Robert Naiman wrote:
> Is there any case, in the last 100 years, when an industrial democracy
> has experienced anything like the Great Depression, without it being
> abetted by contractionary government policy?
There aren't many data points there. There's the 1930s, maybe the
1990s in Japan, and perhaps the decade that's starting now. But I'll
try to answer the question anyway. The 1930s recession was encouraged
to become a full-scale depression by contractionary monetary policy.
I'll talk about that below. I don't know enough about Japan to say
much.
The current onset does not seem to have contractionary monetary policy
behind it. Interest rates have been drifting upward, but that wasn't
due to contractionary monetary policy. Here are some recent rates, on
U.S. Treasury securities:
3-mo 6-mo 3-yr 10-yr
2000. 5.85 5.92 6.22 6.03
2001. 3.45 3.39 4.09 5.02
2002. 1.62 1.69 3.10 4.61
2003. 1.02 1.06 2.10 4.01
2004. 1.38 1.58 2.78 4.27
2005. 3.16 3.40 3.93 4.29
2006. 4.73 4.81 4.77 4.80
2007. 4.41 4.48 4.35 4.63
All columns shows that these rates rose from 2003 up to 2006, but then
fell in 2007. This suggests that Fed became more expansionary in 2007
than in 2006. Longer-term interest rates are not shown because they
are not very influenced by Fed policies. Looking at monthly interest
rates (not shown), they leveled off in about July of 2006 to July 2007
and then after that.
What about real rates? they were low in the middle 2000s. My estimates
of the shorter-term three listed above were actually negative in 2004
and moved positive after that. But I don't the moves as big enough to
encourage recession.
Why did rates rise before 7/2006? My feeling is that it was partly a
matter of rising demand for funds; the Fed does not dictate interest
rates, just as it doesn't dictate money supplies. Instead, it's
constrained by private demand and supply. It was also partly a matter
of the Fed trying to accumulate "ammunition" to fight recession.
Greenspan had cut the fed funds rate almost as low as it goes (to
moderate the 2001 recession). That meant that the Fed couldn't
stimulate the economy if it wanted to. Finally, the Fed does not want
the real rate to be negative or too low. They seem to have a target
rate (following something like the "Taylor rule") and if rates are too
low by this standard, they up them.
So rates had to go up (from the Fed's perspective). After July 2007,
rates have fallen due to falling demand for funds and the Fed's
efforts to prop up the financial system. The Taylor rule has been
jettisoned, at least for now. All else equal, this seems to be the
right thing to do.
There are three ways that monetary policy can contribute to causing
recessions. The first is of the sort we saw during the late 1920s and
early 1930s. The recession was encouraged partly by anti-inflationary
efforts (not that inflation was significant, but it was feared). Then
the recession was converted into a depression (with its symptoms seen
partly in Milton Friedman and Anna J. Schwartz's famous "Great
Contraction" of the money supply).
My feeling is that such policies resulted from the "recessions purge
all imbalances so they're a good thing" attitude of Andrew Mellon and
many others at the time, by the commitment to the gold standard, and
by the conservative response by banks (resisting rate cuts). More
fundamentally, i.e., behind these, there was a world-wide employers'
offensive going on, or what UAW chief Doug Fraser called a "one-sided
class war" in a later era. That is, there was a big effort to smash
Bolshevism and small-b bolshevism (anarchism, socialism, etc.), to
destroy labor unions, and to shift the distribution of wealth and
income to the rich. In the 1920s, that undermined consumer demand
growth, which ultimately set the stage for collapse. In the 1930s, it
led to wage cuts which made matters even worse. The Fed wanted to
"liquidate labor": high wages were seen as being at the root of the
problem of recession. This meant the excessive purgation of
imbalances, even from capitalism's point of view.
Monetary policy largely reflects the same structural fissures that
characterize the capitalist mode of production as a whole. In addition
to class antagonisms (just mentioned), there's structurally-based
competition amongst capitalists. This added force to the employers'
offensive: wage-cutting by one employer encouraged the same by others,
which in turn made the original wage cuts less effective at increasing
profits. At some unknown point during the 1920s, this pushed the US
economy beyond the point (in terms of income distribution) where
stable growth of the "real" economy (production) could be sustained.
The bosses got "greedy" and fouled their own nest.
Part of capitalist competition is the division between production and
finance. The financiers want a bigger piece of the pie, too. They get
this is by pushing for deregulation and by figuring out ways to get
around current financial regulations. This encourages extensive
extensions of credit and increasing degrees of leverage. This in turn
sets up the financial system for collapse, as in 1929 and (perhaps)
2008. The financial collapse reinforced the effects of production's
fragility and crisis.
That's the second way that monetary policy encourages depression.
Instead of directly contributing to the collapse (as a proximate or
efficient cause), they set the stage by "giving the moneyboys what
they want." (This might be called structural or material/formal
causation.) Alan Greenspan did this in spades. _Laissez-faire_ finance
prevailed in the 1920s, too.
The third way that monetary policy encourages recession or depression
is related, since it involves setting the stage. Sometimes a small
recession _is_ needed. In the late 1960s, for example, profits were
being squeezed and employers were trying to deal with this by pushing
up prices (i.e., via inflation). A recession might have stopped this.
But this purging of mild imbalances was prevented by two things.
First, Johnson and Nixon didn't want to cut military spending on the
imperial venture _du jour_. Second, this was ratified by the Fed,
because it was committed to the Bretton Woods fixed exchange-rate
system. Because the Nixon recession was mild from the system's point
of view (though hard on -- and destructive to -- many or most people),
the imbalances persisted, and stagflation resulted.
Since changing capitalism in the leftward direction was ruled out,
this necessitated the big recessions of 1980/1981-82. This started the
new employers' offensive, also known as the neoliberal policy
revolution which has persisted until this day (though it may be ending
as we speak).
(The 1960s imbalances were qualitatively different from any seen
during the 1920s, so while Mellon's strategy _might_ have made sense
in 1968, it did not do so in the 1930s.)
> Japan had a huge overhang, and low interest rates and public spending
> didn't restore growth; but did they have 25% unemployment?
No, they didn't. Unemployed went from about 2.1% (as measured using US
standards) in 1900 to 5.4% in 2004 and has fallen since then Part of
the small size of the rise is due to hidden unemployment (non-working
workers who are being paid).
> ... And isn't the story of this article therefore basically right? That
> there is no danger of a "Great Depression" so long as you have
> reasonable government policy?
In theory, a reasonable government policy could have a positive
impact. In fact, one of the basic tendencies of capitalism is toward
growing explicit socialization of production, circulation, and
finance. That usually refers to the concentration and centralization
of capital and the like, but it also means the greater role for
governments. The anarchy of capitalist production, the class
antagonism, and the aggressive competition amongst capitalists causes
problems that can be (temporarily) solved via explicit socialization.
So the "wise technocrats" like Keynes or social democrats are called
in. Alternatively, fascist financial wizards or the like may be
brought in, if the historical situation is ripe.
But the fact is that "reasonable government policy" doesn't fall from
the sky. We can't go back in a time machine to make sure that the Fed
did the right thing from 1929-33 or from 2003-2007. Repeating myself,
government policy reflects the same problems (class antagonism, cap
competition) that the dynamics of the economy do. (The Fed and
government do have "relative autonomy," but that doesn't matter very
much in the longer term.) The employers offensive of the 1920s or the
one in the US since the late 1970s affects both the economy and
policy.
Now it's true that if we had a mass workers' movement -- even of a
social-democratic sort -- we could see capitalism managed in a more
reasonable way. We saw something like that in W. Europe during the
1950s & 1960s. In the US, we saw that in a anemic way, but some
reasonable management arose from military Keynesianism. The problem is
that the system, its big power blocs, and its leaders hate mass
workers' movements and fight to the death to get rid of them. So such
movements are usually temporary, only persisting to the extent that
people like us fight for them.
--
Jim Devine / "Segui il tuo corso, e lascia dir le genti." (Go your own
way and let people talk.) -- Karl, paraphrasing Dante.
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