Liquidate!

Kevin Drum notes Robert Samuelson pointing out that recessions have benefits, too. Benefits like low wages:

Recessions also have often-overlooked benefits. They dampen inflation. In weak markets, companies can't easily raise prices or workers' wages. Similarly, recessions punish reckless financial speculation and poor corporate investments. Bad bets don't pay off. These disciplining effects contribute to the economy's long-term strength, but it seems coldhearted to say so because the initial impact is hurtful.

I sometimes complain that the Post should make Samuelson write something other than his endless bellyaching about the need for Social Security cuts, but that was just a polite way of saying I think they should fire him. This sort of thing isn't really what I was after. At any rate, Samuelson seems to be a party to what J.M. Keynes would have called the "liquidationist" view of such matters -- recession is the population getting its comeuppance for having been not-poor just a little while back:

It seems an extraordinary imbecility that this wonderful outburst of productive energy [over 1924-1929] should be the prelude to impoverishment and depression. Some austere and puritanical souls regard it both as an inevitable and a desirable nemesis on so much overexpansion, as they call it; a nemesis on man's speculative spirit. It would, they feel, be a victory for the mammon of unrighteousness if so much prosperity was not subsequently balanced by universal bankruptcy. We need, they say, what they politely call a 'prolonged liquidation' to put us right. The liquidation, they tell us, is not yet complete. But in time it will be. And when sufficient time has elapsed for the completion of the liquidation, all will be well with us again.

I do not take this view. I find the explanation of the current business losses, of the reduction in output, and of the unemployment which necessarily ensues on this not in the high level of investment which was proceeding up to the spring of 1929, but in the subsequent cessation of this investment. I see no hope of a recovery except in a revival of the high level of investment. And I do not understand how universal bankruptcy can do any good or bring us nearer to prosperity.

Note in particular that there's no particular reason to think a recession is necessary in order to prompt people to pull out of bad investments. If you've got money to invest, you want to invest it in the most lucrative way possible. If things are really booming, it may be possible to earn some profit with a really dumb scheme. But if things are really booming, then you could earn even more profit with a non-dumb scheme. In a bad recession, meanwhile, even perfectly reasonable schemes may go bad. Either way, smarter investments are always better-rewarded than bad ones; recessions seem bad because they're bad.

Photo by Flickr user Seansie used under a Creative Commonse license

Comments

Samuelson is saying exactly what Herbert Hoovers's economic advisors were telling him in 1930.

Posted by rea | November 7, 2007 7:26 AM

To quote Hoover himself:

the “leave it alone liquidationists” headed by [my] Secretary of the Treasury Mellon, who felt that government must keep its hands off and let the slump liquidate itself. Mr. Mellon had only one formula: “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.” He insisted that, when the people get an inflation brainstorm, the only way to get it out of their blood is to let it collapse. He held that even a panic was not altogether a bad thing. He said: “It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people”...

http://delong.typepad.com/delong_economics_only/2007/02/why_oh_why_cant.html

Posted by rea | November 7, 2007 7:35 AM

Similarly, contrary to the Post opinion section's genius musings, it turns out that war and torture are bad.

Posted by southpaw | November 7, 2007 7:36 AM

It was the best of times, it was the worst of times; it was a time of dogs eating dogs.

Posted by steve duncan | November 7, 2007 7:38 AM

Yeah, I saw that column this morning too. Samuelson gets altogether too much joy from this. Still, not everyone who advocates a business cycle is as nasty as Samuelson. If everytime a bubble pops, the Fed injects loads of liquidity and lowers interests rates, and Congress passes a tax cut, then you keep creating new bubbles (i.e. from dot.com to sub-prime mortgages) at some point when things really pop everyone will be hurt. Maybe more than they would have been under a short downturn. Still, I am ambivalent about the question, and I respect your and Lord Keynes' point.

Posted by d | November 7, 2007 7:43 AM

If things are really booming, it may be possible to earn some profit with a really dumb scheme. But if things are really booming, then you could earn even more profit with a non-dumb scheme.

Not really. The difference between a "dumb scheme" and a "non-dumb scheme" may not be in return, but in risk. In good times, you may be encouraged to take greater risks than you would in bad times because the downside is less dire. It's harder to go bankrupt during a boom.

So in recession, when you have the choice of two investments with unequal returns and unequal risks, you chose the safer, low-return investment. In boom times, you choose the riskier, high-return investment. So the "non-dumb" investments are more likely not to yield as much short-term return as dumb ones, even if in the long term, they do.

This is actually a good thing--it means that investors (whether companies making capital investments, private equity and venture capital investors, or investors in public markets) will occasionally try something new and innovative out of their usual comfort zone during boom times, which may have excellent benefits for society as a whole in the long run.

For example, the tech bubble ate up huge amounts of "stupid" money on great IPOs like Pets.com, but it also gifted the country and the world with a well-developed internet, tons of fiber-optic cable laid down to connect us to the internet, etc.

Recessions and crashes, however, can't be viewed as good things, despite what Samuelson, a man with a heart the size of a walnut, says.

Posted by RWB | November 7, 2007 7:46 AM

Isn't there a saying that an economist is an expert who will explain tomorrow why something he predicted yesterday did not come true today.

Posted by 2cynicalbyhalf | November 7, 2007 7:51 AM

Samuelson is as much of an economist as Ben Stein is. Meaning they both share names with great economists but have none of the knowledge.

Posted by Rob | November 7, 2007 8:14 AM

RWB pretty much covered the same ground as I was going to in correcting MattY's misconceptions. Plus, if things are "really booming", the situation ends up obscuring the real risk involved in some of your investments. It's not just that people won't have an incentive to invest their money wisely, it's that the available information will make it more difficult to do so. E.g.-- the CDO market: 2 years ago you would have thought, "AAA bonds are AAA bonds, right?"

This is, to a degree, why the Fed is supposed to manage growth carefully-- precisely because booms/bubble can create just this sort of harm. The problem is that propping up the economy by creating a housing bubble in 2001 seemed to tempting in their efforts to avert a recession. The problem is that when a recession does hit, economist-pundits tend to impute some moral failure on the wide majority of the sufferers in order to salve their conscience.

That said, assuming I don't lose my job as things turn south, I will be in a much better position to buy a home in 2009 than I would have if rise in property values continued.

Posted by Tyro | November 7, 2007 8:51 AM

I like it when people get vaporized by death rays. It improves traffic and helps keep the slower riff-raff off the streets. Plus, the ashes that get left behind make excellent fertilizer. I don't understand what everyone's complaining about.

Posted by Doctor Biobrain | November 7, 2007 9:30 AM

I love this quote from Mellon: "People will work harder, live a more moral life. Values will be adjusted..."

How about if we be just a bit more selective, and liquidate the people whose morals and values got the country into this mess?

Why, that would be the people who actually own the country -- the top 0.1% or so.

Assuming, of course, that their position at the top of the greasy pole hasn't been ordained by Sky Gods, or some such nonsense.

Posted by lambert strether | November 7, 2007 9:36 AM

None of the so-called liquidationists felt universal suffering was neccesary for market corrections to take place. To the contrary, it was keynes who advocated that real wage rates and prices should be universally lowered through inflation.

Posted by pimp hand strikes! | November 7, 2007 9:41 AM

Samuelson's view is exactly the same as the person who believes that a rising GDP is a good index for the health of the country. In that world, a familyo of 4 who live a sustainable lifestyle on a farm contribute almost nothing to the health of the country, but if the father got cancer and couldn't work and ran up huge medical bills, well, that's an increase in the commonweal.

Posted by Jeffrey Davis | November 7, 2007 9:42 AM

just found my favorite keynes quote

"To dig holes in the ground, paid for out of savings, will increase, not only employment, but the real national dividend of useful goods and services."

the guy makes galbraith look like an economist

Posted by pimp hand strikes! | November 7, 2007 9:43 AM

Well, I think my favourite economist, Dr. John Hotson at the University of Western Ontario, said it best:

"Any economist who advocates fighting inflation with unemployment deserves to be unemployed."

Much like the idea that those who advocate waterboarding for others deserves to be waterboarded.

Experience shows that rightwingers have no compassion until something bad happens to them personally. THEN--- they are all in favour of compassion, at least for as long as it takes to be personally helped. Then they quietly slide back to their default setting of non-compassion.

Case in point, a recent classic:

http://www.monbiot.com/archives/2007/10/23/libertarians-are-the-true-social-parasites/

Posted by Worst. President. Ever. | November 7, 2007 9:46 AM

What strikes me the most in this discussion is the fact that inflation has been subject to a massive underreporting bias by the BLS. Using the dollar exchange index, the dollar has lost on the order of 8% per year since 2001 -- a lot of it in the last year or so (DXY index on any financial website). To be clear, inflation is a hidden tax on all, especially those with jobs and a need to consume (food, education, heat, housing, etc.). Stagflation is a real problem (that we are facing now) and pictures of the bank run on Northern Rock mean we haven't progressed as far as we should have. We need to halt inflation, hopefully without the pain of recession.

Posted by mike c | November 7, 2007 10:05 AM

Fire is good for the forest because it clears out a lot of dead brush and encourages rejuvenation. For the individual trees that get burned, however, fire is not so good.

Posted by Spike | November 7, 2007 10:08 AM

From this morning's market report:
09:00 ET Dow , Nasdaq , S&P : [BRIEFING.COM] S&P futures vs fair value: -16.5. Nasdaq futures vs fair value: -18.8. Futures get a modest boost following a better than expected productivity report at 8:30 ET. Third quarter productivity rose at a much larger than expected 4.9% annual rate. This was due in part to a decline in hours worked. The large productivity gain helped lower the change in unit labor costs to -0.2%.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

See, less hours worked by the proles is a GOOD thing!

Posted by steve duncan | November 7, 2007 10:11 AM

@jeffrey davis: Do you even know what youre talking about? since this post is dedicated to lambasting samuelson for his suggestion that a recession(a decline in the gdp) can have beneficial aspects, how can your assertion that "Samuelson's view is exactly the same as the person who believes that a rising GDP is a good index for the health of the country" possibly hold?

Posted by pimp hand strikes! | November 7, 2007 10:23 AM

So what if Mellon said all those heartless things way back in the day?

He left us all those cool paintings at the National Gallery!

If we get hard up enough, I'll just hock one or two. No problem!

Posted by Daddy-O | November 7, 2007 10:28 AM

Similarly, recessions punish reckless financial speculation and poor corporate investments

Unless, of course, the institution is Too Big To Fail or the management is in tight with the government, in which case government largess will be forthcoming. Free markets are for the other guys.

Posted by LittlePig | November 7, 2007 10:41 AM

I figure with my 40 acres, fruit trees, milk goats, chickens and a stocked pond I can handle whatever happens with the economy. I will let the smart guys figure out what is good or bad. Of course, if the electricity stops I will be pissed.

Posted by danceswithgoats | November 7, 2007 10:48 AM

Robert Samuelson is an idiot, in point of fact.

But if anyone here has got an idea about how to prevent recessions from happening, I'd like to hear it. Many have been tried, all have failed. The best we've been able to do is prevent recessions from turning into depressions...

Posted by Mr. Noah | November 7, 2007 10:51 AM

I also detect a whiff of Donner Party conservatism in the Samuelson/Mellon stance:

...No, the thing that makes capitalism good is that, by forcing people to live precarious lives, it causes them to live in fear of losing everything and therefore to adopt – as fearful people will – a cowed and subservient posture: in a word, they behave ‘conservatively’. Of course, crouching to protect themselves and their loved ones from the eternal lash of risk precisely won’t preserve these workers from risk. But the point isn’t to induce a society-wide conformist crouch by way of making the workers safe and happy. The point is to induce a society-wide conformist crouch. Period. A solid foundaton is hereby laid for a desirable social order.

I think this kind of attitude is eternal, hence so are business cycles that are worse than they should be.

Posted by Delicious Pundit | November 7, 2007 11:12 AM

Companies find it difficult to raise workers' wages during a recesssion? In the US at least, companies have been finding it difficult to raise workers' wages during an ostensible expansion.

Except for the wages of the folks at the top. It sure is a good thing that all the stock-option and bonus-compensation agreements that top managers receive don't have a clause that takes the money back when it turns out the numbers they were based on were garbage. (Wouldn't you love to be in a job where you could oversee the loss of ten or twenty billion dollars and just get to retire to your multiple homes in the country and city?)

Posted by paul | November 7, 2007 11:15 AM

recessions have benefits, too.

Snark:

Didn't Keynes say, "In the long run, we are all dead"?

Accordingly, I propose a neoKeynesian advocacy of death as cure for our economic woes.

Imagine the benefits. Low fuel costs, inexpensive housing, NO TAXES....

The mind boggles.

Samuelson would be happy.

:End_of_snark

Posted by Duncan Kinder | November 7, 2007 11:24 AM

Accordingly, I propose a neoKeynesian advocacy of death as cure for our economic woes.

Perhaps an education on the current situation in Iraq, and on the War on Terror in general, is in order here.

Posted by gregor | November 7, 2007 11:50 AM

Matt,

Do you see the connection between this post and your post about the weakness of the dollar versus the euro (and other currencies)? The dollar has declined so much largely because the Fed has kept interest rates too low. Why? Because the Fed shares your aversion to recessions. Recessions are inevitable in the business cycle though, even though we've been blessed by them being relatively short, mild, and infrequent in the last couple of decades.

The problem is that if the Fed is more worried about preventing a recession than preserving the strength of the currency, it will end up with both a weak currency and a worse recession than we would have had otherwise. If the rest of the world starts to lose confidence in the dollar as a reserve currency, the Fed will be forced to raise rates higher and faster than it would have had to otherwise to make the dollar attractive again; the result will be a deeper and longer recession.

BTW, another reason why you should welcome the occasional recession: it decreases your dreaded inequality.

Posted by Fred | November 7, 2007 1:07 PM

@jeffrey davis: Do you even know what youre talking about? since this post is dedicated to lambasting samuelson for his suggestion that a recession(a decline in the gdp) can have beneficial aspects, how can your assertion that "Samuelson's view is exactly the same as the person who believes that a rising GDP is a good index for the health of the country" possibly hold?

Because he believes that economic activity is the sole criterion for determining a good. He reduces labor to a commodity, as in the example in the blog post.

You sound angry? Are you angry?

Posted by Jeffrey Davis | November 7, 2007 1:45 PM

Taking things out of the more airy realm of whose economic theory is more accurate or 'just', I'd offer the opinion that Mr. Samuelson is an idiot.

That anyone might offer this opinion won't surprise a large number of people. However, that opinion is more than a simple ad hominem assault on the good Bob.

Samuelson's observation that recessions have benefits, "but it seems coldhearted to say so because the initial impact is hurtful", isn't only coldhearted -- it's an almost narcissistic dismissal of the people actually affected by a 'period of lowered economic expectation'.

Discussion and debate over corporate decisions and government policies always seems to be divorced from their effects. It makes 'the hard choices' simpler to put in motion, I suppose, so long as you ignore what actually happens to men, women, and children -- to people.

Some financial analysts on the Net, discussing the rippling effects of Trillions in greed-created debt through the U.S. economy, are openly talking about the possibility of not simply a Recession, but another Great Depression. My hope would be that it's all only speculation -- just like a journalist blandly discussing how this or that event actually has an unanticipated series of benifits.

But, if it isn't only theory -- when I'm standing on a soup line in threadbare clothes and worn shoes, a persistent fever from "sleeping rough" and little trust in anything except "The Rich Get Rich / And The Poor Get Laid Off", I want to turn around and find Samuelson standing right behind me... just so I can say, "Theory's got nothing on practice, huh, Bob?"

Posted by Jemand von Niemand | November 7, 2007 1:49 PM

It's not that recessions are good as much as that they are necessary. Preventing bad capital investments from liquidating just encourages more money to be thrown down ratholes. Eventually, everything liquidates anyway and and things are worse because the bubble was kept going for so long.

At a certain point, the Fed will have to raise interest rates and let us plunge into a recession, or else we will experience hyperinflation.

Posted by Glaivester | November 7, 2007 7:29 PM

If you've been wondering why the Fed has been lowering interest rates into the face of a falling dollar, it's rather simple. The Fed is run by Republican party hacks. They are waiting for a Democratic president to raise rate high enough to bolster the dollar and squeeze out inflation. That's how it worked out in the 1970s with inflation being AOK with the Fed under Nixon and Ford, but not under Carter.

It is possible that there is another way of explaining Fed actions, but if you apply Occam's razor the best answer is Republican Party hackdom.

Posted by Kaleberg | November 7, 2007 7:49 PM

What's with Samuelson's idea that rising wage levels, apparently per se, are bad for the economy? Someone has to buy all the things/services that are offered; if people are forced to live on subsistance-level incomes, a subsistance-level economy is all that will develop.
Studying what occurred during the 1930's would show Samuelson that in an industrialized society once wage/employment levels shrink too far, the only way out is massive government spending - which can create a much greater threat of the inflation he seems to fear so much.
During the Great Depresion the U.S. government's goal was to "prime the pump" for an economic recovery by putting people back to work at government expense. However, the amounts the government spent, while enough to stave off mass starvation, weren't enough to actually "prime the pump" and kick start an economic recovery. That was accomplished by the massive spending deficits of WWII, which transferred billions to industries and individuals. Inflation was held in check by rationing, increased taxes, bond sales, and vastly increased savings rates (nothing to buy). Those bonds, savings accounts and the industrial plant, developed for war but convertible to peace-time uses, were then available for the economic boom of the '40s and 50's.

Posted by Doug Stamate | November 7, 2007 10:01 PM

The idle rich have to have their apologists, and Samuelson is an eager toady, telling them that it's okay to be wealthy when so many are poor.

Posted by John | November 7, 2007 10:13 PM

I like to think of myself as GGG (good giving game), but I don't think that Samuelson should be indulging his sado-monetarist kinks at our expense when we aren't consenting. Now, if he could find a consenting, masochistic "bottom" country whose central bank he could advise, then that's his business, but involving us in it without asking first is wrong, and I'm sure Dan Savage would agree.

Posted by Julian Elson | November 7, 2007 11:21 PM

Damnit why don't these links work?

http://www.j-bradford-delong.net/movable_type/2004_archives/000534.html

Posted by Julian Elson | November 7, 2007 11:25 PM

Matt misses Samuelson's point:

Over-inflated markets are like a Ponzi scheme. It is much better to let the Ponzi scheme collapse early on than to try to sustain it, and ultimately have it collapse when it is a lot larger.

As for Keynes:

It seems an extraordinary imbecility that this wonderful outburst of productive energy [over 1924-1929] should be the prelude to impoverishment and depression.

Except that a lot of the investment was in non-sustainable schemes.

Some austere and puritanical souls regard it both as an inevitable and a desirable nemesis on so much overexpansion, as they call it; a nemesis on man's speculative spirit. It would, they feel, be a victory for the mammon of unrighteousness if so much prosperity was not subsequently balanced by universal bankruptcy.

No, the problem is that much of the expansion is only on paper. People appear to be productive when what they are really doing is eating up their savings.

We need, they say, what they politely call a 'prolonged liquidation' to put us right. The liquidation, they tell us, is not yet complete. But in time it will be. And when sufficient time has elapsed for the completion of the liquidation, all will be well with us again.

We need a liquidation so that we do not keep throwing good money in after bad.

I do not take this view. I find the explanation of the current business losses, of the reduction in output, and of the unemployment which necessarily ensues on this not in the high level of investment which was proceeding up to the spring of 1929, but in the subsequent cessation of this investment.

In other words, the Ponzi scheme would have worked, if we could have kept getting more investors.

I see no hope of a recovery except in a revival of the high level of investment. And I do not understand how universal bankruptcy can do any good or bring us nearer to prosperity.

It helps by getting people to stop spending money they don't have, and by not propping up bad investments so that they take more money out of the economy.

Posted by Glaivester | November 8, 2007 6:10 PM