Thomas Palley - A Second Great Depression is Possible

Thomas Palley has a new op-ed in the Financial Times. Palley overviews some facts which give credibility to those economists predicting a double dip recession. If recession goes on long enough, it can be classified as a depression. A recession can be classified as a depression if it lasts more than 3 years.

There is a simple logic to why the economy will experience a second dip. That logic rests on the economics of deleveraging which inevitably produces a two-step correction. The first step has been worked through, and it triggered a financial crisis that caused the worst recession since the Great Depression. The second step has only just begun.

Deleveraging can be understood through a metaphor in which a car symbolises the economy. Borrowing is like stepping on the gas and accelerates economic activity. When borrowing stops, the foot comes off the pedal and the car slows down. However, the car’s trunk is now weighed down by accumulated debt so economic activity slows below its initial level.

With deleveraging, households increase saving and re-pay debt. This is the second step and it is like stepping on the brake, which causes the economy to slow further, in a motion akin to a double dip. Rapid deleveraging, as is happening now, is the equivalent of hitting the brakes hard. The only positive is it reduces debt, which is like removing weight from the trunk. That helps stabilise activity at a new lower level, but it does not speed up the car, as economists claim.

Now, I want to point to a very good overview article on 30 years of the Middle Class squeeze. In this article is a great summary on how tax structures have encouraged no real valued added economic growth and stymied the production economy, i.e. manufacturing. Ya know, the one where people have good jobs, make useful things....

Government policies actually encouraged this sort of risky speculation over actually investing in productive assets. To name but one example: hedge funds were allowed to report much of their speculative income as long-term capital gains, lowering their tax rate to 15 percent. Meanwhile, the tax rate paid by manufacturers of washing machines (for example) was 35 percent. Why invest in jobs, goods and services when playing with leverage and "innovations" was essentially rewarded by government policy?

The post lists a host of major reasons why the middle class has been squeezed and mentions globalization as a strong reason. But notice the government policies. It should be obvious that a bunch of glorified gamblers, i.e. hedge funds, getting that level of tax break, yet our manufacturing base pays over 2 times in taxes than these guys...uh, there might be an incentive problem!

We went from making things to making bubbles too:

The 1970s also saw the first beginnings of a loosening of financial regulations and the growth of credit and financial "innovations," such as securitization and derivatives. Capital increasingly fled real production for finance, which became the key profit-center of corporate America. GM didn't make money manufacturing autos; they made money selling loans to buy their cars. General Electric made more with its GECC finance arm than it did selling light bulbs and generators.

As a result, where finance and banking once generated a mere six percent of total U.S. corporate profits, by the height of the housing bubble in 2006 it was churning out 45 percent of all corporate profits. Indeed, U.S. "financial services and innovations" were the most heralded exports of the nation.

Now the question is....will this corrupt as hell government enact legislation and policies which actually are economic common sense, not written by various lobbyists to turn this nation around?

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To answer your question: NO

Congress is owned and the White House doesn't have the courage to make the necessary (or even propose)policy changes that would transform our economy. - Financial Information for the Rest of Us.

You should really check this NYTIMES

piece out.

It goes through how it pays for a private equity firm to take a successful business load it down with debt, and then offload it. These guys trade firms like baseball cards, because each time they make a deal they get a cut.

What's really bad to think about is what happens if these funds are in the "winding up" stage in which they need to get out of investments, and there's no one there to buy the firms up because the private equity market has dried up. That means a new rash of firms that go into bankruptcy.......

private equity

That's a bummer the New York Times hasn't found the advertising revenue ability of embedded videos, like the dailyshow has because that's literally a documentary online.

Private equity was a big controversy in the 1980's. Oliver Stone's "Wall Street" firm touched upon it and how they use financial games, controlling interest and now this...debt loads to make profits while destroying corporations which add to the real economy and U.S. middle class.

Going through the history of this and what percentage is going on today in terms of corporate destruction would make an exceptional blog post.

If I recall right, a lot of politics at the time, the 80's talking about stopping these corporate raiders from doing these things and like most things in the national interest...
any legislation died in committee.

Glad to see the New York Times covering it.

Time for a little pitchfork action

And then there's that tax structure thing....

(Great Blog & Catch, BTW) Sure, we are in a decades-long deleveraging spiral, but again the tax structure is being decimated by the neolibs/neocons: around 80% of the American fed tax base derives from the individual taxpayers, whose fed revenues have plummeted by 21% -- corporate taxes ONLY make up about 7% to 7.5% of that remaining 20% and it has plummted down by 58%. (Still need to check on any changes in the normal 12% of expected taxes.) And since those bank stress tests were based upon something in the vicinity of 8% unemployment, we can expect more and more bank failures --- of the smaller variety which usually acts as the small business incubators (i.e., the major job creators).

Plus, with that declining tax base we have the US Congress which appears to want to levy a mandatory private insurance fee upon the citizenry --- together with their push to "revitalize" the securitization (read: ultraleveraging) industry of Wall Street with that carbon offset/carbon derivatives (cap-and-trade, originally supported by Geo. H.W. Bush and, I believe, was created within Enron) legislation which will probably push up commodities even more.

(The Chicago Cubs filing for bankruptcy? Now what president comes from that town?)

Recipe for disaster, anyone?

death & taxes

Two things most Americans do not want to deal with...esp. taxes because most people cannot fill out 1040ez.

So, if you want to take it on, I'm sure we'll be most appreciative of a good detailed tax blog post on how these MNCs aren't even paying taxes to more how tax incentives do make a huge difference in what kinds of businesses and activities corporations will pursue.

I've tried to list a few blogs which specialize in solid tax code analysis and then the GAO frankly has some of the best material out there.

Here is something I've noticed. As more and more true policy experts, economists take to the Internets to gain awareness of their work, analysis, recommendations, I'm seeing these very ideas to start popping up into the MSM.

Now if we could get Congress to pay attention. ;(

I shall try...

..but I think old Mish, here, may have beaten me to it.

doesn't look like it

This would be the various corporate tax codes which enable the "stashing" of money offshore for tax purposes, the tax brackets, precisely how large corporations pay zero in taxes...

kind of the "big picture" stuff. I've read and written on a few of these in the past, but haven't done much recently. Frankly it's a job. It's like studying for a final exam to write up one blog post overviewing things and then trying to communicate your discoveries in one blog post when you just read 1000 pages.

Not an easy task.

I've thought of including Mish in the middle column, but I find so many posts kind of skewed with some sort of philosophy, i.e. philosophy trumps sanity.