Posts Tagged ‘Great Depression’


René Magritte, “La clef des champs” (1936)

Plenty of illusions are being shattered these days, such as the idea that a successful recovery from the worst economic downturn since the Great Depression would keep the incumbents in power. A combination of lost jobs, stagnant wages, and soaring inequality put an end to that illusion. Much the same has happened to American Exceptionalism.

Noah Smith has just discovered another shattered illusion: the independence of supply and demand.


Mainstream economists generally think about the world in terms of supply and demand—at both the micro and macro levels: supply and demand in the market for oranges or labor (which determine the equilibrium price and quantity), as well as aggregate supply and demand for the economy as a whole (which determine the equilibrium level of prices and output). Perhaps even more important, they think about supply and demand as acting independently of one another: a shift in supply or demand in individual markets (which lead to changes in equilibrium prices and quantities) as well as “shocks” to aggregate supply or demand in macro models (which determine changes in the equilibrium level of prices and output). The presumption is that a shift in demand (at the level of individual markets or the economy as a whole) does not cause a shift in supply (at either level), or vice versa.*


As it turns out, the independence of supply and demand is just an illusion.

As I wrote back in 2009, it’s quite possible that at the micro level—for example, in the case of the labor market—both supply and demand are determined by something else, such as the accumulation of capital.

Thus. . .if the accumulation of capital leads to rightward shifts in both the demand for and supply of labor, wages may not increase (and quite possibly will decrease).

Therefore, supply and demand in individual markets aren’t necessarily independent.

And then, in 2013, I discussed the illusion of the independence of aggregate supply and demand.

In terms of the mainstream model, the collapse of aggregate demand leading to the crash of 2007-08 has also affected the aggregate supply of the economy—thereby shattering the illusion of the independence of the two sides of the macroeconomy. As the authors put it, “a significant portion of the recent damage to the supply side of the economy plausibly was endogenous to the weakness in aggregate demand—contrary to the conventional view that policymakers must simply accommodate themselves to aggregate supply conditions.”

Not only does the destruction of a significant portion of the future growth potential of the U.S. economy challenge the model mainstream economists use to analyze the macroeconomy and to formulate policy; it also forces us to question the rationality of a set of economic arrangements in which trillions of dollars of potential wealth (which might then be used to improve lives for the majority of the population) are sacrificed at the altar of keeping things pretty much as they are.

It represents the indictment both of an academic discipline and of economic system.

So, Smith is right: the shattering of the illusion of the independence of supply and demand means the way mainstream economists teach basic economics is fundamentally wrong.

What he forgets to mention, however, is that an economic system that is governed by supply and demand that are not independent of one another—and thus is subject to considerable instability on a regular basis, with the costs being shouldered by those who can least afford it—is also open to question.

Perhaps Tuesday’s results will serve notice that the time for challenging mainstream economics and the economic and social system celebrated by mainstream economists has finally arrived.


*There can, of course, be simultaneous shifts in supply and demand but the shifts themselves are considered independent of one another.


P&B 13.5 Monopoly Smaller Output & Higher Price

It’s the most obvious criticism of mainstream, especially neoclassical, economics.

All of the major models and policy proposals of neoclassical economics—from the theory of the firm through the gains from trade to the welfare theorems—are based on the assumption of perfect competition.

But, as is clear in the diagram above, if there’s imperfect competition (such as a single seller or monopoly), the price is higher (PM is greater than PC), the quantity supplied is lower (QM is less than QC)—and, in consequence, excess profits are not competed away and the amount of employment is lower. (Of course, the monopolist can increase demand, and therefore output, through advertising, which for mainstream economists makes no sense for perfectly competitive firms since they are presumed to be able to “sell all they want to at the going price.”)


The existence of imperfect competition by itself undoes many of the major propositions of neoclassical economics—including (as I explained back in April) the idea that there’s no such thing as a free lunch (since, as in the Production Possibilities Frontier depicted above, point A inside the frontier represents an inefficient allocation of resources, and no new resources or technology would be required, just the elimination of monopolies and oligopolies, to move to any point—B, C, or D—on the frontier).

Readers may not believe it but imperfect competition is mostly an after-thought in mainstream economics. It’s there (and extensively modeled) but only after all the heavy lifting is done based on the presumption of perfect competition—and then none of the major theoretical and policy-related propositions is revised based on the existence of imperfect competition. (The usual mainstream argument is either imperfect competition isn’t extensive or, even if prevalent, imperfectly competitive firms act much like perfectly competitive firms, not restricting output or raising prices by very much. Therefore, perfect competition remains a valid approximation to real-world economies.)

market share

Now, however, imperfect competition seems to have returned as an area of concern—in the White House Council of Economic Advisers and in the Federal Reserve Bank of Minneapolis. The irony, of course, is that the market power of a few giant firms in many industries has been growing after decades of neoliberalism and the celebration of free markets.

As James A. Schmitz, Jr. explains for the Minneapolis Fed, new research

shows that monopolies are not well-run businesses, but instead are deeply inefficient. Monopolies do drive up prices, as conventional theory suggests, but because they also reduce productivity, they often ultimately destroy most of an industry’s profits. These productivity losses are a dead-weight loss for the economy, and far from trivial.

The new research also shows that monopolists typically increase prices by using political machinery to limit the output of competing products—usually by blocking low-cost substitutes. By limiting supply of these competing products, the monopolist drives up demand for its own. Thus, in contrast to conventional theory, the monopolist actually produces more of its own product than it would in a competitive market, not less. But because production of the substitutes is restricted, total output falls.

The reduction in productivity exacts a toll on all of society. But the blocking of low-cost substitutes particularly harms the poor, who might not be able to afford the monopolist’s product. Thus, monopolies drive the poor out of many markets.

The last time monopolies came to the fore in the United States was during the first Great Depression, when Thurman Arnold (from 1938 to 1943) ran the Antitrust Division at the Department of Justice, “taking aim at a broad range of targets, from automakers to Hollywood movie producers to the American Medical Association” in order to protect society from monopoly.

Is it any surprise that now, in the midst of the second Great Depression, attention is being directed once again to the idea that gigantic national and multinational corporations with growing market power are responsible for reducing productivity and crushing low-cost substitutes, thus hurting workers and the poor?

One possibility is to get tough again with antitrust legislations and rulings, and try to restore some semblance of competitive markets. The other is to resist the temptation to turn the clock back to some mythical time of small firms and perfect competition and, instead, through nationalization and worker control, transform the existing firms and allow them to operate in the interest of society as a whole.


The latest numbers are in (from Emmanuel Saez [and pdf]): while the bottom 99 percent of U.S. households have managed to claw back some of what they lost during the Great Recession, those at the top have done much better. The result is that, while the economic recovery looks a bit less lopsided than in previous years, income inequality in the United States remains extremely high.

As readers can see in the chart above, rom 2014 to 2015, the incomes of the bottom 99 percent grew by 3.9 percent, which is the best annual growth rate since 1999. Still, even after the second year of real income growth for families in the bottom 99 percent (amounting to 6 percent, for a total of a 7.6 percent gain since the recovery began), they’ve still only recouped about 65 percent of what they lost (-11.6 percent) during the most severe economic downturn since the first Great Depression. The bottom 99 percent still have not experienced the recovery they were promised.

But those in the top 1 percent have in fact enjoyed their recovery. They did much better last year (when their incomes grew by 7.7 percent), as they have since the Great Recession officially ended (for a total of 37.4 percent since 2009—thus more than making up for the losses they experienced after the crash, -36.3 percent). As a result, the share of income going to the top 1 percent of families—those earning on average about $1.4 million a year—increased to 22 percent in 2015 from 21.4 percent in 2014, while the share of income going to the top 10 percent of income earners—those making on average about $300,000 a year—increased to 50.5 percent in 2015 from 50.0 percent in 2014, the highest ever except for 2012.

top decile

Thus, as Saez explains, income inequality in the United States remains extremely high, particularly at the very top of the income ladder: the figure at the top of the post

shows that the incomes (adjusted for inflation) of the top 1 percent of families grew from $990,000 in 2009 to $1,360,000 in 2015, a growth of 37 percent. In contrast, the incomes of the bottom 99 percent of families grew only by 7.6 percent–from $45,300 in 2009 to $48,800 in 2015. As a result, the top 1 percent of families captured 52 percent of total real income growth per family from 2009 to 2015 while the bottom 99 percent of families got only 48 percent of total real income growth. This uneven recovery is unfortunately on par with a long-term widening of inequality since 1980, when the top 1 percent of families began to capture a disproportionate share of economic growth.

Thus, what we’ve seen in the United States is a crash that was caused, over the course of decades, by obscene levels of inequality—which has turned into a recovery that has been characterized, over the course of the last few years, by similarly grotesque levels of inequality. Those at the top, who managed to capture a large share of the growing surplus in the years leading up to 2007-08, have restaked their claim on the surplus during the recovery.

The rest of the U.S. population, most of whom actually produce the surplus, continues to fall further and further behind. The bottom 99 percent enjoyed only 35 percent of the gains from the Bush expansion (from 2002 to 2007), suffered 51 percent of the losses from the Great Recession (from 2007 to 2009), and, thus far, have gotten only 48 of total income growth during the recovery (from 2009 to 2015).

It’s clear, then, the recovery from the crash of 2007-08 has been highly unequal—which really should come as no surprise, since the current recovery has been just as unequal as the period of expansion before it and the downturn itself. Since the same forces are at work, now as then, why should be expect a different outcome?

As Albert Einstein once quipped, the definition of insanity is “doing the same thing over and over again and expecting different results.”


It’s been more than seven years and yet we’re still haunted by the spectacular crash that took place on Wall Street.

The big banks have been fined but no one, at least at or near the top, has been prosecuted let alone gone to jail.

The question is, why?

We know why the Eric Holder and the Justice Department didn’t go after the top executives: they were afraid of undermining the fragile recovery.

What about the Securities and Exchange Commission (which, remember, was set up during the first Great Depression to stem the fraud and abuses on Wall Street)?

We now know, thanks to Jesse Eisinger (based on a treasure-trove of internal documents and emails released by James A. Kidney, a now-retired SEC lawyer) that in the summer of 2009 lawyers at the SEC were preparing to bring charges against senior executives at Goldman Sachs (over a deal known as Abacus) but they never took the case to trial.

He thought that the staff had assembled enough evidence to support charging individuals. At the very least, he felt, the agency should continue to investigate more senior executives at Goldman and John Paulson & Co., the hedge fund run by John Paulson that made about a billion dollars from the Abacus deal. In his view, the SEC staff was more worried about the effect the case would have on Wall Street executives, a fear that deepened when he read an email from Reid Muoio, the head of the SEC’s team looking into complex mortgage securities. Muoio, who had worked at the agency for years, told colleagues that he had seen the “devasting [sic] impact our little ol’ civil actions reap on real people more often than I care to remember. It is the least favorite part of the job. Most of our civil defendants are good people who have done one bad thing.” This attitude agitated Kidney, and he felt that it held his agency back from pursuing the people who made the decisions that led to the financial collapse.

While the SEC, as well as federal prosecutors, eventually wrenched billions of dollars from the big banks, a vexing question remains: Why did no top bankers go to prison? Some have pointed out that statutes weren’t strong enough in some areas and resources were scarce, and while there is truth in those arguments, subtler reasons were also at play. During a year spent researching for a book on this subject, I’ve come across case after case in which regulators were reluctant to use the laws and resources available to them. Members of the public don’t have a full sense of the issue because they rarely get to see how such decisions are made inside government agencies.

Goldman ended up paying a fine of $550 million in 2010, and agree to another $5-billion fine in a separate case with the Justice Department earlier this month. But no Goldman executive has ever been brought up on charges.

Kidney’s own view is that

the SEC, its chairman at the time, Mary Schapiro, and the leadership of the Division of Enforcement were more interested in a quick public relations hit than in pursuing a thorough investigation of Goldman, Bank of America, Citibank, JP Morgan and other large Wall Street firms.

Although the emails and documents I produced to Pro Publica stemming from my role as the designated (later replaced) trial attorney for the Division of Enforcement are excruciatingly boring to all but the most dedicated securities lawyer, even a lay person can observe that the Division of Enforcement was more anxious to publicize a quick lawsuit than to follow the trail of clues as far up the chain-of-command at Goldman as the evidence warranted.  Serious consideration also never was given to fraud theories in any of the Big Bank cases stemming from the Great Recession that would better tell the story of how investors were defrauded and who was responsible, due either to dereliction or design.

All of which gives lie to the idea that the Obama administration has been tough on Wall Street. According to Kidney,

The large fines obtained by the Department of Justice, while a short-term pinch, are simply a cost of doing business.  Relying on fines to penalize rich Wall Street banks, which, after all, specialize in making money and do it well, if not always honestly, is like fining Campbell Soup in chicken broth.  It costs something, but doesn’t change anything in the way of operations or personnel.

Despite billions in fines representing many more billions in fraud, the enforcement agencies of the United States have been unable to find anyone responsible criminally or civilly for this huge business misconduct other than a janitor or two at the lowest rung of the companies.  Nor have they sought to impose systemic changes to these banks to prevent similar frauds from happening again.

Yessir, according to the Obama administration, Goldman Sachs, JP Morgan, Bank of America, Citibank and other institutions made their contributions to tearing down the economy, but no one was responsible.  They are ghost companies.

And that’s why we’re still haunted, more than seven years later, by the crash of 2008.


Arthur Rothstein, “Resettlement Officials” (Maryland, 1935)

Bill McDowell is an American photographer and curator. For his series Ground, he chose images from the 175,000 commissioned by the U.S. Farm Security Administration in the 1930s and 40s—and was especially drawn to those Roy Stryker damaged with a hole punch to prevent their being used again.

McDowell compares the punched hole to “a portal [that] connects us to post-Depression America” in the wake of the 2007-08 global financial crash.


The spectacular crash of 2007-08, once a public spectacle of economists, politicians, and bankers, is increasingly becoming a popular spectacle in art.

Alessandra Stanley reviews some of the recent films, TV series, and novels—from The Big Short through Billions to Opening Belle—that attempt to represent the causes and consequences of the worst crash since the Great Depression of the 1930s.

Americans are once again paying for the 2008 financial collapse.

This time, though, it’s willingly.

Entertainment industry executives and publishers say there is a growing audience for movies, plays, television shows and novels that address the misdeeds and systemic failures that brought the economy to the edge of collapse eight years ago.

I wonder what impact these projects will have on the current political campaign in the United States, where both parties are being forced to deal with widespread discontent over the real-world spectacle of growing inequality, Too Bigger to Fail banks, and more instability ahead.


We all know how terrible the economic consequences of the First Great Depression were in the United States. Well, as we can see from these charts produced by the New York Times, the current situation in Greece (measured in terms of national income, unemployment, and the stock market) is worse—much, much worse.

As Joseph Stiglitz observed, “I can think of no depression, ever, that has been so deliberate and had such catastrophic consequences.”