The Depths Of DEPRESSION
In the discussion of recession we see that one of the problems confronting both pedestrians and the economy is stepping in an occasional pothole. These potholes are usually small and do little damage. Every now and then, however, our economy falls face first into one humdinger of pothole that's big enough to swallow the better part of a marching band. Rather than a mere recessionary pothole, these are best thought of as depressionary canyons. The Great Depression of the 1930s was the most memorable depressionary canyon on record for the good old U. S. of A. The question we need to ponder over the next few pages is: Are there any more depressionary canyons like the 1930s lurking along the economic pavement?
When Recessions Grow Up
What makes a depressionary canyon so much more ominous that a simple recessionary pothole? Let's consider a few numbers. During a typical recession the unemployment rate in the economy rises from a moderate 5 percent up to the 6-7 percent range. Along the way, the size of the economic pie in terms of gross domestic product shrinks 5-10 percent.
This isn't the best of all possible worlds, but it's a great deal better than the 1930s. During that decade the unemployment rate ranged from 14-25 percent and gross domestic product shrunk by close to 40 percent.
This suggests that depressions are simply recessions that get out of hand. Perhaps the 1930s began as one of those little recessionary potholes along the economic pavement of life that kept getting bigger and bigger when we tried to extricate ourselves.
There's some truth to that. The Great Depression was far worse than it needed to be. When our economy fell into a pothole in the 1930s, our beloved government kicked it, stomped on it, and generally kept it from getting up for a few years. There were, however, some substantial differences between the 1930s and most recessions that preceded it or have occurred since. In other words, it would have been a bad decade in spite of government.
New Shoes for the Kids
Our economy is a lot like a growing child. Until their teen years, most kids outgrow their clothes and shoes before they outwear them. If you don't replace the old stuff with new, then the kids will be laughed at by their more fashion-conscious classmates and develop ingrown toenails.
A growing, expanding economy periodically faces similar problems. However, rather than shoes and clothes, we need to modify what we can refer to as the institutions that make up the economy's structure. What do I mean by institution? An institution is an established practice, organization, or relationship that governs how society does things. In other words, institutions give us the guidelines to follow. They govern most aspects of our lives, including marriage, family, work, play, government, business, and on and on and on....
Some of our economy's most important institutions include government, business organizations (like corporations), labor unions, banks and financial arrangements (like stock markets), the various products produced and consumed and the way that they're produced and consumed, and methods of transportation (like automobiles and airplanes).
We develop institutions for some very good reasons, which makes institutions a valuable part of society and our economy. In fact, we probably couldn't be a society or have an economy without the stability provided by institutions. For example, the legal and judicial systems are important institutions that set the guidelines for orderly social behavior. Without these institutions, we would be little more than a bunch of anti-social barbarians fighting over everything, no matter how insignificant. With these legal institutions, we call follow the guidelines and pursue other things -- such as production, market exchanges, and consumer satisfaction that wouldn't be possible otherwise.
Like the walls of a house, these institutions give our economy the structure and stability it needs. However, we occasionally need to knock out a wall or add on a new room to keep the house suitable for economic growth.
Outgrowing Our Institutions
The problem we periodically face is that some institutions developed during one period are not appropriate for another. As our economy grows, expands, and progresses it also changes. It changes because we -- the consuming public -- have unlimited wants and needs. Once our economy satisfies some of our needs, we come up with other new and different ones.
While our most pressing needs 200 years ago might have been for a fresh pot of stew and a loaf of bread, today we're more inclined to seek satisfaction from a good movie or gossip on the private lives of political candidates. As the economy changes, so must the institutions.
But, by their very nature, institutions are reluctant to change. Institutions are an established way of doing things. They wouldn't be institutions if they changed easily. Does it sound like we may be on the verge of a big, big problem here? We need institutions that don't change, but we outgrow them and need them changed. At some point an institution may cross the line from helpful stability to hindering rigidity, such that it no longer provides a stable structure for our economy, but it prevents our economy from further growth.
Break, But Don't Bend
As our economy grows and changes, it places increasing pressure on our institutions to change. Our institutions are able to hold on and hold on and hold on, until the pressure is so great that they snap. The sound you hear during a depression is that of institutions bursting, cracking, and shattering.
But, here's the good part, as the old ones burst, crack, and shatter, they make room for new ones that are more suited for the economy. This new batch remains suited for the economy, until the economy outgrows them and they begin to burst, crack, and shatter.
Unlike a simple recessionary pothole, a depressionary canyon is a major restructuring of ourour economy's institutions. A depression is only as bad as the underlying institutions are rigid. The more rigid the institutions and the more force required to break them, then the bigger will be a depression.
Yet, here's another good part, the better our economy eliminates old institutions, the more growth and progress we can achieve with the new batch. From a long-term view of several decades, one of the worst things we can have is a depression that doesn't get rid of outdated institutions. If these institutions hang on, they'll strangle our economy and prevent growth.
We saw some big institutional breakage in the 1930s. We also saw more in the late 1970s and early 1980s. The ones that broke in the 70s and 80s were actually some institutions that had bee created in the 1930s. At the top of this list is a lot of government regulation, as well as many of the industries that were regulated, including airlines, trucking, communication, banking, and assorted financial services. A number of other institutions splintered a bit, but have remained intact, including the social security system and labor unions.
We've also seen periods of restructuring during the 1800s, specifically the 1830s and 1880s. The 1770s and 1780s were another period that saw the elimination of some institutions (monarchy rule) and the formation of others (U. S. Constitution). In fact, we seem to be inclined as a society and economy to restructure our institutions every 50 years or so. Why?
The reason seems to be that institutions last as long as those in charge. Those who create a set of institutions stay in power as a group for 50 years until they're replaced by a new generation who have their own batch of institutions. These institutions are ripe for bursting, cracking, and shattering when this group starts to retire or die off.
Tips on Avoiding the Really Big Depressionary Canyons
- Change is an integral part of economic growth. While institutions enable growth by creating stability, they also retard it by preventing change. The big concern is when an institution outlives its usefulness by crossing the line between growth-enabling stability to growth-restricting rigidity.
- If an institution has taken on a life of its own, such that survival of the institution is the most important goal, then it's probably crossed the line into excessive rigidity. Following tradition for tradition's sake is a short cut to depression.
- Flexibility should be built into institutions where-ever possible. For example, a multi-product firm is more flexible than a single-product firm. This lets a firm survive as an institution even though one product is no longer needed. Education and training that gives skills useful in several different industries are also helpful. Accounting and legal degrees are, for example, are better in this regard than a degree in aerospace engineering. Being able to "go with the flow" is good for the economy.
- Expiration dates on institutions would be helpful as well. If government agencies, corporate charters, even college degrees were valid for some period like 25 years, then we would have to rethink them and justify keeping them around for a longer period.