07/23/2010 10:50 am ET | Updated May 25, 2011

Depression and the New Math

We have avoided the fate now for more than eighty years.

Back then, when my parents were infants and my grandmother a wannabe flapper (she loved to party a Friday and Saturday night away), before Keynes was a soothsayer and the government went counter cyclical, before unions and the Democrats were powerful, and before the words "secure" and "middle class" could be mentioned in the same sentence, we called it by its proper name -- depression.

Now it's just a disease.

Which is a shame.

Because, for want of a little honesty, we are framing the national debate in ways that can only make things worse. We are on the verge of turning our euphemistically named "Great Recession" into a depression. And we are doing it with an alarming amount of historical and empirical ignorance.

Start with the facts. The government tells us unemployment has been running at between 9 and 10% for the last year or so. This is flatly wrong. The real rate is between 15 and 20%. In the '30s, before government statistics became an exercise in spin, the rate was north of 25%. We are not quite there today. But we are far closer to that than we admit.

There really is no basis for this statistical fiction. For some reason, the government counts you as unemployed once you lose your job but stops counting you as unemployed once, having lost your job, you stop looking for the next one. This can occur six months out or a year out. But, generally speaking, it does occur. People in their mid-40s or 50s tend to give up after a thousand resumes have been sent out and rejected. This, of course, is no reason to stop counting them as unemployed.

They have no jobs.

Other than mailing resumes out by the dozens.

The government apparently assumes that if you have stopped looking for a job, you either do not want one or do not need one. Though silly (indeed, somewhat stupid), it's predictable given our prejudices. We live in a country where every individual is presumed to go as far as his or her innate ability will take them. You just have to try. In a transparently phony syllogism, the government reasons that, if you are unemployed for too long, you must not be trying very hard. Or at least not hard enough to be counted anymore.

So, a real 15 to 20% unemployment rate becomes a 9% rate.

And the worse things are, the better they look.

If it all stopped there, we might be able to survive this type of scoring error. Maybe it would even be... useful. Sort of like the weekend golfer (this is not autobiographical) who turns an atrocious 8 into a 7 or a 6, maybe because his friend turned that missed five foot putt into the gift of a "gimme." Indeed, in the handicapping system used throughout the world of golf, designed to allow players at all levels to compete with each other, there is an upper limit placed on the strokes that can be taken on any one hole, regardless of how many times the weekend hacker flails away. Everyone feels better and enjoys the game.

But this is not golf. Or a game. And the uncounted don't feel any better for having been told they can no longer be deemed what in fact they are.

Which is unemployed.

Nor are we doing the scorekeepers (i.e., the government) any good either. In fact, to the contrary. For in assuming away roughly a third to half of the real unemployed on the basis of questionable assumptions about human behavior, we are allowing ourselves to pursue flawed "solutions" based on equally questionable assumptions. And the current obsession with deficits must be Exhibit A on any list of those flaws.

Right now, deficits are not the problem, pace the world's bondholders and credit markets. You cannot combat a Great Recession, or would be Depression, by cutting spending. It did not work in 1937, when conservatives made Roosevelt lose his New Deal nerve in trying to balance the budget; in fact, it just led to a second mini-Depression in 1938. It would not have worked in 2008. And it probably will not work today. Anemic recoveries (which is what we are in right now) can turn into recessions, and ultimately into depressions, when consumer spending plummets (usually because of joblessness) and products go wanting for buyers. Everyone loses, including prior lenders whose notes are rendered worthless (or much less). Governments borrow and spend at these times to staunch any hemorrhage.

Given our real 15 plus percent unemployment rate, we are by no means out of the recessionary woods into which we sank in 2008. And we won't get out by listening to the deficit hawks. Obama's current approach is measured. It concedes that deficits have to be tackled in the future, properly excoriates the prior Administration for having needlessly run them up on unpaid-for wars, tax cuts and the prescription drug benefit to Big Pharma, but continues to favor stimulus in the short term.

The only people singing a different song are Republicans. In state houses, where no one has a choice because states can't deficit spend, this makes for easy political virtue as the GOP Governors Christie (New Jersey) and McDonnell (Virginia), along with various GOP gubernatorial candidates like Whitman (California)and Lazio (New York), rail against spending what we do not have (usually on teachers, never on overpaid right fielders; and if you think the government or we taxpayers are not subsidizing those right fielders, think again, 'cause there's a whole lot of tax subsidy built into all those new ball parks that have sprung up over the last twenty years).

But, in truth, it's a false virtue.

Because things could have been and still can be worse.

To the extent the states have a problem, and they do, we should bring back revenue sharing. We should also stop criticizing the first stimulus bill for having included all those so-called "one shots" that states used to keep cops and teachers on the job in 2008 and much of 2009. Those "one shots" helped improve things in the short term.

The GOP should also stop attacking public sector unions. If their wages go down, that exacerbates the problem as well. It's no answer to point out that public sector employees in unions have better wage, health or pension benefits than their private sector counterparts. They do, but this is because we have allowed the private sector to savage employees for thirty years with low wages and enormous de facto cuts in pension and health benefits, a phenomena properly labeled the "Great Risk Shift" by Jacob Hacker. The fact is, had that not occurred, a portion of the enormous productivity gains of the last thirty years would have gone into the pockets of the middle class, making them far more prepared to weather the storm of 2008.

As for the larger national economy, we should continue Obama's measured approach. If we get out of Iraq, start to grow the economy, and avoid a double dip for the rest of 2010 and into 2011, we can survive and then set the stage to prosper. With health care reform on the books and financial reform coming, we may even begin to redress the terrible imbalances that have threatened salaried workers in the private sector, helping them regain the purchasing power lost in those risk shifting years.

The bondholders and credit markets will still complain.

But at least they are being counted.

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