The retail sales numbers for September contain some very bad news for anyone hoping that Monday's stock market rally signalled an end to the uncertainty over where the economy is headed. A 1.2 percent drop may not sound like that all that much, but it was the worst performance in three years, and when you look at a chart of retail sales performance over the last year, the downward trendline is precipitous.
James Picerno at Capital Spectator puts the numbers in perspective:
Considering the U.S. economy's high dependence on consumer spending (roughly 70 percent of GDP comes from personal consumption expenditures), today's retail numbers speak loud and clear that the recession is here, and it probably has been for some weeks or month, and that the general economic downturn will deepen for the remainder of the year and quite possibly continue through early next year. Your editor was at a press conference with money managers in New York yesterday and one especially pessimistic chap talked of quarterly GDP falling by an annualized 5 percent at some point in this year's second half. We're not sure the pain will get that bad, but one can't rule out much these days in light of all the negative surprises in recent weeks.
Not surprisingly, investor sentiment on Wall Street is sour -- all the major indexes were down three or four percent by 11:00 EST. And as if to underline the pain, the Washington Post reported on Tuesday that debt-collection call centers are "one of the few sectors of outsourcing in India that is still hiring aggressively." Indian workers "say they are flabbergasted at just how widespread the financial ruin [in the U.S.] appears to be."
On the positive side, Wednesday morning brought more evidence of credit easing, albeit on a very small scale. So perhaps we can all heave a huge sigh of relief, and say, maybe, just maybe, the massive interventions orchestrated by Ben Bernanke and Hank Paulson have steered the global economy away from the kind of credit contraction that precipitated the Great Depression.
But what if the consensus view on the part of economists that government failure to avert a credit contraction was the primary cause of the Great Depression is wrong? Blogging at The New Republic, John Judis points us to a two part essay (Part I, Part II,) by Rutgers historian James Livingston arguing that the collapse in credit markets isn't the only parallel (and maybe not even the most important one) between the era leading up to the Great Depression and right now.
The Great Depression was the consequence of a massive shift of income shares to profits, away from wages and thus consumption, at the very moment -- the 1920s -- that expanded production of consumer durables became the crucial condition of economic growth as such. This shift produced a tidal wave of surplus capital that, in the absence of any need for increased investment in productive capacity (net investment declined steadily through the 1920s even as industrial productivity and output increased spectacularly), flowed inevitably into speculative channels, particularly the stock market bubble of the late 20s; when the bubble burst -- that is, when non-financial firms pulled out of the call loan market in October -- demand for securities listed on the stock exchange evaporated, and the banks were left holding billions of dollars in "distressed assets." The credit freeze and the extraordinary deflation of the 1930s followed; not even the Reconstruction Finance Corporation could restore investor confidence and reflate the larger economy.
Livingston does a much better job of unpacking that dense paragraph than I can, but the essential point is that in the decade leading up to the Great Depression, the profits from a growing economy did not get recycled back into worker wages, but were diverted into speculative activity. Just so, in recent decades, we have witnessed enormous increases in productivity and huge corporate profits, but wage growth for most Americans has barely kept up with inflation.
Yes, this is a leftist critique of Milton Friedman's explanation for what went wrong during the Great Depression. But the fall of 2008 is a prime time for leftist critiques of the status quo.