New York Times Death Spiral Watch (Casey Mulligan Edition)

Why oh why can't we have a better press corps? The New York Times thinks it's good to use its space to let Casey Mulligan tell us that the Great Depression was a figment of our imagination. Memo to everyone: if you are ever tempted to make an argument that implies that the Great Depression simply did not happen, stop.

Here is Casey Mulligan:

Casey Mulligan: THE Treasury Department is now thinking about using some of the $700 billion it has been given to rescue Wall Street to buy ownership stakes in American banks. The idea is that banking is so central to the American economy that the government is justified in virtually nationalizing much of the industry in order to save us from a potential depression....

[S]aving America’s banks won’t save the economy. And... the economy doesn’t really need saving....

The non-financial sectors of our economy will not suffer much from even a prolonged banking crisis, because the general economic importance of banks has been highly exaggerated. Although banks perform an essential economic function — bringing together investors and savers — they are not the only institutions that can do this. Pension funds, university endowments, venture capitalists and corporations all bring money to new investment projects without banks....

When a bank or a group of banks go under, the economywide demand for their services creates a strong profit motive for new banks to enter the marketplace....

The stock market crashed in 1987 — in 1929 proportions — but there was no decade-long Depression....

John McCain, who was widely mocked for saying that “the fundamentals of our economy are strong,” was actually right.... One important indicator is the profitability of non-financial capital, what economists call the marginal product of capital.... Since World War II, the marginal product of capital, after taxes, has averaged 7 percent to 8 percent per year.... And what happened during 2007 and the first half of 2008, when the financial markets were already spooked by oil price spikes and housing price crashes? The marginal product was more than 10 percent per year.... America’s non-financial companies are still making plenty of money....

And if it takes a while for banks and lenders to get up and running again, what’s the big deal? Saving and investment are themselves not essential to the economy in the short term. Businesses could postpone their investments for a few quarters with a fairly small effect on Americans’ living standards. How harmful would it be to wait nine more months for a new car or an addition to your house?...

So, if you are not employed by the financial industry (94 percent of you are not), don’t worry. The current unemployment rate of 6.1 percent is not alarming, and we should reconsider whether it is worth it to spend $700 billion to bring it down to 5.9 percent.

I don't know which is remarkable: that Casey Mulligan does not know that the non-financial corporate profit rate was high in 1929, that Casey Mulligan thinks that university endowments make construction loans, or that the New York Times thought this was worth its readers time.

Comments

[David in NY]

Well, of course, in 1929 the Secretary of the Treasury thought that doing nothing was the best thing (liquidate, liquidate), and we won't make the same mistake again.

Oh, wait, that's what Mulligan wants us to do this time. Nothing.

Maybe they should have entitled his op-ed: "Mellon Takes a Mulligan."

[Michael Turner]

I'm trying to see the world as Casy Mulligan must see it. We could go nine months with no savings or investment, because ... folks got by without it during WW II? VCs, universities, etc., are equipped to pick up the operations slack from hundreds of failed banks?

I'm somehow reminded of a number of scenes in "I Am Legend" where we hear Bob Marley singing, "every little thing is gonna be all right ...."

[Maynard]

Stupid article, but she did not say that the Great Depression didn't occur - she said that stocks fell in 1987, but no depression followed.

[But every reason adduced for why we should let the entire banking system fail is just as valid in 1929 as it is today...]

[vnk]

What about marginal product of labour? Isn't that factor important too?

[crf]

I've had no schooling in economics, but from recent history, if you look at other countries that have had crises like the one America is having now, where credit has dried up, and people stopped believing that society is following its best course, recessions have followed, with decades-long problems (the "asian flu", the cultural revolution, the great leap forward, glasnost, the great depression).

Credit and banking are presently centrally important to economic functioning, and when they go sour, it is likely a symptom of much deeper problems. Apart from banks, all other methods of getting capital to producers have been found to be less efficient, or have trouble in getting citizens to maintain their credibility in them. Even if there are other willing lenders in the system (not to mention that these lenders are also surely spooked), people and businesses are RIGHT NOW having trouble getting loans, and people are generally quakingly fearful about the future (for good reason). How do you solve that with printing money? You can't tease out a credible analysis of this credit crisis without considering the route the world and the US are presently travelling.

So I don't think this is just a credit crisis. People have lost confidence that huge sectors of the economy are worth as much as had been thought. They fear there has been in the last decade in western economies, and especially in the US, a huge misallocation of financial resources: capital investment, training and employment, into areas of dead-end growth, bad value and irrelevance. I don't think this crisis is unrelated to the Energy Crisis, Global Warming, the Food and Population Crisis, the Extinction Crisis, the lack of skilled workers to replace baby boomers, and the rise of extremism and anti-science thinking and anti-intellectualism. Only an ardent economic navel-gazer would think the outlook for the world is a rosy future, and that we're rising to the challenge of getting there.

I'm not entirely pessimistic that we can change. But telling people to go to bed sucking their thumbs and that everything will be alright, because we have some wealthy rich people and institutions, low unemployment rates, and that most people are not bankers: that's scarily infantile.

[Tim Gray]

This seems a cheap shot (at the NYT; I can't speak about Mulligan), but these "Why can't we have a better press corps" postings often are. The whole point of an op-ed page is to air provocative views

[Come back when they have published a piece warning of us of the invasion of the SHAPESHIFTING ALIEN LIZARD PEOPLE--that would be equally founded in reality.]

and not just being an amen corner (though, yes, several of the NYT's staff columnists end up being exactly that). What's more, Mulligan doesn't say what the posting claims, ie, that the Depression didn't happen.

[He implies it: everything he says about why the real economy is decoupled from the financial economy applis to 1929...]

[Ted]

This is slightly off-topic, but I will try anyway as it is not totally unrelated. I am not an economist - just a lay person looking for some enlightenment and perhaps I can get it in this forum. Clearly there is a credit crunch to business, but what about credit cards ? Why do I still receive a new credit card offer in the mail literally every day ? At what point in this crisis if it keeps going on the same trajectory will consumer credit dry up ?

[Larry R.]

I don't understand the point of publishing someone's "unconventional" or "contrarian" views when those views are clearly idiotic. How does a guy with views like this make professor at UofC? Investment is already halting, people have stopped spending out of fear, and the idea that non-bank industries don't need a functioning bank industry to keep their finances running smoothly in the modern economy is unsupportable. 1987 was a burp compared with what's happening now in the credit markets.

It must be great to be in academia.

[J Thomas]

"Why do I still receive a new credit card offer in the mail literally every day ?"

Do you get offers that are guaranteed? I get offers where they invite me to apply.

So, why would they invite millions of people to apply for credit cards if they aren't going to actually pass the credit cards out? Maybe inertia. They have this mass-mailing stuff funded, and they go ahead and mail them, it isn't very expensive, and while the higher bank executives are running around like chickens about to get their heads cut off, the lower-level guys who aren't important enough to notice just keep doing their jobs.

Tell you what -- apply for every credit card offer you get, and tell us how many of them are granted. Maybe you could keep a running tally, and say what proportion of them get granted each week, that might be useful information.

[Nick]

If only we could have a rare macroeconomic natural experiment to get to the bottom of this. Any countries want to volunteer to do nothing for the next couple of years? We might need a way to randomize this to avoid endogenous "do-nothing-ism." As Richard "I'm loud and I'm British" Quest of CNN put it the other day, when he shot down Jim Rogers (co-founder of Quantum with Soros), "In a democratic country, doing nothing is not an option." The pressure to do something may overwhelm any arguments, no matter how stupid or ingeniously contrarian they may be. Perhaps we should randomize among some dictators.

[Ken Houghton]

This is Casey "you liberals should be happy with Republicans because the income gap falls under them; so what if it only happens because men make less" Mulligan, no?

Greg Mankiw assures us Mulligan is perfectly reasonable. Kathy G. disagrees, but she's not An Economist.

[uhoh]

[As I have said: you miss the point. All the reasons that Mulligan adduces for why the bank failures of today won't cause any trouble are reasons for thinking that the bank failures of 1931 didn't cause serious trouble. Therefore the Great Depression did not happen...]

Maynard is right.

Mulligan obviously isn't an English major.
The NYT failed to assign a copy editor to his column.
Our host here misread the sentence, needlessly.
As Maynard says, Mulligan is wrong throughout.

But he did not deny the 1930s Depression. You can't read it that way.

> The stock market crashed in 1987 — in 1929 proportions — but
> there was no decade-long Depression....

Who added the ellipsis? It should not matter -- assuming the ellipsis is correct -- no space after the last "n" -- the full sentence ended there.

Assuming that's where the sentence ends, any English major can read it for you -- including the implied words -- thus:

> The stock market crashed in 1987 — in 1929 proportions — but
> there was no decade-long Depression [after 1987].

The Professional Organization of English Majors thanks you for paying attention.

[Neels Beals]

Gee, and I thought Mulligan was just being sarcastic. (You do know what a Mulligan is, don't you?)