The Economy as Morality Play
Chris Hayes has a very nice review essay in The American Prospect that winds up focusing on the question of whether big business cycle downturns are in some sense necessary, a needed corrective to past excesses. There’s a tendency, that’s larger on the political right but also pops up across the spectrum because it’s fairly intuitive, to basically see the ups and downs of the business cycle in moralistic terms. A huge recession is punishment for our sins, and we need to just sort of bear with it. The evidence, however, suggests that this is wrong and that downturns can happen for reasons that are all out of proportion to the severity of the harm they do.
I think you see the intuitive—but wrong—thinking about this on display every time you hear someone complain that someone else, be it a government agency or a corporation or an individual, oughtn’t be engaging in some act of conspicuous spending during these days of belt-tightening. The sense that it’s somehow inappropriate is very powerful. But the reality is that if most people are tightening their belts, it doesn’t help them for everyone else to do it too. On the contrary, that makes it worse. What you need during a downturn is for those with the capacity to spend to take advantage of bargain opportunities and go out and spend.
33 Responses to “The Economy as Morality Play”
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July 11th, 2009 at 4:13 pm
So, if we are supposed to loosen our belts in terms of government spending during bad times, then we should tighten our belts during good times, right?
The funny thing is, though, that I can’t remember you calling for cutting government spending during the late boom. My general impression is that your attitude was that good times meant that we should spend more on all your pet projects, just as your current attitude is that bad times mean that we should spend more on all your pet projects.
July 11th, 2009 at 4:29 pm
The funny thing is, though, that I can’t remember you calling for cutting government spending during the late boom.
Not necessarily. In good times, the logic thing to do could also be raising taxes (I know this is something you can’t even imagine), or at least not giving massive tax cuts to the rich. And I can’t speak for Matt, but opposing the Bush tax cuts was a fairly common position on the left.
July 11th, 2009 at 4:29 pm
I’m not sure why you’d find that inconsistent Steve. If you think government spending is too low it makes perfect sense to call for it to increase during both sides of the boom/bust cycle until it reaches what you consider the appropriate range.
What would be inconsistent is to call for a deficit to be run during booms. Given the view that large permanent tax cuts are an awful idea, and taxes should be substantially raised when the economy isn’t in shambles, that clearly isn’t what Matt thinks.
July 11th, 2009 at 4:44 pm
Out here in the flyover zone, I’m not hearing people up in arms about what people with money are spending their money on.
Instead, I’m hearing people literally sickened by the way people are earning their money these days.
In a Chicago suburb – cemetery workers pocketed hundreds of thousands of dollars in cash for digging up and dumping bodies from old grave sites to sell them to new inhabitants.
Sounds appalling – but is it any worse than those very bright Enron boys cackling with pleasure over the money they’d be taking from the little old ladies in California?
Or high life acquired by a mortgage broker who profited very well by engineering very bad loans to people who had no business getting them?
Or the millions in bonuses the guys over in the AIG financial products department are hoping to get as a result of the federal bailout of their catastrophically failed business?
Or the very fine year Goldman Sachs is having, and the predictions of the record bonuses they hope to receive?
The morality play I’m seeing isn’t about how people spend their money, but how they acquire it. For too many people, the way they earn a living is as immoral as the money made by the grave robbers at Burr Oak cemetery….
We can talk all day about how the government needs to spend its way into recovery, but there will be absolutely no recovery without jobs. And today, I’m just not seeing businesses anywhere close to hiring the millions of jobless people out there. Are you?
July 11th, 2009 at 4:47 pm
I’m not saying I agree with these models, but there are a number of economic models out there that include a “cleansing effect of recessions” that has nothing to do with a morality play…usually, in those models, there’s something that businesses need to do (like restructuring) that they can only do when times are bad.
July 11th, 2009 at 5:04 pm
Anne: “today, I’m just not seeing businesses anywhere close to hiring the millions of jobless people out there. Are you?”
Step 1: you create a WPA times 2, say 5-10 million people.
Step 2: 5-10 million people go out and spend their wages.
Step 3: retailers increase stock orders, hire new workers to handle the increased rush.
Step 4: factories/shippers expand to meet the increased volume of orders, new workers go out and spend their wages.
Step 5: As consumer demand and thus profit increases, lenders begin to lend again, investors begin to invest again, more businesses expand or are created.
July 11th, 2009 at 5:36 pm
So, if we are supposed to loosen our belts in terms of government spending during bad times, then we should tighten our belts during good times, right?
The funny thing is, though, that I can’t remember you calling for cutting government spending during the late boom.
There was this guy called Bill Clinton; maybe you’ve heard of him? He presided over eight years of growth; it was the longest expansion in I think 40 years. And lo and behold! He managed to balance the budget after 12 years of reckless deficit spending under Reagan and Bush.
Republicans love to push this small-government horseshit, but the fact is you haven’t put forth a fiscally-responsible president since Eisenhower. But don’t worry, we’ll keep bailing you out every time you fuck up and max out the gov’t credit.
July 11th, 2009 at 5:36 pm
I’m not convinced that the kind of “morality play” Matt condemns is so irrational.
Even in a economic downturn, not all spending is good. We don’t want people spending money they don’t have or spending money on frivolous goods that provide no long-term benefit. When people condemn conspicuous consumption I suspect they are assuming this is more “bubble-creating” behavior.
Secondly, it is not irratonal for people to want to cultivate habits that avoid the “irrational exuberance” that got us into this mess. Since the wealth creation of the past 30 years is largely illusory, it is not crazy to think that we need to change our ways in order to avoid future calamities–especially with global warming on the horizon.
Finally, it is probably desirable from a personal point of view to want to send a message of shared sacrifice to family, friends, and acquaintances. Conspicuous consumption might seem an affront to the many people around us who are suffering.
Morality involves more than a simple utilitarian judgment about what’s best in the short term for the economy. The idea that, if we could just start spending, it will be 2006 all over again is a bit of wishful thinking.
July 11th, 2009 at 5:43 pm
whether big business cycle downturns are in some sense necessary
Except they were apparently not necessary from the end of WWII through the 1960s. There were minor recessions of short duration, but nothing big.
The first big recession was in 1981, when high interest rates and tight money were used to strangle inflation. And now we have this one, which may be as big as the 30s.
But the regular booms and busts of the 1800s didn’t appear. In fact recessions in the 20th century were half as severe as those of the 19th.
But the Austrian School and Monetarist proponents like Samuelson convinced policy makers that macro/micro economics had no role to play. So now we have what you get when those discredited policies hold sway.
July 11th, 2009 at 6:02 pm
It’s a cliche to say that the occassional downturn is a necessary corrective for excesses. There seems to be an assumption that in a downturn, people cut back on that extra latte, and drive a little less, and that makes things more efficient. The reality is more like this: people cut back on dental visits for their kids, saving a few hundred dollars. Years later, the poor children have gum disease. Of course, there are some excesses that are alleviated in a downturn. But I really doubt that the downturn is the best way to alleviate the particular excess. I think most of us know someone who is “cutting back” on spending right now, and excesses are not what they’re cutting back on. They’re cutting back on things like food, health care, and shelter.
July 11th, 2009 at 6:05 pm
A further advantage of the Job Guarantee policy described by Steven Atwell is that people that keep working will be more productive when the private sector is hiring again than people that have been long term unemployed.
July 11th, 2009 at 6:08 pm
We should locate the clearest rationales which have been made for deficit spending in a downturn, then publicize the heck out of the best of the best.
Clear, hard-hitting, pithy is what we need.
Meanwhile, the vultures are doing their best to make things worse.
July 11th, 2009 at 6:18 pm
Go out and spend
Now that sounds familiar. Consumer spending was the salve on the raw wound of 9/11. Now it’s the ticket to Wall Street’s implosion. Funny, bank profits look just fine. Goldman Sachs can’t hide all the money they’re making.
The morality play would have Wall Street losing investors for a generation, returning to packaging quality financial products, and not manipulating opaque energy futures and derivative markets.
It’s not even in rehearsal.
July 11th, 2009 at 6:23 pm
IS THIS THE BIG ONE ? YES!
(Signs Ignored)
No one foresaw Black September I, Great Depression I, of (1929), and once again no one saw the signs in which each Depression were preceded by period of non-inflationary growth, or the crises which affected Japan and Southeast Asia in the early and late (1990s), and the coming of a second Black September II, Great Depression II of (2009), and those that saw were not listened to.
(No Nest Egg)
The politics of fiscal policy are very different from the politics of monetary policy. For the past (30) Thirty years, The American Empire has been spending during the Good Times, have the bad policy of lowing interest rate vice raising interest rates , during the good year build your nest egg, so that when a slump in the economy does come along and it will, you will have a nest egg to draw upon. The plain truth is there is no nest egg, nothing to draw upon, and the borrowing from others nests will soon come to an end, it is like a Vampire taking to much blood from a willing host and killing them, then you have to either, find another willing host, die or attack an unwilling host to survive. Generation upon generation of those new eggs will only have to be used to repay the enormous debt that is being built up with the Peoples Republic of Red China and others who are now loan sharks to the American Empire.
(The Big One!)
Further stimulus is bad, the past Stimulus I, did not come free of charge and has raised questions about the sustainability of the recovery, simply due to the fact that you are creating debt that is totally unsustainable and the collapse of the financial system is unavoidable. Is this the Big One, Black September II, the Second Great Depression, YES! You can not credit card your self out of debt, your only digging yourself deeper into debt and not out of it, it is time to stop printing monopoly money, cut up the Red Chinese Credit Card, and work with what works not try to make what does not work function, The Empire and the (544) Five-Forty-Four, has failed and it is time to replace it with a new stream lined (XXI) Twenty-First Century Model.
(RECOMMENDED READING):
(1) (http://www.spiegel.de/international) THE MAN NOBODY WANTED TO HEAR, Global Banking Economist Warned of Coming Crisis.
July 11th, 2009 at 6:39 pm
I don’t think Chris’s bond trader friend is atypical at all. There is a sizable contingent of rich people who can afford to like recessions just fine. Recessions create bargains and keep the hired help in line.
July 11th, 2009 at 7:07 pm
Ah yes, the fantasy world of stimulus. The economy is ready to explode if only we provide tinder and a flame. Alas, reality has a known conservative bias, and Step 2 actually works out to be “most ditch diggers already spend it all, and the ones that can, save as much as they can.” Why? Because the taxman cometh, again and yet again.
The real crime here is the acknowledgement that sentiment can fuel and retard economic growth, while remaining blind to the effects of constant carping that Government requires more taxes, and more spending, and more taxes.
I know you people can’t appreciate the effect that has on someone trying to decide on hiring or firing, but take it from me, recent events have been arbitrary, capricious, ineffective, expensive, and corrupt. Ask a Chrysler dealer if they agree with that assessment. They will.
The spectacle of seeing government make entrepreneurs into paupers overnight, is riveting. Sticking one’s neck out to risk the ranch is not going to happen any time soon, especially with folks like you all leading the chorus for more taxes.
The realworld thought for the day is SAVE.
July 11th, 2009 at 8:17 pm
I think that Matt largely misses the point. Depressions and recessions, while not per se necessary in an economy, are necessary to an economy that has gone through a boom. (By “boom” I mean an unsustainable increase in economic activity that occurs because of an excess of credit).
This recession was avoidable, had we avoided the housing boom. But once we reached a certain point (probably sometime in late 2005 or early 2006) some sort of recession was inevitable, because the system was unsustainable and had to be corrected. The longer the correction was delayed, the worse it would be.
The time to stop the recession would have been in 2002, 2003, 2004 or maybe early-to-mid 2005 (preferably by having the Federal Reserve not lower interest rates as low as they did or having them raise them more in the latter years than they did).
But by mid 2006 or anytime beyond that, stopping the recession was impossible.
Just about any policy the government creates to end the recession will likely prolong the malinvestments that caused the recession (seomthing that Matt seems to understand extremely well when talking about car manufacturing).
That’s not to say that you cannot argue for the government having programs to mitigate the effects of the recession/depression, provided that these programs are targeted specifically to relieve the effects of the downturn rather than at attacking the downturn itself. These programs almost certainly will prolong the downturn and make the average situation worse, but you can reasonably argue that they cushion those who are hardest hit and make the recession/depression more liveable.
To illustrate my point, I believe that increasing the amount spent on food stamps will not stimulate the economy. However, even if it extends the depression from, say, 24 months to 27 months but means that we will have 2 million Americans going hungry for 27 months instead of 12 million for 24 months, one could argue that the decrease in the overall economy was worth it because it mitigated the worst effects that the depression would have.
July 11th, 2009 at 8:23 pm
Put another way, the problem is not that recessions are inevitable. The problem is that the boom makes the recession inevitable. We could reduce the severity of recessions if we reduced the magnitude of the boom.
But the problem with most of the economists of both the Keynesian an Chicago Schools is that their goal is not to mitigate the cycle but to keep the boom going forever. This is an impossibility, roughly equivalent to feeding a drug addict increasing amounts of the drug in order to prevent him from ever coming down.
July 11th, 2009 at 8:28 pm
Re: …and the coming of a second Black September II, Great Depression II of (2009),
We are not having Great Depression II. Not even close. One might dub this The Little Depression, or maybe The Great Recession (the latter seems to be catching on). I would suggest reading up on the 1930s and the sheer depth of human suffering before comparing today to that era.
Also, what was “Black Sepetmber I”? Last I checked the Crash of ‘29 occured in October.
Re: recent events have been arbitrary, capricious, ineffective, expensive, and corrupt.
Drop the “recent” from that. “Arbitrary, capricious, ineffective, expensive and corrupt” is a good description of reality in general. That’s why the ancients worshipped Fortune as a goddess.
July 11th, 2009 at 8:47 pm
That’s an excellent post, Glaivester. Thank you.
July 11th, 2009 at 9:36 pm
punishment for our sins
Not necessarily our sins but somebody’s. Life is not neutral that way. If you act morally, then you will be rewarded. That’s how life works. Its kind of the definition of moral. Moral actions are those that produce a positive result.
and that is why God exists.
July 11th, 2009 at 9:40 pm
shooter242:
You make no sense. Go back to your basement and talk to back to your radio.
July 11th, 2009 at 11:24 pm
Which part is giving you difficulty?
July 12th, 2009 at 1:38 am
Matt, the unemployment rate in this country is at a minimum -MINIMUM- fifteen percent. 400-500,000 Americans are losing their jobs every month. Employed Americans are working an average of only 34 hours per week. Who has money to fire?
On top of all this, working Americans are busted, and they know it. They didn’t know it, but now, seemingly, it has finally dawned on them that being down $40,000 on their credit cards and having a mortgage they never could afford and knowing, intuitively, that their jobs have always been tenuous, at best, means that they are in deep, deep shit, and they need to tighten up -right quick. And they have.
Tax cuts are not going to change this equation. You might as well tickle a bull with a feather, for all the effect they would have. And a huge portion of the first “stimulus” went toward tax cuts; plus, state aid, unemployment benefits, food stamps, all good things, necessary things, but not the kind of “stimulus” that creates jobs. And jobs -good jobs- are the only answer.
In contrast, the Chinese government, already in the process of concurrently managing and building the four largest mega-projects in the history of mankind, are pumping 650 billion dollars directly into their economy with express purpose of employing even more workers to build even more cool stuff.
The Chinese are running their economy as if there was a war on. Apparently, China has learned more from US history than Americans have. They are doing (and have been doing for some time) precisely what the United States did during World War II -employing citizens and building things. And not so surprisingly, China will manage to grow this year -by seven percent- in the midst of a world wide depression.
July 12th, 2009 at 1:45 am
Business cycles are inevitable in capitalism. Those who think otherwise do not understand System Dynamics 101.
July 12th, 2009 at 2:23 am
The part where you make claims without warrants.
July 12th, 2009 at 2:42 am
[...] Yglesias calls this The Economy as Morality Play: [...]
July 12th, 2009 at 7:09 am
Re: it has finally dawned on them that being down $40,000 on their credit cards …
Very few people owe that much on their credit cards. 40% of us have no revolving debt at all. The median amount owed on credit cards is c. $2,900.
July 12th, 2009 at 9:31 am
WE PACKED OUR BAGS AND WE MOVED TO THE SHACK ON THE HILL. LIVING LIKE KINGS WE RELIED ON THE CHEAPEST OF THRILLS.
July 12th, 2009 at 10:11 am
The ghost of Ronald Reagan still hangs heavy over US politics. It is virtually impossible for the Obama administration to do the smart thing in this recession and, instead of selling treasury notes to the Chinese to finance the stimulus, adopt a policy of tax and spend instead.
Over the past generation Conservatives have so convinced the public that tax increases of any kind are merely a proxy for special interest (and Democratic) favoritism and corruption that the only policy option left in the tool box for government stimulus is to borrow our way out of this recession. And that creates its own political and policy problems — which the Right is only too eager to exploit with their one-sized fits all approach of urging even further tax cuts to stimulate demand.
The basic problem with the sequence of speculative bubbles that have been a substitute for sustainable economic growth over the past two decades is that it tends to concentrate what wealth there is in fewer and fewer hands as insiders have used their knowledge of the financial system to play the system in order to enrich themselves by selling inflated assets to the public or passing along the risk of those exotic financial instruments, which provide the investor class with its profits at the expense of cannabalizing the value of the real economy. Only government has the size and legal authority to confiscate these ill-gotten gains and concentrated wealth through taxation and put it back into productive use — whether in the form of redistributed demand payments to consumers or direct government stimulus investments in things like roads and bridges that put real paychecks in the pocket of real people.
The idea that Gingrich and other conservatives are pushing that eliminating the income and payroll tax is the best stimulus may fit well with conservatiave orthodoxy and be politically advantageous to the GOP now in the wilderness, but economically it is a farce. First, the unemployed pay no tax and so would get no benefit from a tax cut; and second, rather than stimulating the economy, businesses and consumers in this over-leveraged economy would almost certainly use their tax cut to pay down debt, not increase demand. That, by the way, was the conservative complaint with George W. Bush’s tax cut in the summer of 2001 when he tried to stimulate the economy by sending out $600 refund checks to everyone and urging them to go out and spend it. The paid down debt instead.
July 12th, 2009 at 12:12 pm
Yglegias’ point about the Paradox of Thrift is simply not true, neither is Krugman’s use of the term. Collective action makes sense in any economy with a bias toward economies of scale. The consumer is tightening his belt, collectively, to intentionally cause greater economies of scale in goods distribution by using advance technology.
Yglesias, the believer in collective actions, most assuredly should know this. It is the Rahm Doctrine, never let a good crisis go to waste, it is the Obama doctrine, it is why Obama can consider health reform, it is why the federal government has leverage over transportation issues, it is why Pelosi agreed to bail out Goldman Sachs and let them run Treasury.
What Krugman and Yglesias want is just enough Paradox of Thrift so they get their favorite programs enacted; then any more Paradox of Thrift is bad. What we will get, instead, is enough Paradox of Thrift to implement the more efficient production methods, regardless of who has what favorite program.
July 12th, 2009 at 4:27 pm
Re: It is virtually impossible for the Obama administration to do the smart thing in this recession and, instead of selling treasury notes to the Chinese to finance the stimulus, adopt a policy of tax and spend instead.
It is pretty well agreed on by everyone from far Left to far Right that raising taxes in a severe recession is the last thing you want to do.
July 12th, 2009 at 4:37 pm
Y’know, I haven’t hung out in Matt’s comments sections lately, and they seem substantially nuttier and more disjointed than at, for example, his last gig.
I wonder why that is.