An excellent article from Vanity Fair comparing the current economic mess to the Great Depression of the late 1920s and 1930s. One of the arguments is that the economy was weak even before the recession, but this was masked by the property boom. Do we need government spending cuts or investment in the country’s people and infrastructure? It raises the question – are we already going down the wrong path?
A must read.
For a time, the bubbles in the housing and lending markets concealed the problem by creating artificial demand, which in turn created jobs in the financial sector and in construction and elsewhere. The bubble even made workers forget that their incomes were declining. They savored the possibility of wealth beyond their dreams, as the value of their houses soared and the value of their pensions, invested in the stock market, seemed to be doing likewise. But the jobs were temporary, fueled on vapor.
Of four major service sectors—finance, real estate, health, and education—the first two were bloated before the current crisis set in.
As in 1937, deficit hawks today call for balanced budgets and more and more cutbacks. Instead of pushing forward a structural transition that is inevitable—instead of investing in the right kinds of human capital, technology, and infrastructure, which will eventually pull us where we need to be—the government is holding back. Current strategies can have only one outcome: they will ensure that the Long Slump will be longer and deeper than it ever needed to be.
Two conclusions can be drawn from this brief history. The first is that the economy will not bounce back on its own, at least not in a time frame that matters to ordinary people… Monetary policy is not going to help us out of this mess….
…anyone who believes that monetary policy is going to resuscitate the economy will be sorely disappointed. That idea is a distraction, and a dangerous one.
What we need to do instead is embark on a massive investment program—as we did, virtually by accident, 80 years ago—that will increase our productivity for years to come, and will also increase employment now.
Public investments could be directed at improving the quality of life and real productivity—unlike the private-sector investments in financial innovations, which turned out to be more akin to financial weapons of mass destruction.
The second conclusion is this: If we expect to maintain any semblance of “normality,” we must fix the financial system.
…the implosion of the financial sector may not have been the underlying cause of our current crisis—but it has made it worse, and it’s an obstacle to long-term recovery.
…we have poured money into the banks, without restrictions, without conditions, and without a vision of the kind of banking system we want and need.