Question: the economics of recession

[ShortsBelfast]

I don't know if I would go as far as the full theory of Kondratiev cycles, but there certainly are both business and consumer cycles and there will be economic downturns (and upturns). But things like the Crash of 1929 and the Great Recession aren't set in stone either. For example:-
1) If Hoover had permitted Mellon to free up the money supply somewhat after the 1929 Crash (as Mellon wanted to do OTL), there might never have been a Great Depression just a recession and the US economy starting to recover by 1932. The 1929 Crash would still have been a thing but wouldn't have had any graver long term historical resonance than the 1907 Crash;
2) If Russia hadn't gone Communist at the end of WW1, hadn't defaulted on Tsarist bonds and was fully engaged in the global economy, the business cycle and consumer cycle would still most probably have delivered a Crash and, at the very least, a recession. But this would likely be triggered in 1931 or 1932 and not 1929 due to a larger global market;
3) If Roosevelt had been assassinated in 1933, contrary to much AH speculation, the New Deal would have probably worked better under Garner who had a better instinctive grasp of economics than FDR and opposed those elements of the New Deal which modern economists believe to have delayed recovery and prolonged the Great Depression; and
4) Some technical innovation being introduced ten years earlier (e.g. commercially viable TV around 1921) probably generates a consumer electronics boom that would take the worst effects off the Great Depression.

 

[Whanztastic]

The 2008 derivative driven crash avoidable, people saw it coming as early as 1999. It wouldn't've avoided the whole possibility of a housing related recession, but would've made a major difference. Mortgage lenders were still going to get shady, the rating agencies would still have their issues.

But imagine if a different President was in office during Enron, not one that received direct contributions from it. An administration without major ties would've been able to make stronger corporate reforms. Who is in the room matters, saying that Gore in 2000 or Kerry in 2004 would've led to the exact same Great Recession outcome as Bush seems... dubious. This isn't say the recession was fully a partisan matter (Democrats certainly were extremely cozy with Wall Street at this time), but the personalities involved is importation. Who takes the Fed in 2006, for example, could have a major impact from turning the Great Recession into a regular one.

Brooksley Born

Brooksley E. Born (born August 27, 1940) is an American attorney and former public official who, from August 26, 1996, to June 1, 1999, was chairperson of the Commodity Futures Trading Commission (CFTC), the federal agency which oversees the futures and commodity options markets. During her tenure on the CFTC, Born lobbied Congress and the President to give the CFTC oversight of off-exchange markets for derivatives in addition to its role with respect to exchange-traded derivatives,[4] but her warnings were ignored or dismissed, and her calls for reform resisted by other regulators.[5] Born resigned as chairperson on June 1, 1999, shortly after Congress passed legislation prohibiting her agency from regulating derivatives.[6][7]

 

[GeographyDude]

All given, IMO. (I take "breakup" to apply only to the survivors, since the true deadbeats have already been wound up & closed down.)

I'd add a requirement the ratings agencies have a duty (fiduciary duty?) to the people asking for ratings to provide accurate ones, or (at a minimum) a ban on taking money from the companies offering the instruments as conflict of interest.

I'd also add a 90% tax on stock options (not deductible by the company, either), 90% capital gains tax, & 90% tax on all income over US$2 million.

I've contemplated a stock trades tax, too, but heard arguments it hurts the market. I'm not clear how; I'd target the tax to hit "flip trades" or short-term holds hardest (as speculation), & actually reward "buy & hold"--which is actual investing. That, IMO, reduces volatility & actually increases actual investment.

Some of this is too radical for my tastes.

Which I kind of love! , since I’m usually the most radical, most liberal, leftie, socialist, etc. and it’s nice playing the conservative role for a change!

Okay, a huge thing is the East Asian Miracle, which successfully raised the living standards of a whole lot of people, much more so than even the most succcessful of the communist experiments. That is, I believe in mixed systems.

And then, even people working at Walmart (and nothing wrong with that!) want to be rich, and no matter how unrealistic, it’s not our job to step on the dream. At the same time, the average person does want to treat their (imaginary and future!) employees fairly. And that gives us plenty to work with.

Try to get a fuller answer later.

 

[phx1138]

Some of this is too radical for my tastes.

Which I kind of love! , since I’m usually the most radical, most liberal, leftie, socialist, etc. and it’s nice playing the conservative role for a change!

Glad to oblige.

even people working at Walmart (and nothing wrong with that!) want to be rich, and no matter how unrealistic, it’s not our job to step on the dream. At the same time, the average person does want to treat their (imaginary and future!) employees fairly. And that gives us plenty to work with.

I wouldn't disagree with any of that.

 

[GeographyDude]

3) If Roosevelt had been assassinated in 1933, contrary to much AH speculation, the New Deal would have probably worked better under Garner who had a better instinctive grasp of economics than FDR and opposed those elements of the New Deal which modern economists believe to have delayed recovery and prolonged the Great Depression;

If we’re going to talk about, for example, the NRA — National Recovery Administration — being clunky and stifling, well, I’m going to talk about French indicative planning and the mixed economies of the Asian Tigers, all of which are demonstrated successes. Although for Japan, Taiwan, South Korea, and now all of China, it’s probably 70% capitalism and 30% socialism, which is a mix I’m perfectly happy with.

So, please explain more.

And would you agree that most of all FDR was an experimentalist?

 

[Sam R.]

>heterodoxy
Is normally the politest thing that marginalists say about Marxist analyses. I’m taking it as a compliment.

Obviously we agree my account was tailor to descriptive usefulness. Personally I would have dug our compositions of capital and labour. Stay tuned for “gymcrack, the second derivative, and zero hours”: the post WWII story of how Ford II collapsed his company by being out of step with methods of exploitation and accumulation.

Kondratieff is normally referred to a seminal in modern conceptions of waves or cycles, which is why I name dropped, not to claim Kondratieff’s specific theory, but to note minor and major crises in capitals reproduction (53 versus 72).

4) Some technical innovation being introduced ten years earlier (e.g. commercially viable TV around 1921) probably generates a consumer electronics boom

Radios and pianos didn’t penetrate the class because productive monopolies (Ford) didn’t experience sufficient benefits from capital goods productivity relative to other sectors or labour skill composition and discipline to “eat their own shit” and pay their workers to buy their commodities. It took the WWII discipline on line and productivity to allow fordism to generalise. TV purchases won’t be widespread enough to delay a recession. Now there’s a perfectly good, cheap to produce, worker preferenced commodity which is consumed regularly and not held in reserve. A commodity that forces labour to cycle preference towards commodity rather than investment. Beer. Just sayin.

 

[phx1138]

Radios and pianos didn’t penetrate the class because productive monopolies (Ford) didn’t experience sufficient benefits from capital goods productivity relative to other sectors

That's getting too esoteric for me. Are you saying, in essence, the unit price isn't high enough for the number of sales? Because I'd have thought Motorola, frex, did pretty well with radio sales (& TV, too).

A commodity that forces labour to cycle preference towards commodity rather than investment. Beer.

That would appear not to be an ideal choice, either, given the comparative ease of production (& bear in mind, before Prohibition, there were upwards of 6000 breweries in the U.S. ), meaning any one company will have a real problem achieving production & sales scale approaching, frex, Ford's with the Model T--which appears to be your standard.

 

[Sam R.]

Are you saying, in essence, the unit price isn't high enough for the number of sales?

the inverse. Radios and Pianos required too great a proportion of labour to capital goods. If you’re ahead of the curve with more mechanisation and profitably sell all the goods your machines produce, you will temporarily (20 year frame) be more profitable than firms that are more labour reliant. This holds as true today for algorithms and open cut mines as it did before.

Beer is easy for individual capital to enter, but that wasn’t 29s problem. 29 was excess investment chasing limited production. But if you buy more beer and fewer shares as a society you’re going to delay the rich over investing.

As Ford and Keynes observed the long term issue was to increase the absolute price of labour to allow labour to buy the mechanised equivalent of beer: tv and cars. This is also called a low equilibrium trap being transformed into a high equilibrium state. Either works: cheaper labour, under consumption, over investment / expensive labour, more consumption, comparatively reduced investment.

 

[GeographyDude]

. . . As Ford and Keynes observed the long term issue was to increase the absolute price of labour to allow labour to buy the mechanised equivalent of beer: tv and cars. This is also called a low equilibrium trap being transformed into a high equilibrium state. . .

Is this the same as saying a growing middle class ramps the entire economy?

 

[IntellectuallyHonestRhino]

I agree.

I remember this guy telling how his high school civics teacher said the unemployment rate is either 0% or 100%. If you’re working, it’s 0%. But if you’re looking for a job and not finding it, unemployment is 100%.

A lot of truth in that!

Not as much as some might think, for even if you have a job, your wages will still go down under a recession (it's only a positive for you if prices of godos go down by an even larger percentage, thus increasing your purchasing power). Also, if you're unemployed, you're more likely to find a job under an expansionary period than under a recessionary period.

 

[phx1138]

the inverse. Radios and Pianos required too great a proportion of labour to capital goods. If you’re ahead of the curve with more mechanisation and profitably sell all the goods your machines produce, you will temporarily (20 year frame) be more profitable than firms that are more labour reliant. This holds as true today for algorithms and open cut mines as it did before.

Beer is easy for individual capital to enter, but that wasn’t 29s problem. 29 was excess investment chasing limited production. But if you buy more beer and fewer shares as a society you’re going to delay the rich over investing.

As Ford and Keynes observed the long term issue was to increase the absolute price of labour to allow labour to buy the mechanised equivalent of beer: tv and cars. This is also called a low equilibrium trap being transformed into a high equilibrium state. Either works: cheaper labour, under consumption, over investment / expensive labour, more consumption, comparatively reduced investment.

Okay, I get the "hard product" examples: raising wages in the short term, & driving down labor & production cost, meaning Henry had the right ideas.

I'm still not seeing how it applies with beer... Labor cost would seem very high, & unit cost very low. Unless you mean the volume of sales is just so high, it overcomes both of those. Or unless cost to enter the production market is easy & cheap?

 

[Sam R.]

Is this the same as saying a growing middle class ramps the entire economy?

It corresponds during 1945-1972 when national production is internal to the state. (Ownership *not* necessary cf Au or NZ where capital was UK or US). Workers spend on products made by workers inside that states economy which reinforces workers ability to purchase.

But if you import consumer goods wages in the imperial country will stagnate and you can get capitalists aren’t buying enough super yachts and so they’re investing.

OTOH this raises Chinese wages.

It doesn’t help that the most recent consumer goods require so little labour compared to capital that video game artists aren’t keeping the toilet cleaners in business.

 

[Sam R.]

Beer.
Market entry is easy.
capital costs are low.
demand is infinite.
employment per unit of capital is high and beer workers buy beer and toilet paper: increased consumer velocity.

The problem is that beer isn’t susceptible to mechanisation. Legalising beer may shift capitalist investment to productive goods but long term growth will be lower because the proportionate labour cost per unit of profit is high.

But as we’ve looked at until capital tolerated increased wages nobody could buy capital intensive cars. Beer is one way to delay the 1929 crisis and lessen it: it deters the problem of excess capital and raises wages slightly within existing models of mechanical productivity.

 

[Sam R.]

So why not beer historically?

the old middle class’s petitbourgeois morality about drunkenness which was an effort to regulate and control workers

drunk workers have worse labour discipline (saint Monday hangover holiday)

and The IWW organised out of beer halls and bars.

 

[Alexniko]

Looking at the runup to 2008 makes me wonder if there aren't indicators that could be relied on to produce gov't intervention, without a persistent brake.

Sez WP, 1980-2001, the ratio of median home prices to median household income fluctuated from 2.9 to 3.1. In 2004, it was 4.0, & by 2006, 4.6.

Seems to me, once it got above 3.5, or even 3.25, it should have been a sign to do something.

Or are there "blips" where it spikes higher & doesn't stay?

OTOH, is a drop under 3 a bad sign, too?

People in biblical times, like people in all past epochs, suffered from hunger when adverse natural conditions destroyed the harvests, i.e. when too little was produced. Today, however, bad weather or insect pests can no longer cause famine, at least in the industrialized countries. Crises do not arise from the fact that too little is produced, but "too much". The problem is not that the stocks are empty, but that they are too full. The companies are stuck with their products, too high a range of goods depresses prices. Factories stop manufacturing, go bankrupt. Any company that restricts or gives up its production forces its suppliers to restrict or shut down production. Workers and employees who lose their jobs and therefore their income are lost as solvent customers. A vicious circle. A capitalist crisis is a paradoxical affair: people become impoverished because there are too many goods. The unemployed are on the street because the machines are stopped. Distress arises from abundance. One would think that it is easy to remedy the situation. If the stocks overflow and many people are poor, why not give the excess goods to the poor? If the machines stand still, why not let the unemployed work with the machines and produce useful things? If there is a lack of demand, why not raise wages? The answer is simple: because we live in capitalism. Capitalist production is not production for the supply of people, capitalist production is production for the profit. And if further production does not bring any profit, then the production is stopped, regardless of whether the products are needed or not.

 

[GeographyDude]

. . . As Ford and Keynes observed the long term issue was to increase the absolute price of labour to allow labour to buy the mechanised equivalent of beer: tv and cars. This is also called a low equilibrium trap being transformed into a high equilibrium state. . .

I think John Maynard Keynes during the midst of the Depression, maybe around (?) 1935, talked about getting stuck at an equilibrium point way under the maximum production which the economy is capable of.

Is this what you’re referring to?

And if you can recommend an above-average reference, I’ll be doubly happy!

 

[GeographyDude]

“ . . . and it wasn’t until May 2014 (the month of the AEA conference) that payroll employment re-attained its January 2008 peak. . . ”

https://wws.princeton.edu/system/files/research/documents/Blinder_What_Did_We_Learn_from_the_Financial_Crisis_the_Great_Recession_and_the_Pathetic_Recovery.pdf

This is my guy . . economist Alan Blinder!

And yes, the Great Recession (Dec. ‘07 — June ‘09) had a slow recovery indeed.

 

[phx1138]

“ . . . and it wasn’t until May 2014 (the month of the AEA conference) that payroll employment re-attained its January 2008 peak. . . ”

https://wws.princeton.edu/system/files/research/documents/Blinder_What_Did_We_Learn_from_the_Financial_Crisis_the_Great_Recession_and_the_Pathetic_Recovery.pdf

This is my guy . . economist Alan Blinder!

And yes, the Great Recession (Dec. ‘07 — June ‘09) had a slow recovery indeed.

Mine, too, I'd say. That PDF should be required reading for every Congresscritter & Senator; hell, everybody with responsibility for financial policy anywhere.

It's also an astonishing indictment of how buggered things were OTL.

 

[GeographyDude]

. . . That PDF should be required reading for every Congresscritter & Senator; . . .

Of course, as a Congresscritter said, I think back in the ‘30s, it’s awfully hard to get a man to see a point, when his livelihood depends on him not seeing the point.

And with the big money required in politics, even for an honest person, and each member of the House now representing 700,000+ persons, this whole thing has probably come full circle!

 

[GeographyDude]

. . . I'd add a requirement the ratings agencies have a duty (fiduciary duty?) to the people asking for ratings to provide accurate ones, or (at a minimum) a ban on taking money from the companies offering the instruments as conflict of interest. . .

I may have more of an answer than I had the other day.

Okay, the standard with chemicals seems to be that it’s just fine for the company to introduce the chemical until at some later date that we have pretty good evidence that it’s not safe, and somehow the burden of proof is largely on us. Obviously, there are middle courses of action without asking the company to “prove a negative,” which people love repeating that you can’t do.

And/or when a Vegas casino wants to introduce a new game, they don’t get instant approval from the gaming authority (love this analogy! )

——————

And a lot of the engine of real estate tax shelters is the fiction of depreciation. On the other hand, when a landlord puts on a new roof, he or she is expected to “capitalize” it and then slowly deduct it over a number of years. Why don’t we just switch these two!