Posts Tagged ‘Second Great Depression’


The members of the political establishment in the United States seem surprised by the astounding success of Bernie Sanders’s campaign. Reuters even has the democratic socialist now leading by more than 6 percentage points.

As it turns out, the political establishment in the United Kingdom has had a similar problem: they don’t understand how Jeremy Corbyn has come to lead the Labor Party.

Simon Wren-Lewis argues that the Left’s success on both sides of the Atlantic really shouldn’t be a surprise. That’s because of the growing importance of the financial sector, which has fueled obscene levels of inequality and created the conditions for the Second Great Depression.

The establishment on the centre left often seems too timid or ignorant to talk about the power of the financial sector, and is therefore unwilling to challenge it. Many ordinary people who support the left in the UK and US do have some understanding of what has gone on. It should therefore not be surprising that they have moved away from established leaders towards those – like Corbyn and Sanders – who are willing to talk more openly about the power of the financial sector and inequality.

Why were politicians and the media so surprised by this success? I think it tells us how insular the Westminster and Washington bubbles really are. Political commentators talk to politicians who talk to political commentators. It tells us how embedded the influence of the City and Wall Street is. The media relies on economists from the financial sector, and so tends to see the economy from their perspective.

The blind spot is mostly to the left, because we have the Daily Mail and Fox News. As a result, it came as a complete surprise that a crisis caused by the financial sector that left that sector unscathed but instead led to a diminished role for the state, might make many people rather angry.

Surprised? Don’t be.



Brad DeLong [ht: ja] has finally admitted he was wrong—just like the drunk man searching for his keys under the streetlight.

Back before 2008, I used to teach my students that during a disturbance in the business cycle, we’d be 40 percent of the way back to normal in a year. The long-run trend of economic growth, I would say, was barely affected by short-run business cycle disturbances. There would always be short-run bubbles and panics and inflations and recessions. They would press production and employment away from its long-run trend — perhaps by as much as 5 percent. But they would be transitory.

After the shock hit, the economy would rapidly head back to normal. The equilibrium-restoring logic and magic of supply and demand would push the economy to close two-fifths of the gap to normal each year. After four years, only a seventh of the peak disturbance would remain.

In the aftermath of 2008, Stiglitz was indeed one of those warning that I and economists like me were wrong. Without extraordinary, sustained and aggressive policies to rebalance the economy, he said, we would never get back to what before 2008 we had thought was normal.

I was wrong. He was right.

Finally, in a moment of apparent sobriety, DeLong has recognized the Second Great Depression.

But then DeLong goes back under his streetlight, arguing that the problems we face are ideological and political, not economic—as if capitalism has played no role in creating the conditions for this, the “longest depression.”


As readers know, I have long been referring to the aftermath of the crash of 2007-08 as the Second Great Depression. Best I can tell, on this blog, since at least October 2010.

Apparently, at least one other economist—none other than Ben Bernanke [ht: ja]—agrees with me.

Just one year after Ben Bernanke became Chairman of the Federal Reserve Board, the economic alarm bells started going off. Now, a year after leaving the Fed behind, Bernanke is putting the crisis into perspective — HIS perspective.

He described the financial crisis as “the “worst in human history.”

Worse than the Depression? “The financial crisis itself, the collapse of asset prices, the near-collapse of so many large financial institutions, in my view, was a worse crisis than even what we saw in 1929, 1930.”

The summer of 2008 saw panic across the globe.

“If you look at the major financial firms, most of them either failed or came close to failing or needed some kind of help,” he said.

“And it would have taken down the entire economy,” said O’Donnell.

“It did!”

Just sayin’. . .



Is it possible that—a quarter century since the Fall of the Wall and in the midst of the severe crisis of Western European democracy, we can finally begin (here as well as there) to reassess the legacy of the “revolutions” (first to socialism and then to capitalism) in Eastern Europe?

That’s what Joan Roelofs [ht: ja] begins to do in her review of Kristen Ghodsee’s recent book, The Left Side of History: World War II and the Unfulfilled Promise of Communism in Eastern Europe, which Roelofs describes as “an elegant book on a forbidden topic.”

These are Roelofs’s own reflections, “informed by but not attributable to Ghodsee”:

Bulgaria, like many others, had been a fascist country since the 1920s, with little freedom or equality. After its communist revolution, a decent standard of living gradually emerged; women, workers, farmers, and the elderly were protected by a social safety net. The Roma minority were assimilated, if willing; others could follow nomadic occupations such as street carnivals; and housing and education were provided for all. Violent crime, death by fire, and other breaches of homeland security, so common in the United States, were extremely rare. Men were required to serve in the military for a short period, but they did not go abroad to get killed and maimed, and murder thousands of foreigners. People did not live on the streets, and prostitution was not an industry. University education was free. Students upon graduation served for three years in their specialties, but in a location selected by government.

As in all countries, there were many imperfections, some serious. There were shortages, sometimes of essential items, not just luxuries. An impressive cultural life existed, despite censorship and repression. Fear of subversion (not irrational) resulted in surveillance and political prisoners. Most people lived a life untroubled by the authorities, yet, as Ghodsee’s informant Anelia pointed out, they accepted the political oppression of others passively, rather than protesting and taking action. This, I discovered, was true even of rank and file Communist Party members, who would have had some influence if they had tried to exert it. CP members, about 10% of the population, had both extra duties and personal advantages.

Roelof continues, offering a variety of explanations of why Bulgarians, especially young people, eventually rejected socialism and celebrated capitalism (including the consumerist values communist leaders themselves had fostered).

Finally, Roelof returns to Ghodsee’s narrative:

She found that in 2013, despite many years of transition and healing, even those who had not been Communist Party members or even supportive of communism were appalled by the current situation in Bulgaria, including the huge inequalities and their own loss of jobs, social safety net, homes, and even heating fuel. Attempts to survive for both rulers and the ordinary citizens included crime, drugs, prostitution, and migration.

There’s a lot to consider here—both for Bulgarians, who may now be expressing buyers’ remorse, and for those of us in the West, who may finally be emerging from the shadow of the Cold War and realizing how appalled we are at the huge inequalities and our own loss of “jobs, social safety net, homes, and even heating fuel” in the wake of the Second Great Depression.


Thomas Palley does an admirable job summarizing and discussing the implications of four different stories about the relationship between inequality and the financial crash of 2007-08. The only problem is, he completely overlooks a fifth story about that relationship, one that hinges on the existence and use of the surplus.

According to Palley, there are four major stories of the financial crisis and the role they attribute to income inequality. They are identified with (1) Raghuram Rajan (according to whom inequality has not really been a problem per se but the government responded to populist pressures to do something about growing inequality by extending home mortgages to unwarranted buyers), (2) Michael Kumhoff and Romain Rancière (who developed a model in which worsening income distribution, caused by declining union bargaining power, led to a persistent surge in borrowing as workers tried to maintain their living standards, which rendered the economy fragile to a financial sector shock), (3) Gauti B. Eggertsson and Paul Krugman (who leave out inequality entirely and focus instead on the idea that a financial bubble drove excessive borrowing and leverage in the US economy—which, when the bubble burst in 2007-08, led to a financial crisis and a deep recession, which in turn prompted a wave of deleveraging as borrowers shifted to rebuilding their balance sheets and excess saving that reduced aggregate demand), and (4) Palley himself (who , in his “structural Keynesian” account, focuses on the shift from wage-led growth to neoliberal financialization).

Thus, according to Palley,

Income inequality did not cause the financial crisis. The crisis was caused by the implosion of the asset price and credit bubbles which had been off-setting and obscuring the impact of inequality. However, once the financial bubble burst and financial markets ceased filling the demand gap created by income inequality, the demand effects of inequality came to the fore.

Viewed in that light, stagnation is the joint-product of the long-running credit bubble, the financial crisis and income inequality. The credit bubble left behind a large debt over-hang; the financial crisis destroyed the credit-worthiness of millions; and income inequality has created a “structural” demand shortage.

Palley then proceeds to discuss the implications, for economic policy, of each one of these four stories.

The entire essay is worth a good, careful read. But let me focus here just on the causal stories, and leave for another post the implications of the stories for policy.

While I am sympathetic to Palley’s critique of the other three stories, what’s missing from his own account is the role inequality played in the financial crisis itself.


Consider, for example, what happened to profits and wages in the long run-up to the crash of 2007-08. What we can see, from 1970 onward, is a steady decline in the wage share of national income and an initially halting and then uneven increase in corporate profits (measured here in terms of “net operating surplus”).* The argument is that the decline in the wage share led to increased profits both directly and indirectly: directly, as wage costs for producing enterprises declined; and indirectly, as some of those corporate profits were recycled through financial enterprises to lend to workers, thereby further boosting the profit share of national income. That combination fueled the housing and asset bubbles that eventually burst in 2007-08.

So, on my account—on my structural class account—inequality played an important role in creating the conditions for the most recent financial crash. And now, during the Second Great Depression, the class inequality that was such an important factor before is on the rise again.

Now, I understand, that’s not a complete story about the relationship between inequality and the crash of 2007-08. But it’s a start. It shows that such a story is possible. And, as I will explain in another post, it has implications for economic policy very different from the other four stories out there.

*My chart doesn’t show all of what I consider to be the economic (class) surplus. To get there, we’d have to transfer some of what is included in wages and salaries (e.g., the salaries of CEOs, which put them in the top 1 percent) to “net operating surplus.” I’m still searching for a good way to do that.


This semester, we’re once again teaching A Tale of Two Depressions. And, as in previous offerings of the course, we often touch on and return to the theme of the American Dream.

The students in the course get the clear sense that the definition of the American Dream changed during the 1920s (during the transition from small-town rural life to factories in the big cities) and that the First Great Depression turned that dream into a nightmare for most Americans. A new American Dream was, of course, created during the New Deals and the postwar period but began to unravel from the mid-1970s onward (as wages stagnated and the distribution of income and wealth became increasingly unequal).

What about now, six years into the Second Great Depression?

Well, a new report from the Pew Charitable Trusts [pdf, ht: ja] documents the fragile financial situation of many U.S. households outside the top 1 percent—and thus how far American workers are from even imagining, let alone achieving, the American Dream.

Consider the following facts:

Household incomes are dramatically volatile: in 2011, about the same percentage of Americans (a bit more than 20 percent) had to endure a 25-percent decrease in income over a two-year period as a similar increase in income. (One of the consequences is that a large percentage—a third, according to one study—who suffered a loss in income still not recovered financially when their income was measured 10 years later.)

Household spending has declined and stayed down: since the start of the recession in 2007, American households have tightened their purse strings, reducing spending by almost 9 percent. Further, the typical rebound in expenditures following recessionary periods has not occurred since the end of the latest recession. (In contrast, during the 22 years before the start of the downturn, household expenditures grew 16 percent, with 69 percent of that growth [11 percent] occurring between 1990 and 2006.)

Household spending is extremely unequal: in 2013, the top quintile’s annual spending on housing alone ($30,901) outpaced what the middle quintile spent on housing, food, and transportation combined. (In turn, the middle quintile spent nearly as much on housing as those at the bottom spent in total across these categories.)

Most households are in a precarious financial situation: Almost 55 percent of households are savings-limited, meaning they cannot replace even one month of their income through liquid savings (money in cash, checking accounts, and savings accounts). Just under half of households are income-constrained, meaning they perceive that their household spending is greater than or equal to their household income. And 8 percent are debt-challenged, which means they report debt-payment obligations that are 41 percent or more of their gross monthly income. As it turns out, seventy percent of U.S. households face at least one of these three challenges, and more than a third face two or even all three at the same time.

Clearly, the current recovery has represented a reversal of fortunes, after a short but dramatic dip, for a small minority at the top. But, for the American working-class, there has been no recovery. They find themselves as far—many of them, even farther—from the American Dream as they were before the crash of 2007-08.


*The title is a bit of a private joke. Many years ago, before email existed, I told someone by telephone the title of my upcoming talk at American University on the role of mathematics in economics. I planned to begin my presentation with a discussion of Descartes’ dream. As I walked across campus and saw the posters announcing my talk, I realized the wording of my title had been transformed. So, as we walked into the seminar room, one graduate student turned to me and asked: “Professor, what does Dr. Who have to do with the mathematization of economics?”


According to CNN Money [ht: ja], the number of people working part-time involuntarily is more than 50 percent higher than when the current economic crises began.

Paige Stevenson is caught in the part-time job trap. She started working six months ago as a legal assistant for 30 hours a week in Annapolis, Maryland, a state where involuntary part-time has doubled since the recession began. She keeps trying to find something full-time.

Stevenson accepted her current position as a “stop-gap” measure because she had been unemployed for a while and wanted to get back into the workforce any way she could. She earns $15 an hour and receives no benefits, but her husband’s technician job provides health care for the family.

After taking into account daycare for her 4-year old son, a home mortgage and the cost of living near Washington D.C., she is in debt.

“When you’re dealing with part-time jobs, they’re basically dead ends,” Stevenson, 32, says, “Employers, at least around here, have been asking for the moon and paying zero.”

Many of those working part-time when they prefer to have full-time employment are being forced to have the freedom to stay as long as possible in dead-end jobs. They are also more likely to live at or below the poverty line, to be laid off and go through extended periods without any job at all, and to work without any benefits (such as paid sick leave, vacation days, job training, or health insurance).

The high number of involuntary part-time workers are a sure sign we’re still in the Second Great Depression.