The Developing Economic Situation: February 2-May 1, 2009

My book A Failure of Capitalism: The Crisis of '08 and the Descent into Depression was completed on February 2 of this year. That was the day I sent the edited manuscript back to the publisher (Harvard University Press) to be put into page proofs. After February 2, I could not make any substantive changes. Of course February 2 was not the end of the economic crisis, or of the government's response, or of my education in depression economics; and so my intention (announced in the book's preface) was and is to update the book by means of this blog, weekly (but more frequently at first), and to invite and respond to readers' comments, until the crisis is over or (more likely) I run out of things to say.

In this first entry, I summarize economic developments since February 2; in my second, which I will post tomorrow, I will summarize the political developments--the government's remedial efforts--since February 2. My tentative menu of subsequent entries is (1) adding some depth to my discussion of certain economic issues, and suggesting some additional readings; (2) discussing current plans and proposals for changing the regulation of banking and finance; (3) revisiting the issue of who is to blame for the crisis, (4) responding to critics, and (5) discussing the role of law and law schools in helping the economy to recover. After that--we'll see.

So--the economic update. Much has happened in the three months since February 2, though nothing--I emphasize--to alter the basic analysis and conclusions in my book. I begin with some economic data. The unemployment rate, 7.2 percent in December 2008 (the latest unemployment rate available when I finished the book), had risen by March to 8.5 percent, and the underemployment rate (which includes not only the officially unemployed, but also people who have given up looking for a job or who are involuntarily working part time) had risen from 13.5 percent to 16.2 percent. The Dow Jones Industrial Average, which though it contains only 30 stocks is a very good barometer of change because its stocks are all heavily traded, has risen since February 2 from $7,800 (rounded to the nearest hundred dollars) to $8,200. This change, an increase of about 5 percent, has little predictive significance--such is the complexity of the economic and psychological forces that influence stock prices in the short run. But it is a positive sign because so much of people's savings nowadays consists of direct or indirect ownership of common stocks. Any increase in the market value of those savings is likely to make people feel a little richer and therefore a little less hesitant about spending money; and it is a dearth of spending that is the immediate cause of the fall in output and employment that is at the heart of the economic crisis. But because this is so, the fact that personal consumption expenditures fell in March (by 0.2 percent from February), because personal incomes fell (by  0.3 percent) and the rate of personal savings increased (from 4 percent to 4.2 percent--compared to well under 1 percent a year ago), is a negative sign. This is not the time for frugality--from a social, though not an individual, standpoint.

The Gross Domestic Product (the market value of all goods and services sold in the economy) fell in the first quarter of 2009 at an annual rate of 6.1 percent, which is just two-tenths of a percent less than the fall in the last quarter of 2008 and more than 8 percent below the GDP trend line (that is, below where GDP would be in a year of normal economic growth). Bank credit continues to be constricted. Indeed, bank lending has fallen since the bank bailouts began last fall--a fall that has fueled populist rage against "Wall Street." And total excess bank reserves (that is, cash or its equivalent that banks are not required by the regulatory authorities to keep rather than lend or invest) have risen from $2 billion in 2007 to $725 billion in March of this year. That is, banks are continuing to hoard cash, partly because they are undercapitalized, but more, I think, because (1) lending into a depression is risky and (2) the demand for loans has declined because of the overindebtedness of consumers (whose savings are concentrated in volatile assets, namely houses and stocks, the value of which has plunged).

So the economy is continuing to decline. But there is evidence that the rate of the decline has slowed--inventories, for example, have declined, which brings closer the day when manufacturers will have to produce more goods in order to satisfy even weak demand.

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Richard A. Posner

Richard Posner is an author and federal appeals court judge. He has written more than 2500 published judicial opinions and continues to teach at the University of Chicago Law School. More

Richard A. Posner worked for several years in Washington during the Kennedy and Johnson Administrations. He worked for Justice William J. Brennan, Jr, the Solicitor General of the U.S., Thurgood Marshall, and as general counsel of President Johnson's Task Force on Communications Policy. Posner entered law teaching in 1968 at Stanford and became professor of law at the University of Chicago Law School in 1969. He was appointed Judge of the U.S. Court of Appeals for the Seventh Circuit in 1981 and served as Chief Judge from 1993 to 2000. He has written more than 2500 published judicial opinions and continues to teach at the University of Chicago Law School. His academic work has covered a broad range, with particular emphasis on the application of economics to law. His most recent books are How Judges Think (2008), Law and Literature (3d ed. 2009), A Failure of Capitalism: The Crisis of '08 and the Descent into Depression (2009). He has received the Thomas C. Schelling Award for scholarly contributions that have had an impact on public policy from the John F. Kennedy School of Government at Harvard University, and the Henry J. Friendly Medal from the American Law Institute.

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