Saturday, July 26, 2008

An Era of Extra-Ordinary Prosperity

So what to make of the current economic situation? What sense to take of it? Or what sense to take of it from looking at the times through a historical lens, since I imagine most readers will prefer my analysis, at least in part, because of my historical perspective rather than simply my sunny personality (although it is quite sunny).

First, let me recommend you to an excellent article that prompted me to write on this topic (and therefore certainly has some influence over the contents of this post), which has some fine points that I'll probably re-iterate to some extent. The Economist has a nice rundown of the situation in the article called "Working Man's Blues"

Now for my overview:

Well, as a historian who has studied a decent deal, although not a great deal, of material about the Great Depression, I can tell you this isn't the Great Depression. We don't have the majority of the country poor or going toward poverty, we have most of the country middle class, and some perhaps tilting toward lower middle class, with a rather small number in extreme poverty and an uncomfortably high, but not that high, a number in relative poverty. Most importantly we have not had any negative growth, thus technically we are not even in a recession (by the traditional definition, used in, for example Investor Words, a recession is two consecutive quarters of negative real GDP change).

No this is not a recession, and it is not as Paul Krugman claimed a return to the Guilded Age.

(even ignoring his arguments, he gets the periodization wrong, or at least without providing arguments sets up a different periodization than almost all major historians. The Guilded Age was roughly between the end or the faltering of the Reconstruction (around 1877 when federal troops left the South) and probably at most the assassination of McKinley (ie, the beginning of Teddy Roosevelt's term in 1901), it does not last into the 1920's as Krugman claims, and the Progressive Era is usually dated between around 1901 and around 1920, not starting in the late 1920's or early 1930's as Krugman implies.)

This is an economic downturn. We had something of a boom between say 2003-2007, not as much as say in the 1990's, where we had an extraordinary boom (one of the few eras where real median household income grew, although that measure, like most is questionable, especially given the number of poor immigrants that come to the US), and now there's a downturn. The size of this downturn is rather massive, compounded by problems in economies around the world, high oil and food prices, and the economy-distorting measures taken to reduce the last downturn in 2000 (such as Greenspan's massive intrest rate cutting.))

But that's just looking at it from a historical perspective, looking backwards many years, we can see that, you know what, even in a downturn, we are still at a level of wealth rarely seen in the life of mankind. That can be said for the world especially, but in the US we have the majority of the population with a degree of financial security, although they need to work and worry to keep it, which nowadays means the necessities are satisfied, health is alright, + (and this is actually very historically rare) we have machines and tools to make daily life easier + we have machines and tools to keep us entertained. Taking the long view from the past, that's pretty good, average man-wise.

(That's the tricky thing, because we have to remember, historically the middle class was not the average man. The average man used to be what was then called the working class, which would nowadays be considered the working poor (the current working class is more the middle class). I suppose the definition of the middle class for previous eras was financial security, having the necessities, and being able to aspire to more, or maybe it's just a semi-Marxist vision, those who are not dependent on the means of production of someone else, but who do not themselves own the means of production, perhaps, perhaps, perhaps)

Taking the view of the future though... things are a bit odd right now. Despite all the nations of the world being in essentially one global economy, each country seems to exist in a different world economically, in a way that has little to do with the economic realities of the country. But these oddities always have a bit of sense, and are generally rooted in a very specific past.

For example, why is the US so prosperous now relative to the world? Explaining fully its situation in the 19th century relative to Latin America might be a bit tough, but to a great deal it helped that the ethnic groups which did the discriminating, though the mix shifted, tended to always been a vast majority in the US, which has not been the case in much of Latin American history (the situation of the South as economically backward during this period partially backs this theory). But let's not go back that far, let's just look at the beginning of the 20th century it was on the higher end of the income scales, but similar to Britain, France, Germany, Denmark, Netherlands, Belgium, Argentina and perhaps a few other exceptional Latin American economies. However, it was not devastated by WWII, nor did it suffer from radical economic deviations, and moreover it didn't have to deal with imperialism, or major revolutions. That alone would give the US quite an edge over the rest of the world, whether it explains everything is question, but it explains a lot of the particular oddity of the massive US share of the global GDP.

Similar stories of exceptional luck history wise can be found scattered around the world. Yes, this luck was built on hard work, the US' low-revolution count was built on a strong belief in democracy in the political class and especially among some of the better of our leaders. But we got lucky with WWII, had Latin America gotten involved, as some Latin American countries wanted to, we might have been as devastated as Europe.

Yet historical luck is not a way to build a lasting prosperity. And despite whatever good qualities of the American people might have, we are not so exceptional as to have the economic fundamentals to maintain our privileged position in the world, and thus relative to the world we are sinking. I had hoped that it might be the case that the world might be catching up fast enough that in absolute terms we would still maintain our lifestyle for the immediate future, but that may be a bit uncertain. I suppose that's not surprising, after all, when the working class caught up to and merged with the middle class, the middle class did lose a lot of their old perks, such as even the lower middle class having servants.

But let me not be too gloomy. We might be destined to sink somewhat relative to the rest of the world until we reach a point reflecting our size, resources, skills and attributes, but that place is still pretty high in the world. Moreover, even if things might even be sinking in absolute terms, the future still holds the potential to raise us up with the rest of the world, even if perhaps at a slower speed. And then once a bit of the adjusting is done for the past, perhaps then we can grow naturally, with our long-term growth being reflective of the long-term economic trends of our nation. Until then...
But as I said things aren't so bad now, and while the future might have some roughness, it is unlikely to hold a new Great Depression any time soon (although I'd advise against any predictions going to infinity). The true reality that we are going to face though, is that economic moments, like all moments, pass, and the situations change, and control of the course of events will always allude us.

But that just means that history will always be surprising.

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