On a dreary day in April, 2005, I wrote a piece speculating that we were already in another Great Depression. I revised it in light of recent news stories about 6 million long-term unemployed.
The first Great Depression of the 1930s saw sustained unemployment of 20% to 25%, entirely men of working age. Real family income declined as the Dow dropped from 400 to 150, but purchasing power dropped less sharply due to deflation. Lasting effects included creation of the social "safety net" and the shared sacrifice values of the "greatest generation."
I define a "depression" as an economic downturn that affects more than 20% of families. By that definition, the Great Inflation of the 1970's was a second Great Depression. The Dow dropped from 1,000 to 550, but purchasing power dropped even more (about a factor of 5) due to inflation. 40% of working age women left home and entered the work force, but real family income stayed flat. In other words, for almost half of American families, it took a second paycheck just to stay in place. Lasting effects included a rise in the divorce rate and decline in quality of public schools as educated women sought better paying jobs.
Are we in a third Great Depression? I wondered back in 2005. The visible effect of an oncoming "Great Depression III" could already be seen in rising under-employment, particularly for younger workers. With the financial market meltdown of 2008, under-employment turned to outright unemployment. By the same measure as was used in the 1930s, unemployment is more like 16% to 17%. The less scary 10% figure doesn't count people unemployed for so long that they are written out of the work force by statisticians. The number is more like 20% for men: a true Great Depression figure.
In 2005, we were already seeing a rise in multi-generation households (mine included!), where Boomers housed not just themselves, but aging parents, grown children, and even grandchildren, who just a year or so earlier lived in their own nuclear households. I used to think, "This will be over when [adult child's name] gets a job." But as soon as that individual found a new job, paying a lot less than the old one, one or two more family members were in distress.
In 2005, the only good investment was prime residential real estate. Every other asset class offered mediocre returns, at best. Since then, even that haven disappeared. Floyd Norris, the New York Times financial columnist, wrote that too much capital was chasing too little return. So Wall Street created vehicles, like credit derivative swaps, to chase the tiny returns harder and harder, until it all went off the cliff in late 2008.
Although the mantra of the 1990s and 2000s was that inflation was low, it was bogus accounting. The "standard" measure of inflation has been fudged with over the years to ignore housing, education, energy, health care, and food. The excuse is those sectors are "volatile." The truth is that all those sectors experienced fierce inflation in the last 10 to 15 years.
Inflation historically depresses equity and helps real estate. Future earnings will purchase less, making equity less attractive. Future mortgage payments will be easier, making real estate more attractive. So it should not be a surprise that the Dow is just about where it was in 1999.
A depression occurs when pessimism feeds on itself. We experience three interlocking deficits: the federal budget, current accounts, and trade. Each deficit makes the others worse by reducing the capacity of the economy to invest in new growth. The strong dollar of the last decade hid the ill effects by making imported goods seem cheaper, but accelerated erosion of the manufacturing and service base. A change to a weak dollar will not, by itself, or quickly, set matters right. We can only look for consumers to pay more while the investment base rebuilds.
Depressions engender great social angst. The suffering and grit of the first Great Depression is well documented, both in history books and in the oral tradition of many American families. The dislocation of the Great Inflation is less well understood, although just as profound and even more pervasive.
The anger and angst around "tea party" demonstrations probably just scratches the surface of current concerns -- because they have been building for years. It got to me five years ago, when worse was yet to come.
The social effects of Great Depression III remain to be seen. Will the erosion of the middle class from the Great Inflation continue? Or will a renewed sense of common purpose re-energize the nation? The outcome will shape the 21st century.