Map of life expectancy at birth from Global Education Project.

Monday, September 15, 2008

Uh oh

My mother remembers the Great Depression, although she was just a little girl. My grandfather was a professor at New York University, and never lost his job, but my mother remembers that men used to come to the back door, and my grandmother would make sandwiches for them. At the height of the Depression, the official unemployment rate in the United States was above 30%. Stock prices fell to 20% of their peak value in 1929, banks and corporations failed and a whole lot of bonds became worthless as well. Most ordinary people's life savings were wiped out.

The catastrophe happened because working people didn't have enough income to buy the potential output of U.S. businesses, so, lacking sound investment opportunities, the upper middle class and the wealthy created an immense bubble in stocks and real estate. When the bubble collapsed, it took the economy with it.

There were important differences between the 1930s and today. For one thing, international financial relations are more or less reversed. The Depression spread to Europe because European economies were dependent on loans from the United States. When cash-stressed American banks called in those loans, it pulled the rug out from under Europe. Today, the U.S. is a debtor nation, so there is an opposite danger: if foreign investors lose faith in U.S. financial assets, we'll just go down harder. The Depression also led nations, including the U.S., to throw up barriers to trade, bringing global commerce to a near halt. That hasn't happened yet, but we'll see. Here's a little history lesson for those who are interested.

Today, we also have what are called "automatic stabilizers," created during the New Deal, in response to the Depression. These are unemployment insurance, and Social Security. Of course the Republicans want to largely do away with these. They reduce the risk of a deflationary spiral and an economic collapse, but whether they eliminate it? Well, I don't know. But I do know that John McCain believes the fundamentals of our economy are strong, by which I assume he means that a depression won't be so bad for the beer business. In fact, we may be in for some trying times indeed. I'm not sure I put a whole lot of faith in President Palin's leadership.

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