A Couple Things

Normally a depression is defined by a 10% loss in GDP. A recession is normally defined by two consecutive quarters of negative growth. There is little question that we’re in the middle of the latter and might be headed to the former. If unemployment rates go above 10%, to say 13-15% levels, we’d probably hit the 10% loss in GDP easily.

The government, of course, doesn’t want to see that happen. So its solution is bailing out firms and industries that are viewed as relatively essential to the economy but in risk of failure. We learned the other day that AIG needs more money. Detroit’s auto manufacturers are in big trouble and asking for help. And then today we learn that American Express is looking for bailout money as well. Perhaps most frustrating of all, the Fed is not releasing the names of the recipients of the aid it is giving out.

It is extremely easy to be critical of these bailouts. After all, from a populist perspective they’re simply rewarding failure. But what is the other solution? Should we really let GM and Ford go out of business? Should we let American Express fail? Thinkabout the points made above. If you hit 10% unemployment your 10% GDP loss is right around the corner and you’ll be welcoming in a nice little depression.

Creative, out of the box ideas, are needed.

Edited to add: Tyler Cowen has a timely piece on what ended the Great Depression that more or less answers McArdle’s query about the role of government intervention in ending massive recessions/depressions.

This entry was posted on Tuesday, November 11th, 2008 at 9:39 am and is filed under Domestic Politics, Economics. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.