%: in other words, over its lifespan, the 30-year nominal T-bill yields are 2.2 percentage points more than the expected average of future short-term nominal T-bill rates. The current 30-year T-bill yields 3.2% annually, which means that, unless the marginal bond buyer today is unusually averse to holding 30-year Treasuries, she anticipates that short-term nominal T-bill rates will average 1% per year over the next generation. The US Federal Reserve keeps the short-term nominal T-bill rate near 1% only when the economy is depressed, capacity is slack, labor is idle, and the principal risk is deflation rather than upward pressure on prices. Since WWII, the US unemployment rate has averaged 8% when the short-term nominal T-bill rate is 2% or lower."

That is the future that the bond market sees for America: a slack and depressed economy, if not for the next generation, at least for most of it.

     http://delong.typepad.com/sdj/2013/03/the-north-atlantic-macroeconomy-let-it-bleed-we-are-live-at-project-syndicate.html

     During the recovery we've averaged GDP of about 2.2%. For a recovery that's very feeble, historically speaking. In the 30s we had some turbo charged growth-from a much lower starting point of course. Still it's hard to remember that in the 70s there was a lot of derision of the recovery from the 1975 recession-it was complained that we weren't garnering the kind of growth to bring down unemployment. Yet, then we were averaging over 4% GDP. That was considered too slow. Ultimately, Carter would be one of only 4 Administrations since the 60s to actually give us more jobs created than population growth-the other 3: Reagan, LBJ, and Clinton. 

     In any case this is a more sobering look. We do seem to be taking off and lets' hope we are. However, this has been a historically slow recovery even in the U.S. We're getting subpar growth while in Britain and Europe they're actually regressing. 

    I recently agreed with Tim Duy that we may not see another recession till 2017. This seems like a long time without a recession, but bear in mind that we had a lot to come back from in lost output. In the 30s it would be 8 years till the next recession. Yet Duy could be right and we would still be way behind where we should be. 

     http://diaryofarepublicanhater.blogspot.com/2013/03/on-recovery-ill-join-tim-duy-on-his-limb.html

      So one answer to why we're doing so well is that we're not. With more activist policy-particularly on the fiscal side-we'd be doing much better. While we haven't had Europe's level of austerity we haven't had the level of stimulus we should have. 

      Look at it this way. Even if we're not doing so bad with QEInfinity and a month into the sequester. Can really we say are better off if we had QEInfinity and no sequester? And can we say we would be better with QEInfinity and no sequester than the same but also passing the $100 billion in new stimulus spending Obama and the Dems have argued for?

     If we're 60% below trend as Delong shows could that gap possibly be less if we had more activist policy out of the Fed and Congress? To say that QEInfinity mitigated the effects of the sequester-bearing in mind we're only one month in-is not to say that the sequester was a good policy. No one claims that, not even the GOP though they also are claiming credit for it in their typically pique of cognitive dissonance. 

    To agree with Sumner though that we've now in the last 3 months proven that the fiscal multiplier is zero you have to show that the U.S. economy circa 2013 is a Panglossian Best of all Possible Worlds. Is anyone interested in making that case?