Robert Samuelson decided to once again push the second Great Depression, applauding the Obama administration for preventing the Great Recession from turning into a depression. This is the great myth (I'm tempted to say "fake news") that establishment types push endlessly with zero foundation.
It is important for the worldview they like to promote, in which we have seen a massive upward redistribution of income over the last four decades, well you know, that's just because that is the way the world is. We may not like this rise in inequality, and after all President Obama did raise taxes on the rich and propose an increase in the minimum wage, and gave us Obamacare (all very good policies), but growing inequality is just baked into the genetics of the modern economy.
The Wall Street bailout that stands at the center of the second Great Depression avoidance myth is the world's largest slap in the face of promoters of the baked-into-the-genetics story. After all, other aspects of the rigging (yes, I'm promoting my free book, Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer) are more subtle.
We have free trade in manufactured goods but rigged protectionist measures that no one knows about that protect doctors, dentists, and other highly paid professionals. We have ever stronger and longer patent and copyright protections. These protections take hundreds of billions of dollars each year out of the pockets of the bulk of the population and give them to the people in position to benefit from them. Protection adds more than $350 billion a year to the cost of prescription drugs alone. We have a Federal Reserve Board that raises interest rates to throw people out of work, and keep workers from getting bargaining power, as a way of ensuring that an arbitrary inflation target is not breached.
These and other policy measures that redistribute income upward are occurring all the time and almost completely escape public attention. But the Wall Street bailout, that was impossible to miss. The basic story was that the greed and incompetence of the major Wall Street banks, Citigroup, Goldman Sachs, Morgan Stanley, Bank of America, and others, put them on the brink of bankruptcy. If we let the market work its magic, all of these banks would be condemned to the dustbin of history.
But rather than leave things to the market, maybe with a dash of retraining assistance for unemployed bankers, Congress and the Fed came racing to the rescue with the TARP and the Fed's bailout. The banks were brought back from the brink of death with access to trillions of dollars of below market interest rate loans, coupled with Treasury Secretary Timothy Geithner's promise that there would be no more Lehmans. In other words, the banks would not be allowed to fail no matter how bad their finances and how incompetent their leaders.
How do you justify this massive intervention to save the hides of many of the country's richest people? Naturally, you say that it was done for the general good. No one really wanted to lend trillions of dollars to save Goldman Sachs and Citigroup, but it was necessary to keep the rest of us from enduring a second Great Depression: a decade or more of double-digit unemployment. The elites circled the wagons and agreed that this would be the story and anyone who didn't agree would be called names.
I long ago stopped giving a damn about elite types calling me names. (I got called lots of names when I was warning about the housing and stock bubbles.) I'm sorry, the second Great Depression story does not make any sense. The reason is that we know the secret for getting out of a depression; it's called "spend money."
If we had allowed the market to work its magic on the Wall Street banks there is no doubt that the initial downturn would have been worse, but the day after Goldman, Citigroup, and the rest went out of business there was nothing to stop the government from spending massive amounts to restore the economy, just as it did during World War II. It was this massive spending that eventually got the economy back to to full employment and finally ended the Great Depression.
The second Great Depression story depends on the country just not taking action immediately in the wake of a crash, but not ever. This view was even given academic gloss with a study by Alan Blinder and Mark Zandi. This widely cited paper contrasts the world in which we had the bailout and the stimulus with one in which we never did anything to boost the economy. It shows in the never-do-anything scenario we would get a decade of double-digit unemployment.
While this is taken as proof that we were saved from a second Great Depression by these actions, it actually shows nothing of the sort. The decision not to rescue Citigroup and the rest did not preclude us from a massive stimulus, the next day, the next month, or the next year, as assumed in the Blinder and Zandi modeling exercise.
Of course, it is possible that the president and Congress would sit there twiddling their thumbs even as unemployment was stuck in the double-digits, but we have never seen anything like this. The first stimulus as passed in February of 2008 when the unemployment rate was 4.7 percent and George W. Bush was in the White House. In addition to stimulus plans put forward by Democratic presidents and members of Congress, Reagan and Ford had both supported large deficits when the economy faced downturns, the latter explicitly as stimulus to get us out of recession.
In any case, the argument that we would have faced a decade of double-digit unemployment had we not rescued Wall Street rested on a political assessment, not an economic one. There was no economic reason that large amounts of spending following a financial collapse would not have boosted the economy back towards full employment and without the albatross of an incredibly bloated financial sector.
Anyhow, this is the story that the elite types do not want people to hear. They do not want everyone to know that we gave billions of months' worth of food stamp benefits to the richest people in the country. Hence, we get the second Great Depression myth, brought to you today by Robert Samuelson.