Understanding the Lesser Depression
**J. Bradford DeLong, U. C. Berkeley, August 2011
The Lesser Depression
Some call it the “Great Recession”. I call it the “Lesser Depression”. It is the worse episode of macroeconomic distress that the U.S. has seen since the Great Depression itself—although it does remain and will almost surely conclude as far smaller than the Great Depression of the 1930s. It is the largest episode of prolonged high unemployment since World War II. And it is what the American economy is going through right now.
If economics is of any use at all, it should be able to help us understand our current Lesser Depression—to give good and convincing answers to the four obvious questions:
- Why, irregularly but semi-periodically, do industrial market economies suffer recessions and depressions?
- Why is this particular Little Depression sharper, suddener, and larger than other such episodes we have seen in the post-World War II period since World War II of the 1940s ended the Great Depression of the 1930s?
- Why is the economy not recovering nearly as rapidly as the economy did before during other pre-1990s post-World War II economic downturns—why is this Lesser Depression dragging on for so long?
- What should the government be doing in order to fix the Lesser Depression—to make it as short and as near-painless as possible?
- Why is the government doing what it is doing rather than what we economists advise it to do?
How to Do Economics: Goldsmiths, Plumbers, and Pigs
Before we start to tackle these questions, however, comes a digression on the method of economics as an intellectual discipline.
There are, broadly, three ways to do the intellectual discipline of economics. My old teacher the late Rüdiger Dornbusch gave names to the practitioners of these three intellectual styles.1 He called them “goldsmiths”, “plumbers”, and “pigs”.
Goldsmiths: Goldsmiths start with a few organizing principles—principles of human psychology and motivation and of market structure. They would then work them with precision, deducing theoretical corollaries and consequences to create a finely-crafted, detailed, and beautiful intellectual structure They would then apply that structure to understanding the world. I could follow this style, but then this book would be very much like a Principles of Economics textbook, and there are enough Principles of Economics textbooks in the world already—I am aiming to write something different that will, I hope, be more useful.
Plumbers: Moreover, there is a danger in attempting to be a goldsmith. You might turn out to be a plumber instead. Suppose that you start with your few organizing principles of human psychology and motivation and of market structure, but you get them wrong. Or suppose that you get your organizing principles right but try to apply them to situations that they do not really apply to. Then when you reach the end of your intellectual journey you will discover that you have constructed an elaborate Rube Goldberg-like device that gives no insight into what is going on in the real world.
Pigs: Better, Rüdi thought, to be what he called a “pig”: to leap into a subject with vigor, and then to wallow in the subject until you emerged with a defensible and coherent point of view, even though you did not proceed with goldsmith-like precision from a few organizing principles of human motivation and market structure to their logically-entailed conclusions. When Rüdiger Dornbusch called my other teacher Lawrence Summers “a fearful pig”, he was paying him a high compliment.
We are going to be pigs. We are going to look first at some data about the recent history and current state of the economy—at the Lesser Depression in which we are enmeshed—then we are going to look at some old-fashioned economists' attempts to think about and understand economic situations like the one we seem to find ourselves in today, and last we are going to wallow in the subject and so attempt to assess, explore, and develop the different hypotheses about what is going on that economists have set out.
Let us start wallowing.