The Problems With Stiglitz’s Depression

January 2nd, 2012 at 10:59 am David Frum | 7 Comments |

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What is wrong with Joe Stiglitz’s analysis of the Great Depression? Click here for Part 1.

Problem 1: Repeat after me – The Great Depression was a global event. That’s a fact American economic historians always have great trouble keeping in mind, and Stiglitz here succumbs to the national myopia.

How did the troubles of the American farmer wreck every economy from Germany to China? If your theory of the Depression does not start with the huge debts bequeathed by the First World War – and the failure of the postwar settlement to re-establish a stable economic and financial order – then it’s not a very good theory.

Problem 2: So here’s the chart of the decline of farm employment.

The question that’s bound to occur is: Do these farmers look trapped to you? Between 1900 and 1930, the farm share of the population declines on a steady glidepath. There look to be abundant opportunities elsewhere. We can import into our chart some of our knowledge of US history: migration from the farm was certainly easier for whites than for blacks. Perhaps it makes sense to think of Southern black sharecroppers as “trapped.” (The unusually sharp drop in the farm population between 1940 and 1960 represents the great migration of Southern black farmworkers to industrial cities.) But poor black sharecroppers were hardly in a position to accumulate significant debt in the 1920s. Nor is it plausible to describe the decline in their consumption from pitifully little in 1928 to miserably less in 1930 as an important constraint on overall economic demand in the US economy.

Problem 3:

If “trapped industrial workers” are the reason for today’s deep and protracted unemployment, why was the plunge in employment deepest and most protracted in Nevada, South Carolina, Florida and California? The Rustbowl suffered its most painful shocks between 1974 and 1993. If Stiglitz’s story is true, why did we not see deep and prolonged unemployment in the 1990s and 2000s, closer in time to the steepest drops in industrial employment?

Perhaps Stiglitz has in mind a story like this: Dad loses his steelworking job in Youngstown, Ohio, and subsists thereafter on a disability pension. Junior graduates from high school in Youngstown, finds work in the homebuilding industry in Florida – but is now stranded by the collapse of the housing market. Some verion of that story probably applies to a large number of people, but how is it a story of “entrapped” labor? Isn’t it a story of labor flexibility – manufacturing to construction? Yes, perhaps Junior’s life history tells us something about the shrinking prospects for less-skilled workers. But that’s a different narrative from the narrative that Stiglitz wants to tell.

Problem 4:

Stiglitz’s critique of Obama administration policy reminds me of the old law school joke, “Right result, wrong reason.” Even as he rejects the administration’s theory of its actions, he calls for extra doses of exactly the same policies.

The only way it will happen is through a government stimulus designed not to preserve the old economy but to focus instead on creating a new one. We have to transition out of manufacturing and into services that people want—into productive activities that increase living standards, not those that increase risk and inequality. To that end, there are many high-return investments we can make. Education is a crucial one—a highly educated population is a fundamental driver of economic growth. Support is needed for basic research. Government investment in earlier decades—for instance, to develop the Internet and biotechnology—helped fuel economic growth. Without investment in basic research, what will fuel the next spurt of innovation? Meanwhile, the states could certainly use federal help in closing budget shortfalls. Long-term economic growth at our current rates of resource consumption is impossible, so funding research, skilled technicians, and initiatives for cleaner and more efficient energy production will not only help us out of the recession but also build a robust economy for decades. Finally, our decaying infrastructure, from roads and railroads to levees and power plants, is a prime target for profitable investment.

It’s a familiar program, exactly the program that President Obama laid out in his Kansas speech last month, subject to all the same objections. The US has doubled K-12 spending since the early 1990s. What do Americans have to show for it? Who believes that even more spending will buy better results? What results have been bought by the rising per-student cost of higher education? Yes, we can improve the job statistics (at least for a time) by putting more people on the government payroll at relatively high wages. But as Tony Blair and Gordon Brown too painfully demonstrated in the UK between 1997 and 2008, their government-led employment did not translate into higher productivity, but only into a heavier debt load for taxpayers to sustain when their own incomes are dropping. As for direct government investment in energy technology, one can only say … sigh.

- MORE TO COME -

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7 Comments so far ↓

  • valkayec

    There’s a lot to take on in this blog post. However, I’ll start with just one: education. The Atlantic, on Dec 29, published an article discussing the difference between the US k-12 education system and Finland’s education system. Finland ranks at the top of the list while the US ranks in the middling range. What is the difference? According to Pasi Sahlberg, director of the Finnish Ministry of Education’s Center for International Mobility, the biggest difference are America’s penchant for competition over equity and the failure of the US to view teachers as important professionals. Perhaps Sahlberg’s idea of equity of opportunity might also apply to other segments of our society/economy. As PIMCO’s Republican CEO said Sunday morning, our economy (or formal economic policies) over the course of the last 30 years have turned upside down, placing capital above labor, and until that result is reversed the threat of economic instability – or worse – will remain.

    http://www.theatlantic.com/national/archive/2011/12/what-americans-keep-ignoring-about-finlands-school-success/250564/

    From his point of view, Americans are consistently obsessed with certain questions: How can you keep track of students’ performance if you don’t test them constantly? How can you improve teaching if you have no accountability for bad teachers or merit pay for good teachers? How do you foster competition and engage the private sector? How do you provide school choice?

    The answers Finland provides seem to run counter to just about everything America’s school reformers are trying to do.

    For starters, Finland has no standardized tests. The only exception is what’s called the National Matriculation Exam, which everyone takes at the end of a voluntary upper-secondary school, roughly the equivalent of American high school.

    Instead, the public school system’s teachers are trained to assess children in classrooms using independent tests they create themselves. All children receive a report card at the end of each semester, but these reports are based on individualized grading by each teacher. Periodically, the Ministry of Education tracks national progress by testing a few sample groups across a range of different schools.

    As for accountability of teachers and administrators, Sahlberg shrugs. “There’s no word for accountability in Finnish,” he later told an audience at the Teachers College of Columbia University. “Accountability is something that is left when responsibility has been subtracted.”

    For Sahlberg what matters is that in Finland all teachers and administrators are given prestige, decent pay, and a lot of responsibility. A master’s degree is required to enter the profession, and teacher training programs are among the most selective professional schools in the country. If a teacher is bad, it is the principal’s responsibility to notice and deal with it.

    And while Americans love to talk about competition, Sahlberg points out that nothing makes Finns more uncomfortable. In his book Sahlberg quotes a line from Finnish writer named Samuli Puronen: “Real winners do not compete.” It’s hard to think of a more un-American idea, but when it comes to education, Finland’s success shows that the Finnish attitude might have merits. There are no lists of best schools or teachers in Finland. The main driver of education policy is not competition between teachers and between schools, but cooperation.

    Finally, in Finland, school choice is noticeably not a priority, nor is engaging the private sector at all. Which brings us back to the silence after Sahlberg’s comment at the Dwight School that schools like Dwight don’t exist in Finland.

    “Here in America,” Sahlberg said at the Teachers College, “parents can choose to take their kids to private schools. It’s the same idea of a marketplace that applies to, say, shops. Schools are a shop and parents can buy what ever they want. In Finland parents can also choose. But the options are all the same.”

    • sweatyb

      The US seems to be marvelously good at misappropriating funds. Ironically this seems to stem from Republican-style distrust of government and fear of getting ripped off. We spend a lot of money to ensure that the people we have working for us aren’t conning us. And then that the people we hired to check the people we have working for us aren’t also conning us. Ad infinitum.

      We don’t trust our teachers. We don’t trust our school administrators. More money isn’t going to fix that problem.

      On a side note: If you look at your list of questions (Which accurately describe quite a bit of current educational debate), they’re not questions about education at all. Those are manufacturing metrics.

      • valkayec

        Just a note, everything below the link is a excerpt from the Atlantic article. It’s kind of unfortunate that there’s really no good way to highlight a lengthy excerpt on this forum’s formatting.

  • sweatyb

    +1 to Frum.

    Though I seriously doubt that his prescription for what ails the economy is going to match mine. Especially when he says a heavier debt load for taxpayers to sustain and fails to acknowledge that the US is in a position to borrow at the rate of inflation.

    Just as you cannot starve your way out of debt; the federal government cannot cut its way to recovery.

  • JohnMcC

    First, terrific pictures! I feel free to criticize the editors so I ought to praise them when I think it’s deserved.

    Second, Mr Frum’s remark that the global nature of our Great Depression is ignored by the article is true. But it’s really a pretty short article. I’d bet Mr Stiglitz is aware of the international nature and contributions to the disaster. One thing I’d say along that line is that the ‘Great Migration’ of African-Americans from the rural south to the industrial north was driven by more than the pull of better jobs. It was also driven by a push from the collapse of the price of cotton in the early ’20s.

    And third, this is not brand-new analysis. It is essentially a fairly succinct retelling of the ‘structural unemployment’ argument. And that is a good thing to hear because it is important to recognize the truth that the US economy was not doing well during the ‘oughts’. Middle class incomes actually were stagnant or in slight decline during that period and consumption was kept alive by personal debt.

    Finally, it’s good to read such a strong statement concerning the need to regulate the Banking/Investment segment of the financial sector. I personally would start with Alan Greenspan’s head on a pike on Wall Street. But that’s just me.

  • Sinan

    I keep coming back to the individual. When my personal debt load starts to overwhelm me, I cut back. When it overcomes me, I retrench and cut my losses. When millions are in the same boat, it has devastating power to destroy economic activity outside of the minimum it takes for human survival. This has happened many times to previous economies going back to the Babylonians. The answer has always been the same. War, disintegration or forgiveness of debt (Jubilee). We kid ourselves that we can grow ourselves out of a debt induced orgy because it appeals to our dual sense of being honorable (pay your debts) and being optimistic (American Exceptionalism). While this can get you through minor debt induced pain, I have no faith that it can get us out of a massive personal debt crisis without a remedy that is draconian but obvious to historians. Either you create demand by destroying something and rebuilding it (war) or you tap massive new markets (exports) or you just give up and wipe the slate clean and start all over again (Jubilee or TARP). We let the banks wipe it clean, we need to do it for the people also because without a market, there is no growth.

  • zaybu

    I agree with Mr. Frum: Stiglitz analysis fails to recognize the international dimension of the Great Depression.

    The similarities between that period and our Great Recession have been pointed many times: the collapse of a bubble, followed a financial crisis. The irony is that we are repeating the same mistake: concern over the debt and the mistaken policy of austerity.

    We should worry about the debt once we are out of this economic mess, and our economy has fully recovered. Most of the debt is owed by Americans. It’s true that a larger portion of that debt is owed by foreigners then it was the case in the 1930′s, but what is forgotten is that Americans have invested abroad, which offset this. The net result is that we gain: foreigners are getting low interest rates, while Americans are cashing in on higher returns.