My book A Failure of Capitalism: The Crisis of '08 and the Descent into Depression, published just days ago by the Harvard University Press, was finished on February 2 of this year. Much has happened in the more than three months since, and so I decided that as soon as the book was published I would begin to blog on the economic situation in an effort to keep the book up to date, as well as to enable me to rethink my views about the situation on the basis of criticisms of the book and of comments on the blog. I have written a number of blog entries in accordance with my plan, and they can be found at "A Failure of Capitalism," http://correspondents.theatlantic.com/richard_posner/. This week, as a visitor to Andrew Sullivan's blog, I will be highlighting a handful of issues arising from the book and the blog entries and whatever exciting developments occur during the week.
The title of the book has aroused concerns in some quarters, and this first entry in the new blog series is addressed to those concerns. First, the preferred word for our current economic situation is "recession"; readers wonder why I insist on using the more ominous "depression." Second, they wonder whether I want to replace capitalism with some different economic system.
Most economists would reserve the word "depression" for a situation in which either output or employment has fallen by at least 10 percent. But that is round-number thinking. There is no basis for drawing the line between "recession" and "depression" at a particular percentage rate of decline. One month of 10 percent unemployment cannot be thought more serious than ten years of 9 percent unemployment. What marks our current economic situation as a depression in a meaningful sense, though not one likely to match in severity the Great Depression of the 1930s, is the intensity of the anxiety that it has aroused, the enormous costs that the government has incurred to try to stop the downward spiral of the economy, the possiblity that those costs will bite us as the economy begins to recover and by doing so will knock the recovery off its path, and the further possibility that the recovery will be extremely protracted because of long-term changes in consumer preference. To illustrate the last point, the sale of automobiles has fallen by almost a half in the last year. Millions of people evidently decided to keep their "old" car a year longer than they were planning. They may discover that modern cars are extremely durable, that one can be quite content with another year or two years or three years driving their "old" car, and so in the future that they will buy a new car less frequently. Then hundreds of thousands of jobs that have disappeared from the auto industry in the last year, because of the economic downturn, will not return. The occupants of those jobs will not be rehired. They will have to find jobs for which they may have no skill or training. That may take a long time, and if so (and if the pattern is repeated in other industries) unemployment may remain high for a long time.