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Mit Schlag

Worst Economic Downturn since the Great Depression?

It has been the worst financial crisis since the Great Depression. I am now going to stick my neck out and say it will probably be the worst downturn since the Great Depression.

Calculated Risk:

Calculated Risk: Retail Sales Collapse in October: The Census Bureau reports that retail sales collapsed in October:

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for October, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $363.7 billion, a decrease of 2.8 percent from the previous month and 4.1 percent below October 2007. Total sales for the August through October 2008 period were down 1.3 percent from the same period a year ago. Retail trade sales were down 3.1 percent from September 2008 and were 5.0 percent below last year.

The following graph shows the year-over-year change in nominal and real retail sales since 1993. To calculate the real change, the monthly PCE price index from the BEA was used (October PCE prices were estimated based on the increases for the last 3 months)... [R]eal retail sales declined by 8.8% (on a YoY basis). This is the largest YoY decline since the Census Bureau started keeping data. Retail sales are a key portion of consumer spending and real retail sales have fallen off a cliff.

Path Finder

Paul Krugman is considerably more optimistic:

Depression Economics Returns: The economic news, in case you haven’t noticed, keeps getting worse. Bad as it is, however... we probably won’t see the unemployment rate match its post-Depression peak of 10.7 percent, reached in 1982 (although I wish I was sure about that).

We are already, however, well into the realm of what I call depression economics... in which the usual tools of economic policy... have lost all traction. When depression economics prevails... virtue becomes vice, caution is risky and prudence is folly.... [W]ith no possibility of further interest rate cuts, there’s nothing to stop the economy’s downward momentum. Rising unemployment will lead to further cuts in consumer spending, which Best Buy warned this week has already suffered a “seismic” decline. Weak consumer spending will lead to cutbacks in business investment plans. And the weakening economy will lead to more job cuts, provoking a further cycle of contraction.

To pull us out of this downward spiral, the federal government will have to provide economic stimulus in the form of higher spending and greater aid to those in distress — and the stimulus plan won’t come soon enough or be strong enough unless politicians and economic officials are able to transcend several conventional prejudices. One of these prejudices is the fear of red ink. In normal times, it’s good to worry about the budget deficit — and fiscal responsibility is a virtue we’ll need to relearn as soon as this crisis is past. When depression economics prevails, however, this virtue becomes a vice.... Another prejudice is the belief that policy should move cautiously.... Under current conditions, however, caution is risky.... Finally, in normal times modesty and prudence in policy goals are good things. Under current conditions, however, it’s much better to err on the side of doing too much than on the side of doing too little....

The Obama administration will almost certainly take office in the face of an economy looking even worse than it does now.... My own back-of-the-envelope calculations say that the package should be huge, on the order of $600 billion. So the question becomes, will the Obama people dare to propose something on that scale? Let’s hope that the answer to that question is yes... it would be very dangerous to give in to conventional notions of prudence.