Why 2008 Was Not 1929 Redux
[For my response to Paul Krugman’s later column on the same general theme, click here. For comment on the President’s OAS diplomacy, click here.]
Maybe it’s just spring. But for the first time in over a year, an old but newly strange feeling has gripped me: optimism. It crept up on me slowly and is growing stronger day by day.
Readers of this blog will find several implied comparisons between our current predicament and 1929 (see especially 1 and 2). Now I think those comparisons were overblown. Here are seven reasons why the stock-market crash of 2008 won’t turn out to have been 1929 redux:
1. The world is different now. In 1929, the world’s dominant free-market economy, the British Empire, was in decline. Europe was still recovering from the devastation of World War I, which had ended only a decade earlier. Germany was in the grip of the Weimar Republic’s hyperinflation, which soon brought Hitler to power. Japan was just beginning to industrialize seriously. China and India were still under colonial rule, and Russia was a basket case, dismembered by its bloody Bolshevik revolution. Brazil was part of a woefully underdeveloped southern hemisphere, mostly run by inept dictators controlled or manipulated from the north.
What a difference a century makes! Europe collectively is comparable to us in economic strength. Germany has the world’s fourth largest economy, having just been surpassed by China. Japan has the second largest—an economic powerhouse known worldwide for quality and reliability in a wide range of manufactured goods. China and India are free from colonial rule, rapidly industrializing, and relatively independent. China has vast foreign currency reserves, which it is using to stimulate its own economy. And the Indian Nano—that cute, tiny car that will sell for about $2,000— is obviously intended for domestic consumption, not European, Japanese or American markets. Brazil is booming; its auto industry, which relies heavily on cane-derived ethanol for fuel, is the world’s most self-sufficient. Even Russia is not in bad shape: it has lots of fossil fuels, the need for which is not going to disappear any time in the immediate future.
2. We are different now. In 1929, a small coterie of super-rich people controlled American finance and industry. The group was so small we can’t even describe it as a social class. Its members had built up huge fortunes not subject to income tax until 1913. The Sherman (Antitrust) Act, adopted in 1890, was just beginning to break up the monstrous industrial combines they had assembled. Members of this coterie labeled FDR a “traitor to his class” for supporting labor’s most fundamental aspirations and for trying to contain the damage that their own stupidity and greed had wrought as the Great Depression deepened.
Our industry then was primitive. It comprised things like steel, railroads, shipping and agriculture. Whole industries that we take for granted today were just being invented or just gaining scope and scale: things like airplanes, cars, electric lighting, telephones, and electrical appliances. Electronics, computers, and mass-produced pharmaceuticals—let alone the Internet and biotechnology, were not even on the drawing boards. Silicon Valley was half a century away.
Today industry is infinitely more diverse. Not only that, we share wealth much more broadly. Over 50% of us own stock (or did before the 2008 crash). Managers and CEOs, though still envied and reviled, are no longer a small coterie of privileged, supremely powerful industrial or financial autocrats. They are a whole social class, with diverse political and economic views, Republicans and Democrats. They are responsible and often responsive to regulators, shareholders, employees and even communities.
Not only is our industry infinitely more diverse. Our people, collectively, are infinitely stronger. In the Great Depression, millions of people had little more than the clothes on their backs. They stood humbled in bread lines, or they worked on WPA projects, where they cut trees, broke ground, and engaged in simple, labor-intensive construction. Now tens of millions of people have homes, cars, some savings, and even some stock. Big earth-moving machines do construction, and we have plenty of them. People’s 401(k)’s may be depleted, but they still have positive net worth. Millions have enough savings or assets to go bottom fishing for homes and other things as soon as they think a bottom is near.
3. The world is smarter now. As the Great Depression deepened, the great industrial powers did exactly the wrong things. They retreated into their shells and raised tariffs to protect their domestic industrial bases. We joined that trend, passing the Smoot-Hawley tariffs, which most scholars now consider a primary economic motivator for World War II. Two of the most rapidly industrializing countries, Germany and Japan, responded with authoritarian takeovers, militarism, and headlong preparation for war.
Today, the response is infinitely smarter. Japan and China took the last century’s lessons and adopted huge stimulus packages. So did the UK. The rest of Europe was less enthusiastic about stimulus but managed to create some of it anyway. No important nation, so far, has taken any serious step down the primrose path of Smoot and Hawley. International trade is secure in its web of sensible mutual obligations wrought by infinitely greater economic understanding. It is ready to rebound at a moment’s notice as global economic conditions improve. And the G-20 powers just committed a trillion dollars to keep the most vulnerable nations from bearing too much economic pain.
Detractors of our President made much of his failure to secure huge stimulus packages from Europe at the recent G-20 meeting. But the consensus that did emerge—no new tariffs or trade barriers, massive help for the developing world, and stronger, cooperative regulation of finance—would have been unthinkable in 1929. If the world’s leaders had reacted then as they have now, World War II might never have happened.
4. We are less important now. In 1929, we were practically the only game in town. We were the world’s dominant and most rapidly rising economic power. No other country could come close. That’s why the whole world held its breath, waiting to see when we would oppose Nazi and Imperial Japanese aggression.
Today we are still dominant, but the world around us has changed immeasurably. China has surpassed Germany to become the world’s third largest economy. Germany and Japan have realized their economic potential as manufacturing and innovative powerhouses, this time to peaceful ends. India and Brazil are coming on strong, and Russia has nearly recovered from its seventy-year ideological disease. Even South America has replaced most of its pathetic dictatorships with thriving free-market economies. South Africa and several other African nations have done likewise.
Why does this matter? Because the economic collapse started here in America and still has its greatest impact here.
For a while, we Americans felt poorly concealed schadenfreude as banks abroad succumbed to global ripples from our subprime debacle and housing bubble. We scoffed at the notion of “decoupling.” But now, several months later, we can see that our own economy was not just the cause of the collapse, but its epicenter. Real-estate bubbles bursting in other nations (principally the UK, Ireland, and Spain) had nowhere near the effect of ours bursting here at home. Foreign economies whose banking systems were unscathed—such as China’s, India’s and Brazil’s—will lead the world out of this recession.
As that happens, we will be among the beneficiaries of the multipolar world that I and others saw forming months ago. Maybe I should read my own blog posts more carefully.
5. Huge sums of cash are sloshing about. In 1929, many wealthy people lost everything because it took time to sell stock. By the time they got around to selling, they had no value left. Millions of others, who worked as laborers from day to day, had nothing to sell.
Today, half of our entire population owned stock before the recession began. Every one of them could sell stock on line in a minute or two, from anywhere in the world, over the Internet. Lots of them did, both before the market crashed and on its way down. So trillions of dollars in cash now lie in millions of private hands, much of it waiting eagerly for a positive sign to invest again.
That’s why the stock market is so volatile. With every bit of good news, some of that huge store of cash sloshes back into equities. There hasn’t been all that much good news lately, and yet our Dow has risen over 20%. There is plenty of ready money out there to finance business expansion and new business ventures, once investors figure out when and where reliable growth will come.
6. The catastrophic collapse has limited scope. Investors are more cautious now, as they should be. But there are only two industries in fundamental distress: finance and automobiles. Finance collapsed because of the greed and stupidity of its (mostly American) managers and their foreign counterparts’ lack of independence. The car industry is in collapse because of enormous global overcapacity and a growing realization that the internal combustion engine is nearing the end of its useful life. The air travel and aircraft industries are in suspension between the downdraft of plummeting business travel and the updraft of sharply lower fuel prices.
But there is nothing wrong with the rest of industry that restoration of credit and confidence can’t cure. People worldwide still need food, drugs, clothing, and consumer products, and most of the world’s population still covets the electronics, appliances, advanced drugs and medical devices that developed countries enjoy. These industries may have some excess capacity in developed countries, but there are plenty of customers elsewhere who need their products and will buy them as soon as they have money to do so.
As for basic industries—mining, steel, other metals, and cement—that’s where the stimulus packages come in. China’s and our own huge stimulus packages will keep these industries humming as we replace our aging infrastructure and China brings its enormous and still-primitive hinterlands into the twenty-first century.
7. The world’s largest economy now has rational leadership, and the world knows it. Imagine that your nation is partially or wholly dependent on a powerful foreign country’s economy. Then imagine that that country has been run for eight years by a clique of dogmatic fools. Imagine that these “leaders” governed from their guts, knew nothing about economics, valued ideology over evidence, and gave every indication of being intransigent bullies to boot.
That’s how the world viewed us during Dubya’s and Cheney’s misrule. If you can think of any circumstance more destructive of global confidence, please let me know.
Our President is no Messiah. But the world’s leaders are no fools, either. The admiring—even adoring—looks they bestowed on him at the G-20 summit were genuine. They reflected enormous and well-justified relief.
Now the world’s leaders know that the leading military superpower and sole economic superpower has thoughtful leadership with strategic vision, respects facts and expertise, and exercises self-restraint. Instead of a know-nothing imperium, they see a responsive government that reacts intelligently to evidence, understands economics, and is willing to listen.
Although largely atmospheric so far, these facts make an enormous difference in a global economy. Responding to reason rather than bullying is just human nature. Even Ahmadinejad is beginning to come around.
It has taken me over two months to begin to feel the change in mood and tone, and I’ve supported Barack Obama enthusiastically since early 2007. How much longer will it take for political and business leaders worldwide to fully internalize the change? When they do, their steps will be lighter and their outlook improved. Their willingness to cooperate with us and to assume their fair shares of prudent risks will grow exponentially.
All these positive effects won’t happen overnight. There are still high hurdles to leap. Foreclosures are resurging after a brief moratorium, and housing prices will continue to fall as a result. Toxic asset valuations will fall with them, and financial institutions that hold them will need further help. GM will probably go through expedited bankruptcy, and Chrysler might fail (although Fiat appears willing). Employment is a lagging indicator in any event, and it probably won’t level off—let alone begin to climb—for another year or so. As the President says, there’s a lot of pain still left to endure.
But two undeniable facts remain. First, the world is a far, far different, smarter and better place than it was in 1929. The global economy is infinitely more diverse, decentralized, and resilient. Second, our present calamity is more a collapse of American finance and global confidence than a total collapse of the global economy.
Study the multimedia review of profits of Dow Jones Industrial companies recently published in the Wall Street Journal. It lets you see each company’s profits, quarter by quarter, since late 2007, just before the recession began. If you delete the financial firms and GM, virtually all the Dow firms are still profitable, and their profits and relative positions are not much different today than they were before the recession began. Part of the reason is that these firms are multinational; they make a substantial part of their money—if not a majority—abroad, in the global economy.
The real problems are in our own financial and housing sectors, where the crisis started, and in the auto industry, parts of which are becoming obsolete. But the Obama Administration is addressing all three sectors effectively. After weeks of taking the usual “daddy knows best” approach to transparency (don’t let the rubes know anything, or they’ll cause a run on the bank), it has resolved to let some light in. When it does, investors will regain confidence in the stronger banks, and private capital will flow to them. The government may have to invest more taxpayer money in the weaker ones, but the sector as a whole will begin to revive.
The Administration has loosed enormous sums for mortgages and refinancings, and lenders are tying to stem foreclosures wherever possible simply because workouts are cheaper and less disruptive. And some of those huge sums sloshing about out there are looking for bargains in housing and will rush in whenever a bottom begins to seem evident.
As for autos, the Obama Administration is doing the hard work that makes sense. It is pruning unfruitful trees realistically and relentlessly. It may force GM into expedited bankruptcy and allow Chrysler to disappear. If it does, it will be making room for electric cars from major global manufacturers, startups like Tesla Motors and Fisker Automotive, and whatever is left of GM. At the same time, our government will invest heavily in an advanced electric grid and other infrastructure to power these future cars and a much-needed transition to clean electric energy.
There’s not much more that government (or anyone) can do, and these useful steps are likely to become more effective over time. The global economy’s unprecedented resilience, plus that huge store of sloshing cash, create conditions for a rapid rebound when confidence returns. Once these facts sink in, business, consumers and investors here and abroad may come to share my growing optimism, and this recession may turn out to be shorter than anyone now expects.
Update: If you want to see some of the spirit that will whip this recession, both here and around the world, watch this.
P.S. Paul Krugman’s Take.People who compare Paul Krugman’s column this Friday and my (foregoing) post of Wednesday might think we disagree. Krugman emphasized reasons for caution and was skeptical of a quick rebound. I emphasized reasons for optimism.
But if you read both pieces carefully, you’ll see there’s far less disagreement than first meets the eye. Both of us cite reasons for caution, including the precariousness of toxic-asset valuations and the likely short-term effect of the foreclosure spike just now beginning. Both of us think that employment will be the last thing to recover, with any real rebound unlikely this year. Both of us advocate continuing the course of economic medication prescribed by our Doctor in Chief. Just as you shouldn’t stop your course of antibiotics just because your strep throat feels a bit better, so we shouldn’t stop our stimulus, regulatory reform, or real economic transformation before their effects have become unmistakable and entrenched (past tense).
There are only two differences worth discussing. Krugman worries that politicians will seize on signs for optimism—any signs—as excuses to return to the business as usual that caused this mess. His warning is dead on. I once accused him of poor political insight, so this time I’ll salute him. I would hate to have any politician exploit optimistic views, including my own, as excuses for making and selling more gas guzzlers, more complex derivatives, more McMansions, and more useless, empty shopping malls. My optimism arose from my belief that our unmatched powers of creative destruction would transform our economy, not snap it back to our old, profligate ways like an overstretched rubber band. We’ve got to finish what we start.
A second apparent difference was focus. Krugman’s piece focused almost exclusively on our own domestic economy and its peculiar troubles. Mine focused on the global economy and our part in it. Implicit in my analysis was the view that growth and investment abroad will lead the world out of this recession.
I still believe that. In short, I think much of the rest of the world is in better shape than we are. We have some catching up to do, not only in rationalizing our finance sector, but also in repairing and modernizing our infrastructure. If you want to see how far behind we are in high-speed, efficient rail transit, for example, watch this. Nothing I could find in Krugman’s column refutes these points; his piece doesn’t address the global economy.
My optimism stems from my belief that there are still enough smart people here—and enough money—to do the right thing and do it well and quickly. For example, almost any investment in clean electricity or the equipment to use it to move people and goods efficiently should pay off. Those who invest in the past, whether in fossil fuels, the machines that burn them, McMansions, or shopping malls selling useless gewgaws, in the long run will fail. And they should. There are still many opportunities to make money honorably here, but being stupid is not among them.
I don’t think Krugman and I disagree on that. Where we may disagree is my view that the rest of the world will get on just fine without us.
To me, what’s at stake in following our President’s wise prescription is not global progress. It’s arresting our own relative decline. Empires (economic and otherwise) come and go, but the global economy is in better shape than at any time in world history.
What we should be concerned about is our part in it and our future capacity to lead. Reinforcing those will require radical political and industrial change here at home, from decentralizing and downsizing our finance sector, through breaking the corrosive power of the fossil-fuel industries, to selling the convenience and efficiency of modern mass transit. As our President has hinted, anyone who prefers our modern air transport, with all its delays, frustration and indignities, has never ridden a city center-to-city center bullet train in Japan, France, Spain or China.
P.S. The President’s OAS DiplomacyRepublican bloviators continue to amaze us with their total lack of common sense. As our President returned from his enormously successful initial contact with Latin America, they put up a barrage of flack. Why wasn’t he tougher and nastier, they asked, with folks like Venezuela’s Hugo Chavez and Bolivia’s Evo Morales?
What planet do these bloviators come from? When they meet people for the first time, do they usually insult and threaten them to “break the ice”? Is that how people like John Ensign—a Republican Senator from the great industrial state of Nevada—got their start in politics? If not, where do they get off suggesting that our President adopt such stupid, counterproductive tactics? Do they, like Rush Limbaugh, want him to fail?
Have these nay-sayers experience in anything besides demagoguery? Surely they have none in business. If they had, they wouldn’t imply that good negotiation begins with insults and threats. For thirty years, the best book ever written on negotiating has advised “separat[ing] the people from the problem,” i.e., being nice to negotiating partners in the hope that everyone will see the problems to be solved, not each other, as the enemy. Maybe these so-called politicians should read it.
But besides the obvious point that you don’t improve relations by being nasty, the bloviators missed three essential points.
First, North and South America have an enormous range of common interests. They go way beyond drugs, vestigial revolutionary movements in the outback, and oil. Should Obama ignore these interests just to play the tough guy?
Second, all Latin American countries are not created equal. Chavez’ controls oil, a fungible commodity in the world economy that is on its way out. Morales’ controls lithium, which represents the world’s energy future. We Americans should be generous in offering Morales and his people the best possible deal, which we can do because we still have the world’s most innovative economy and the longest experience in dealing with Latin America. Obama’s friendly overture was a good start.
Finally, in pointing out the goodwill that Cuba’s ambassadorial doctors have engendered throughout the region, our President implicitly fingered a failure of imagination on our part. For decades we have viewed Latin America mostly as a source of natural resources and a battleground for our consistently failing “war on drugs.” How much more good will could we have engendered if, for example, we had invited 100 students from Latin America, every year, to attend our best medical schools free of charge?
For two decades our policy toward Latin America, including Cuba, could best be described as malign neglect. No only did we fail to propose anything outside our most immediate short-term self-interest and Cuban-Americans’ stiff-necked resentment. Our self-interest wasn’t even enlightened.
Our new President means to change all that, starting with a smile and a pat on the back. We all should be relieved and pleased as punch that someone with his common sense and flair for diplomacy is finally going to try to clean up the mess we’ve helped make (or in Cuba’s case perpetuate) in our own back yard.