by Richard A. Posner
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 possibility 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.
Another thing that marks our economic crisis as a "depression" is its potential for profound political consequences. There is a rage to reregulate the banking industry, and more broadly to increase the scope of government intervention in the economy, perhaps dramatically. It has increased dramatically--with the bank bailouts and the auto bailouts and the conditions attached to the bailouts and the $787 billion stimulus package--and while these are emergency measures, which can and should be ended when recovery from the depression is well under way, there is fear that they have given the federal government an appetite for permanently redrawing the line that separates government in a capitalistic economy from the production and distribution and consumption of goods and services, which are tasks of the private sector.
There is a sense, in short (turning to the second concern that I flagged), that capitalism has failed us, and we need something different, and that the title of my book signals support for that view. But that is not my intention. "Capitalism" is not a synonym for free markets. Capitalism is a complex economic system with many moving parts, and buying and selling and investing and borrowing and other activities carried on in private markets are only some of those moving parts. Others include a system of laws for protecting property and facilitating transactions, institutions for enforcing those laws, and regulations of markets designed to align private incentives with the goal of achieving widespread prosperity. One of the key regulatory institutions is a central bank, which in the United States is the Federal Reserve.
The part of capitalism that consists of a private banking system is unstable and can fail and can bring down much of the rest of the economy with it, and that is one reason a capitalist system cannot consist just of free markets. A central bank has a key role to play in preventing the banking system from failing; so do the other government agencies involved in the regulation of banking. These "moving parts" failed crucially in their responsibility for preventing the banking system from failing. And for reasons that I will explain in subsequent entries in this series, the blame for the depression should be allotted primarily on the Federal Reserve, on other parts of government (including the Treasury Department and Congress), and on the economics profession, rather than on the banks.