When recession turns into Great Depression

When recession turns into Great Depression
Comment E-mail Print Share
First Published: Thu, Dec 18 2008. 01 15 AM IST

Updated: Thu, Dec 18 2008. 03 46 PM IST
The difference between recession and depression is simple. Recession, goes the saying, is when you lose your job; depression is when I lose mine.
These days recession is starting to feel like depression to a lot of people. Recession starts to feel like depression every night at General Motors Corp. (GM) when they turn off the escalators and turn down the lights in the faint hope that one more person will get to keep his wage and benefits one more day.
Ron Gettelfinger, head of the United Auto Workers union, knows that worker packages, which cost car makers $74 (Rs3,500) an hour in wages and benefits, are way out of line with deflationary reality. But most of Gettelfinger’s proposals aren’t about slashing those packages. Instead, he is emphasizing plans for federal assistance to manufacturers, or federal cash to improve terms of auto loans.
These latter approaches aim to fortify the overall economy. In a recovered economy, the logic runs, worker pay won’t seem so egregious. Behind Gettelfinger stand economists who argue that bringing down wages isn’t right or possible, even in a troubled period. Wages, economists says, may move up, but they are sticky downward.
These economists cite the UK’s John Maynard Keynes. They also often cite one of the parents of modern economics, Irving Fisher of Yale. Around World War I, Fisher wrote up a then-novel plan: index wages to the growth of the economy so that raises are automatic.
But in recent years, scholars have been making a different argument. Lee Ohanian and Harold Cole of the University of California, Los Angeles, say the high-wage method of fending off economic depression can make a depression more likely.
The model Ohanian and Cole use is the ultimate depression, the Great Depression of the 1930s. Early in that depression, unemployment hit 25%. It fell all the way to 13% or 14% in the mid-1930s, only to head up to 19% in the later 1930s. This was a huge shift from the preceding decade, when unemployment averaged less than 5%.
What was transpiring at GM or Ford Motor Co. in those days? In the 1920s, Henry Ford pushed for wage increases in the faith that they would enable workers to buy more cars. A young labour leader named John L. Lewis was also pushing for higher wages. Lewis convinced Herbert Hoover who, first as commerce secretary, and then as president, insisted higher was better. After the stock market crash of 1929—the equivalent period to now, more or less—Hoover sought to block wage cuts.
In the 1930s, the Roosevelt administration continued the trend, leading the Congress in passing the Wagner Act. This gave unions the power to organize Detroit and threaten sit-down strikes. At the same time, unemployment was heading up. Until now, many economists have tended to blame broad monetary forces for a general decline, and hence the new joblessness.
But the order was probably the other way around. Ohanian and Cole ran the numbers and found that in the late 1930s, manufacturing wages were 20% above the trend for the rest of the century. They posit that employers were unable to cut wages, so they simply fired or failed to hire.
Another truism that we all know—nice work if you can get it—captured this period perfectly. The unions got, the jobless paid. The Depression duly earned its adjective, Great.
At the time, employers knew what was going on. When executives were asked to rank what New Deal laws they wanted to see repealed, they put the Wagner Act high on the list, way above, say, the law that created the Securities and Exchange Commission or deposit insurance.
Fast forward to today’s auto industry and the famous $74 hourly package. Everyone knows the US auto makers would have a better chance of survival if that package were pared. But an economist who follows manufacturing closely, Ken Mayland of Clear View Economics Llc. in Pepper Pike, Ohio, notes that in the modern discussion, price and labour are not allowed to adjust. Instead the pressure is, as in the 1930s, to address trouble via other methods.
Maybe it’s worth trying out the idea that there’s nothing wrong with allowing wages to fall. Sometimes they just have to go down. Even one of the favoured fathers cited above—Irving Fisher—acknowledged this.
In 1918, Fisher wrote of what his proposed index system would do for employers if the general price level dropped: Those firms which have advanced their employees’ wages on the basis of index numbers can make a reduction, at least to the point at which they started, with the understanding on the part of the employees that the reduction is the automatic result of a price change similar but opposite to that, which gave the high-cost of living compensation.
Gas prices are down today. So are prices at the mall, even pre-Christmas. If the US auto makers and their workers can make reasonable packages their goal, then we’re all less likely to have our own personal depression.
Bloomberg
Respond to this column at feedback@livemint.com
Comment E-mail Print Share
First Published: Thu, Dec 18 2008. 01 15 AM IST