October 12, 2015
Hey, we should all be thankful that Ben Bernanke saved us from a Second Great Depression and a Martian invasion. Yes, the Second Great Depression theory is being touted yet again, this time by Robert Samuelson. He tells us that unemployment would have soared to 25 percent without the bailout of the banks.
As I’ve written any number of times, neither Bernanke, Samuelson, or anyone else has said a word as to why a big stimulus package from the government would not have quickly gotten the economy going again and unemployment falling. This is what finally got us out of the first Great Depression; the government spent a ton of money to fight World War II. There is no magic or mystery to spending on wars, any spending in the economy has the same effect.
If someone wants to make a political argument, that we could not have gotten political support for a serious stimulus, that’s fine, they should put that argument on the table. But that is a political argument, not an economic one. Furthermore, we have never seen our political leaders refuse to take steps to boost the economy out of a severe recession in the post-World War II era. George W. Bush signed the first stimulus when the unemployment rate was 4.7 percent. So it would be an interesting political argument, but one that lacks any evidence to support it.
After going through the account of how Bernanke saved us from the Martians (sorry, the Second Great Depression), Samuelson genuflects about the cause of the prolonged downturn. He notes that Bernanke blames the financial crisis, while he attributes the prolonged downturn to the loss of confidence. Fans of data everywhere attribute the weakness to the loss of $8 trillion in housing wealth.
With the plunge in house prices, we saw the end of the boom in residential construction, costing us roughly 4 percentage points of GDP (@$720 billion annually in today’s economy). The loss of wealth also led to a drop in consumption, in accordance with the housing wealth effect that economists have been writing about for around 60 years. The drop in consumption was around 2–3 percentage points of GDP ($360 billion to $540 billion annually in today’s economy).
There was nothing that would obviously rise up to fill this massive gap in demand. We did get the stimulus in 2009–2010, which helped a great deal. But it wasn’t large enough or long enough to get us back to full employment. It’s hard to imagine what anyone thought would fill the gap in the absence of a larger stimulus.
I know this is all distressingly simple, and folks really want to believe the downturn was very complicated and mysterious (who could have known?), but it wasn’t. The basic story was pretty much as clear as day for anyone who could look at the economy with open eyes. Unfortunately, we didn’t have anyone like that in a position of responsibility in the last decade.
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