Like all economists (or the ones I've read), Posner posits that old metaphor for "the economy" (machine, engine) and then describes conditions within the metaphor (overheating), and suggests solutions (cooling, and other blah blahs) as if all the diagnosis and prescription added up to something beyond and more practical than poetry, or rather, interpretation of poetry, his own.

Archimedes,
Since you're being so critical (something I'd admire if you used your real name), why don't you also point out that Posner is also employing that silly "cycle" notion. Economists (pseudo-scientists, adherenets of "math for math's sake") seem to believe that in putting together their circle drawing from some historical data patterns they have, in the form of "business cycle", discovered something as profoundly insightful as Watson and Crick's DNA structure. They have discovered what they themselves planted.

Archimedes,
Since you're being so critical (something I'd admire if you used your real name), why don't you also point out that Posner is also employing that silly "cycle" notion. Economists (pseudo-scientists, adherenets of "math for math's sake") seem to believe that in putting together their circle drawing from some historical data patterns they have, in the form of "business cycle", discovered something as profoundly insightful as Watson and Crick's DNA structure. They have discovered what they themselves planted. It's about time the "republic of letters" was weeded. But I don't garden for free, so I'll stop here, having already pointed the way. Sat sapienti.

So if we accept that the optimal amount of government intervention is not zero, then what? In a leap of idiocy, the honorable judge concludes the optimal level is somewhere between the Truman presidency and the Johnson years. What a joke.

Did "Economics Allergy" really just criticize someone for not using their real name?

Just a minor quibble that I hope some will find illuminating: the widespread belief that the top marginal federal income tax rate is 35 percent is too low by at least half. I know this because I instructed my tax preparer to temporarily increase various income categories by $100, and thereby discovered that my consulting income is taxed at 54 percent, while my wife's W-2 income is taxed at 47 percent.

From what I've seen, all public discussion of tax policy is conducted by people who are grossly (though understandably, given the complexity of the computations) misinformed about this very basic number, the top marginal tax rate. That can't be a good sign.

Just a small change to your article if you don't mind -

"A depression is an essential backup to efforts to moderate the business cycle. The housing bubble could not expand indefinitely; leverage could not keep growing indefinitely. The government was doing nothing to prick the bubble or to limit leverage. The longer the world economy went without a depression, the worse the collapse would be when it finally, inevitably, came. The saving grace of catastrophes is averting worse catastrophes: imagine if ............. Lincoln had not instituted the homestead act but instead had socialized all Land and charged leases to everyone based on the market value of the Land and then returned 100% of the proceeds to every individual equally in the form of a yearly Land Dividend Payment. The check everyone received would be equal to the lease payment on the average piece of Land. Life is the Foundation of every everlasting social structure and Land is a Inherent Birthright. Build upon the right foundation and our social structure will always stand. Live and Learn.

Scott

Just a small change to your article if you don't mind -

"A depression is an essential backup to efforts to moderate the business cycle. The housing bubble could not expand indefinitely; leverage could not keep growing indefinitely. The government was doing nothing to prick the bubble or to limit leverage. The longer the world economy went without a depression, the worse the collapse would be when it finally, inevitably, came. The saving grace of catastrophes is averting worse catastrophes: imagine if ............. Lincoln had not instituted the homestead act but instead had socialized all Land and charged leases to everyone based on the market value of the Land and then returned 100% of the proceeds to every individual equally in the form of a yearly Land Dividend Payment. The check everyone received would be equal to the lease payment on the average piece of Land. Life is the Foundation of every everlasting social structure and Land is a Inherent Birthright. Build upon the right foundation and our social structure will always stand. Live and Learn.

Scott

Unemployment lowers the opportunity cost for education? It's rather ridiculous to suggest that people will have an incentive to enroll in school because they don't have a job and therefore don't have anything better to do with their time, which is essentially what this argument amounts to. If anything, financial insecurity discourages education. A parent who is laid off will be less able to afford college for his or her kid (or him/herself, for that matter). In fact, they might not even be willing to make that long-term investment in the first place, and will instead prefer that the son or daughter spend their time looking for a job to help the family in their time of financial distress.

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The simple comparison of 94%, 70%, and 35% tax brackets perpetuates misunderstanding. The lowering of brackets were accompanied by a corresponding elimination of deductions and so called 'loopholes'. In many cases, individual taxes in top brackets changed insignificantly. Only the calculation method changed. It did, however, remove a great deal of the 'tax effect' calculation in investment decisions.

If current circumstances deteriorate into a global Depression, I'm confident someone will start a war to settle accounts and wipe slates clean. This planet's recorded history is benchmarked by wars.

Dr. Posner:

You make one very misleading comment:

"Federal taxes as a percentage of Gross Domestic Product are no higher today than they were in the 1940s, 1950s, and 1960s—periods of healthy economic growth."

It's not central to your basic argument, but it is very important that these facts are right.

The problem with this statement is that it suggest that the fiscal size of government is relatively flat. But that's simply not true.

There are 3 important issues that you miss:

1. You are looking at tax receipts, not outlays. Outlays matter more becuase ALL government spending crowds out private spending -- whether borrowed or taxed.

2. You are missing state/local spending, which has increased especially in recent years.

3. You are looking at %gdp. Although this is a common way to look at government spending, it's biased toward more government spending. Why should spending automatically increase as people get richer? A much better measure would be government spending per capita, which just accounts for population-growth related increases in gdp, but not productivity/capita increases.

Check out the following article for facts:

http://en.wikipedia.org/wiki/Government_spending

It shows increasing spending since the 20's, using the flawed %gdp measure. %gdp started to stabalize during the 80's. But increased steadily up until the 80's.
And from the statistical abstract:

% GNP/GDP for federal spending
1940: 10%
1945: 43.6%
1950: 16%
1955: 16.2%
1960: 17.7%
1965: 18.2%
1970: 19.3%
1975: 21.8%
1980: 21.7%
1985: 22.9%
1990: 21.8%
1995: 20.7%
2000: 18.4%
2005: 20.2%

The only drop came in the 90's when military spending dropped. Now it has come back up. And has most certainly gone above 21% again.

But since 1940, we are about spending double the amount AS A PERCENT of gdp. So, that's many times more when looked at from a per-capita standpoint.

Jeremy

Chase,

I agree that a decision to enter college as an undergraduate is not heavily influenced by the depression/recession. However, I think that Judge Posner is right with regards to graduate and Professional school. The opportunity of cost for someone considering returning to school to get an MBA or a law degree is reduced in a period of economic uncertainty. Returning to school allows access to student loans and the potential for higher income in two to three years when the economy turns around, and forgone income in the interim is less of a concern if you have already lost your job or are likely to in the near future.

Recessions or Depressions? The only difference lies in the "Fear Factor" which aggravates the problem and creates the conditions for becoming self fullfilling prophecy. Perhaps, that's why no one is willing to say the "D" word, but then, if we don't, we certainly won't take the necessary actions to solve the problems with all the "market" failures. Kudos!

As for the "Orthodox Economics" that have led us to this point, clearly it is functioning as an archaism and hindrance to viable action dealing with the current problem. Even the E.U. and G8 have recognized this and are clamoring for change.

As from the "Heterodox Economics", specifically, Thermoeconomics, There is the principle of Entropy at work in all systems, i.e. "things run down". Sound familiar? So the solution is to find the magic elixer of anti-entropy. Which is and always will be the creativity of the human mind and the courage to take the necessary actions. By inserting additional "energy" into the system.

on "slack" in the economy:

it is not clear to me that recessions or depressions remove slack. people that have inherited lots, or have jobs due to nepotism, may not be phased as much as people who do not inherit money or jobs. furthermore, I do not see how one can possibly do what the boss says 24 hours a day at certain financials and possibly atone for gaffes of sr management.

Great article, as always, but Judge Posner fails to mention the role that moral hazard plays when government engages in industrywide bailouts. You say, in effect, that things could be worse even with a depression. However, don't depressions come about, in part, because bailouts protect institutions from the full consequences of their actions (and, by extension, create or exacerbate circumstances that would otherwise be manageable?) Why do we need the "silver lining" of a depression when it could have been staved off in the first place by non-interventionist policies?

Great article, as always, but Judge Posner fails to mention the role that moral hazard plays when government engages in industrywide bailouts. You say, in effect, that things could be worse even with a depression. However, don't depressions come about, in part, because bailouts protect institutions from the full consequences of their actions (and, by extension, create or exacerbate circumstances that would otherwise be manageable?) Why do we need the "silver lining" of a depression when it could have been staved off in the first place by non-interventionist policies?

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The silver lining of depression looks a lot more sterling for someone with a lifetime job and a government guaranteed pension than it does for a 73 year old retiree who has foregone a lot of current income to fund a retirement program that has been dramatically reduced by the depression and is now threatened with nationalization by politicians. I suggest spending a couple of days discussing the silver lining with WalMart customers to get a better perspective.

The silver lining of depression looks a lot more sterling for someone with a lifetime job and a government guaranteed pension than it does for a 73 year old retiree who has foregone a lot of current income to fund a retirement program that has been dramatically reduced by the depression and is now threatened with nationalization by politicians. I suggest spending a couple of days discussing the silver lining with WalMart customers to get a better perspective.

Posner's article is quite decent but it fails to look at the social ramifications of a depression. In the 1930s the depression had an upside in that people pulled together, many turned economic distress into greater family and community involvement. Excesses were wiped out and many returned to what really mattered in their lives. The oncoming (highly likely) depression may not have the same affects. People feel too entitled and the government too willing to assist. History however will judge the reaction of people towards each other in this new crisis.

For me the rather obvious flaw in Judge Posner's post is his apparent assumption that depressions separate the wheat from the chaff in economies, serving a kind of beneficial darwinistic function. This is unfounded.

The reality is that depressions act to drastically limit opportunities for innovation and growth due to shortage of investment capital and rather indiscriminately impact both healthy and unhealthy businesses.

R&D funding in sectors such as health care/pharmaceutical applications is already being cut by both public and private sources. There is no silver lining in this as it represents systemic retardation that will last for close to a decade. Fewer patents, fewer breakthroughs, fewer high-tech start-ups in the pipeline. Not good.

Wow! What nonsense from Judge Posner! First he dismisses Hitler as a sidebar to the depression as if Hitler and the 50 or 60 million people who were killed in WWII mostly because of Hitler was a minor secondary effect to an otherwise routine business cycle. That was as far as I got in that post. Now we have the far left poised to belly flop onto Obama and our current "depression". Please visit the site below for some of their ideas. My advice is a nice Cayman or Swiss account and soon.

http://www.carolinajournal.com/articles/display_story.html?id=5081

Why is our current depression dangerous? The government is bankrupt, we import almost everything including food and 70% of our oil, our total tax burden is approaching 50% and now there are some, as related in the website above, who would confiscate the 401(k)s and IRAs to pay for the politically and financially corrupt policies of a professional political class which has been squandering our wealth since WWII.

I smell the potential for civil war, dictatorship and who knows what death toll.

Yes sir, Judge Posner, depressions are good.

"Confiscating" 401(k) plans to fund SSA would be the unconstitutional taking to end all takings. It will never happen. Ain't no way no how.

But undoing the trickle-down B.S. behind the Reagan era tax bracket reforms? That seems a certainty, at least to some extent.

Unfortunately for conservatives, the recent and ongoing redistribution of wealth/socialization of losses to bail out banks pulls the rug out from under anti-socialism arguments when it comes to the tax structure to provide relief to the middle class.

Hey Dan,

Do you feel the same way about bailing out General motors? The banks were(are)stupid. General motors was(is)stupid.

What is the middle class anyway?

Cosnstitution? Did not Obama recently say that the Supreme Court should have gotten into the redistribution game as a civil rights issue? Constitution? Takings?

I am not taking sides politically. As far as I am concerned politics IS the problem. The mommy state(democrats) and the daddy state(republicans) are equi-evil and both think that all problems can be solved by political means ie. you vote for me and I will give you some goodies at someone elses expense.

Jim,

I can't argue with you about the state of national politics. Every now and then I like to go back and re-read Mark Twain's essays for a reality check. I think he gave a St. Patrick's Day speech about 120 years ago where he lamented that St. Patrick was able to drive the snakes out of Ireland but not the U.S. Congress. So the more things change... you know how it goes.

But I'll take you up on defining the middle class, based on standard of living. Able to afford a three or four-bedroom single family home, two cars, and able to afford college tuition for one child at a time at a mid-range private college or university.

What used to be considered "middle class" standard of living now requires a household income of somewhere around $180,000 USD. Based on median income, a two-income household is lucky to be at $90,000 - $100,000. Add in childcare costs.

It isn't about redistributing wealth; it's about redistributing tax burden in a scheme that makes sense. I'll cop to having "socialist" tendencies to the extent that I think the current distribution of wealth in the U.S. is a mockery of the social-mobility model that used to underpin the country. Compare ratio of % of GDP controlled by the top 10% and bottom 10% of the U.S. population to the ratios in other "developed" nations. It is a joke.

Austrian Theory actually predicted the current banking and housing mess. This is a huge accomplishment and a demonstrates that it has a lot more predictive power than rival schools as the Chicago a.k.a. monetarism, and keynesianism.
That's why Krugman and Roubini always check mises.org in search of predictions. But they later claim all the credit, and then propose the keynesian medicine, but remember, they did not use Keynes to come up with the predictions, so their medicine will not work. Why it should?

What's all this talk about taxation problems being the cause of "market failure"? There is a plan already on the shelf tailor made to the problems at hand. Known as the "Land Tax" as developed by the American Henry George in his work, "Poverty and Progress". Any one familiar? Didn't think so. Once again, the "Orthodoxy" has killed off another viable solution. Even "Uncle Milty" recognized it's benefits.

5 billion spent on this last election cycle, 75 to 150 million spent on movies every weekend, endless sold out baseball and football stadia every week, entertainers and sports celebs making millions in pay, universities with billions in endowments, politicians with private gyms, barbershops and restaurants.On and on. A government which takes in 2 trillion per year and is broke, hawked swearing in tickets for thousands. What recession? Let them eat cake. Louis XV is exiting and Louis XVI is taking over.

Apologies in advance for the ensuing rant, but there are themes popping up on this and other economics blogs that I feel need to be addresed:

Progressive taxation is not Socialism. Neither is a negative income tax, unless Friedman was a Socialist (see last week's blog). If you think that progressive taxation is inefficient, give a reason. If you think that a negative income tax is bad for the economy or the country in general, make the argument. The same goes for the bailout. Describing a policy as 'socialism' is not an argument - it is a catch-phrase vulgarized by a desperate political campaign.

Also, the idea that taxation is an unconstitutional 'taking' is absurd. It is specifically allowed by an amendment, once again proving that many who claim to be 'Constitutionalists' have no idea what the actual document says or means. And no, it is not an unconstitutional amendment. Moreover, taking is only unconstitutional if it is not accompanied by just compensation. What would just compensation be for a tax? Refunding the money? That would kind of defeat the purpose. Or maybe it is the return of government services. But how could you measure whether the amount of services an individual receives is 'just'?

Daniel,

Clearly, the Constitution says whatever the Supreme Court says it says. There is nothing wrong with taxing but there is something wrong with taxing and then wasting the money on programs which are unnecessary or unneeded or take away incentives to work either from the taxed or the negatively taxed which taxes beyond a certain point surely do. The taxing, the wasting and the giving, to a certain extent, reflects the current public belief that politicians and their government can nourish the public soul and fulfill every desire. I believe that is irrational and dangerous since failure to do so will lead to chaos.It has become common for presidential candidates to refer to themselves as "Commander in Chief" in a general meaning rather than of the armed forces. Is there really a commander in chief of the country or even of the economy? I don't think so. And if there is, I am going to send my restaurant tabs to that person for reimbursement because occassionally I overeat and am distressed by the charges.

As to the bailouts, the banks, insurance companies and automakers allowed stupid,greedy and shortsighted management to ruin their businesses and to put their employees (the people) at risk. The government now is going to give those same morons billions of borrowed dollars with minimal safeguards. The managers will keep their mansions and golf club memberships and the employees might get to keep their jobs so that they can ask the government to help them pay their mortgages. The government will do it because the politicians know that millions of people out of work will lead to the politicians being unemployed.

As to "takings", confiscation of liquid assets would no doubt start a civil war in this country. What would just compensation possibly be? The only reason that a congressional committee would invite such testimony is that the government realizes that it is flat broke and is casting about looking for money to further their (our) mess.

Daniel, I don't much care what name you put on a political philosophy, but One thing about one man one vote, You get exactly what you deserve.

Daniel: you might try actually reading the link that Jim provided to see that the taking we were discussing was not a tax but a proposed federal confiscation of 401k plan funds in order to prop up the failing Social Security system. I re-read my post and I think I was very clear. I'll stand by my assessment of that proposal as an unconstitutional taking.

And as far as your bizarre assertion that tax structure is unrelated to the socialism --> free market capitalism continuum, you don't know what you're talking about. In E.U. countries, for example, taxation provides the funding for national health care, nominal daycare costs and tuition-free university education. Tax policy has everything to do with a nation's position on socializing certain costs. I don't know anyone who holds otherwise.

Dan and Jim,

I wasn't saying that taxation is unrelated to socialism, obviously the more money a government brings in the more it can purchase and control the factors of production (although we are currently increasing the government's role in the market without increasing taxation). All I was saying was that taxation in and of itself is not socialism, and that wealth redistribution in and of itself is not socialism. It depends on what government uses the money for. And I don't think that moving from a 33 to a 38 or 40 percent tax rate approaches the rate at which socialism becomes inevitable - it is probably necessary to keep our current deficit from further balooning (unless you actually think that Government will significantly reduce spending, in which case you are more naive than me).

The examples Dan cites are clearly moves towards socialism, but you have to go the next step and argue why that is a bad thing (a case which can certainly be made). I wasn't attacking you and Jim directly, but was referring to a growing trend of labeling a particular policy as socialist without going into why it is or is not good policy. That reduces substantive debate and the effectiveness of your position.

Jim provided a smart and informed response to my comment. I only wish that he had made it in the first instance. By the way, I agree with you on the moral hazard issue, but I think that the bailout is a necessary evil. There are ways that Congress and Treasury could have structured the program to minimize the moral hazard issue, but I am certainly not holding out any hope that they will do so - my confidence in our politicians is about as high as yours.

Actually, Daniel, I don't "have to" do anything.

Please consider the possibility that there may be a fair amount of subtext to the comments that I and some others on this blog write...

The next time I'm in court I'll be sure to take counsel from your primer on argumentation. It's always good to get a fresh perspective from law students. Thank you for your input.

'Have to' was the wrong phrase; sorry for the implication, and your point is noted. Thank you for the considered replies, I enjoy good debate.

Haven't you guys figured out yet that the "moral hazard" argument is but a red herring. Boy! Has the Orthodoxy got you guys conned. No wonder the Economy is collapsing.

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Dr. Posner,

Your statement that "A modest increase in marginal rates from their present low level would increase tax revenues substantially, ....." is wrong and misleads. One lesson I remember from my University of Chicago training several decades ago is that if you tax something at a higher rate you get less of it. In fact recent empirical evidence suggests that reducing tax rates generates tax revenue increases as should be expected if one but considers the behavioral effect on the production of income that the tax rate level inevitably imposes. . I refer you to the Internal Revenue Service who reported in 2004 that the highest 5%, of all individual taxpayers paid $406 billion in federal taxes. 2004 was significant because it was the first full year when the top federal income tax rate was reduced from close to 40% to 35% and a reduction in capital gains tax to 15% applied. So what happened in 2005 the second full year of the lower 35% marginal rate? One might expect this lower rate would produce reduced tax revenues. But just the opposite happened, the 6.6 million tax payers in this prosperous group paid 37% higher taxes as they paid more than $550 billion into the U.S. Treasury. It is noteworthy that this top 5% of income reporters accounted for 60% of revenues collected from individuals. I would be grateful if you or any of your readers can identify any examples of similar scale where income tax rate increases raised revenue to the government.

Vince Kolber

Vince, As for revenue increases and social benefit via taxation, try 1861 when it was first imposed under, Article 1, Sec. 8 of the Constitution, or the 1890's until it was terminated by the Supreme Court under "Pollock vs. Farmers Loan & Trust" and a major recession occured, and then again in 1913 when Congress and the Nation passed the Sixteenth Amendment.

Remember, the advancement of economics and social benefit is dependent on, the establishment of justice, ensuring domestic tranquility, providing for the common defense, and promoting the general welfare. And it all costs. Irrespective of what the UofC School of Economics claims in the classrom.

Neilehat,

I would pay more tax with pleasure if the government actually did those things but it doesn't and in addition it wastes at least 660 billion according to the W. R. Grace Commission in 1984 a website referring to which appears below.

http://query.nytimes.com/gst/fullpage.html?res=9C0CEED6143BF932A35757C0A966958260

The Commission found that in 1984 the government was wasting 33% of every tax dollar paid. Today that would represent 33% of 2 trillion or 660 billion.

Rather than pay more into that kind of incompetence I will work less and spend less, both of which will certainly reduce federal revenue. In addition I will be looking to get my share of "free" education, health care, food, housing, transportation, legal services, etc.

What a country!

Jim, And what is the "waste" that that 33 cents on the dollar represents? Administrative costs? Haircuts for Senators? Remodeling the Whitehouse? Providing free school lunches? Providing free text books and pencils? Feeding and clothing the Armed Forces? To me that 33% is just a number with no meaning. For all we know it could have just as well been pulled out of the air. Especially if it came from the likes of the Cato Institute.

Neilehat,

If you are really interested check out this site and from there you can get the entire report. I don't think that The Cato Institute has anything to do with this but I could be missing something.

http://deliberatecoincidences.zoomshare.com/files/Income_Tax/gracerpt.pdf

Sorry. Wrong website. Try this one:

http://www.freecanadian.net/articles/grace.html

Is the first step to "opening the door" to higher taxes establishing a narrative that there are many benefits to paying higher taxes than we are right now, and that Americans are willing to pay them if they perceive they will cure numerous societal ills?

Please excuse my poor HTML skills.

Jim, Oh, BTW; That Supreme Court Case cited above is a little off. It ought to read, "Pollock vs. Farmers Bank & Trust, or Pollock vs. Farmers Trust & Bank. Anyway, it's Pollock vs. Farm something or other. At least we're not being held to citation by Bluebook or Maroon book, or Blackbook or Whateverbook.

As for that Grace Report I'll take a quick look-see, if I can find it. ;)

Pollock v. Farmers' Loan & Trust Co., 157 U.S. 429 (1895).

God help me. Wasn't sure whether it is still appropriate for me to type "human" in the spam protection field.

Former Law Review Dweeb, Thanks!

Jim, I found the Executive Summary. Rather sobering. It clearly points to the fact the OMB/GAO clearly needs to be strengthend and given a set of good sharp teeth. Not too mention, putting the Government on a Zero Based budgeting scheme instead of the Cost Plus method. Also, it might be a good idea to reformulate the Taxing Method (income vs Land). I've already advanced Henry George's idea.

I'd still like to know what the 2,794 specific instances of savings are. Not just the three or four listed in the Executive Summary.

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Neilehat,

What is so unjust when the prosperous pay more as their 37% tax payment increase in 2005? Like Posner you choose to dismiss the impact of rates on behavoir even in the face of clear evidence that a lower rate produced much higher revenue. Is it just to tax person A's $1 dollar on income at different rate than person B's $1 dollar of income? If we believe all men are created equal, then why would we discriminate over their level of economic output?

Neilehat,

What is so unjust when the prosperous pay more as their 37% tax payment increase in 2005? Like Posner you choose to dismiss the impact of rates on behavoir even in the face of clear evidence that a lower rate produced much higher revenue. Is it just to tax person A's $1 dollar on income at different rate than person B's $1 dollar of income? If we believe all men are created equal, then why would we discriminate over their level of economic output?

Neilehat,

What is so unjust when the prosperous pay more as their 37% tax payment increase in 2005? Like Posner you choose to dismiss the impact of rates on behavoir even in the face of clear evidence that a lower rate produced much higher revenue. Is it just to tax person A's $1 dollar on income at different rate than person B's $1 dollar of income? If we believe all men are created equal, then why would we discriminate over their level of economic output?

Why do these same old, tired apologists for the capitalist, market economy never realize they have been riding a dead horse for decades. Wake up guys, even Alan Greenspan finally saw the light.

What the current depression provides is an opportunity for the citizens of the U.S. to become participants in a real ownership society. An ownership society where the people take controlling interest in the economic behemoths that determine the nation's economic health, sharing in their profits during the good times, instead of only being allowed to particpate in their losses, through taxpayer financed bailouts. Meanwhile, the grossly overpaid buffoons currently placed in charge of these semi-public corporations, continue to amass their obscene wealth at the expense of the public.

Becker and Posner continue to be the apologists for this sordid economic system and champions of its unjust distribution of rewards.

I completely agree with Professor Posner’s finding benefits to a recession (depression). I think since the Great Depression we have been all too ready to find nothing but loss in a recession and nothing but gain in growth. I believe this Received View of economic downturns to be superficial. Judge Posner goes some way to correct this simplistic view of recessions and recoveries. As with any thing or activity in the world, there are upsides and downsides that must be considered. For example, if there were no hurricanes, then the temperature of populated areas closer to the Equator would build up so much heat that they would become unlivable. So, while hurricanes can be disastrous ( as I am well aware of first hand since I have lived in New Orleans and Florida), they have definite but overlooked benefits. We have been all too quick to overlook the importance of economic corrections. We must consider the economy as well as any other social organization as an organic system as we think of the eco-system.

At the same time as we consider the hidden benefits to a recession or depression, I do acknowledge that the Great Depression was a horrific, long-lasting event in our history that permanently harmed many lives. My mother lived though the Great Depression and to this day feels its effects.

But the overall theme of my post here is my agreement with Judge Posner’s exercise of finding silver linings to recessions. I have a number of them here in addition to the ones Judge Posner discusses with which I fully agree. The first is purely economic as markets clear and resources are redirected to their most efficient use as determined by the effective demand of consumers. The interest rate, if allowed to be determined by the market for loanable funds, has a chance to bring savings and investment into equilibrium so that sustainable economic growth can have the chance to reassert itself. Long term investments can then be upheld over time as the pool of savings is continually replenished by savers responding to a rate of interest that affords them adequate returns for deferring consumption. All of this is possible if the Federal Reserve would only restrain itself from the temptation to re-inflate the money supply to head off a temporary downturn in the economy that was brought on by the Fed’s own earlier action of holding the interest rate below where the market would have set it. Those earlier actions of holding the interest rate down artificially as the Fed injected more money into the American economy was motivated by an aversion to recession that has culminated in the present crisis.

As Judge Posner’s reflections go further than purely economic considerations, I now move to other less obvious advantages of a recession. I touched on the first of these in my post last week on the opportunity cost being greater during an economic boom for time away from work spent on social activities such as cultivating personal relationships with family and close friends. Researchers have found that in times of rapid economic expansion the time spent in personal conversations on any one subject dramatically declines, so that conversations change topics several times per minute. Music speeds up so that slower, more reflective, poignant songs are less popular. People tend to neglect personal relationships and spend more time at work. They also spend less time on personal development such as education, demanding hobbies that require study and effort, or even personal appearance. Furthermore, people smoke more during a boom and are more prone to drink excessively. They drive faster and more aggressively. In prosperous times, people are less likely to take care of their physical health by watching their diet, exercising, and visiting their doctor when they start noticing symptoms of health problems (see the research of Christopher J. Ruhm, professor of economics at the University of North Carolina at Greensboro). They are more subject to diseases caused by stress. They are also less religiously observant, which affects their regard for other people as well as their own integrity.

People need a balance among a variety of the motivations of excitement, tranquility, and transcendence. It seems that boom times overly excite people so that they are more likely to engage in risky, stimulating behavior that can be not only self-destructive but dangerous to others with whom they engage in business deals or personal relationships. It has been assumed by Professor Becker, Judge Posner, and other commentators that human nature is constant and so are the destructive tendencies to such imbalances of the soul as greed. While I do agree that human nature is constant throughout history since we all share the same essential nature, I disagree that our propensity to fall into emotional disequilibrium is fixed. Aristotle observed that greed is an imbalance of the soul as it becomes overly stimulated to seek out financial gain at all costs. There is something about boom times that overly excites people, and perhaps some people more than others, to seek out thrills and risk to the exclusion of other human pursuits. Part of this process is simply being exposed to an up-tempo pace of life that becomes unconsciously infectious. Consider the effects mentioned above of up-tempo music and conversation that is less substantive as well as the neglect of personal relationships that anchor a person inducing feelings of care and responsibility. Another source of stimulation is likely to found in seeing others making large sums of money or seeing the conspicuous consumption in which they so publicly indulge. One feels the pressure to keep up or lose out. Even if one is not so materialistic or status conscious, one finds that over time, housing and other necessities are priced out of their reach so that they are pressured into entering the competitive fray or risk losing a certain social and material minimum. So, even if people are naturally greedy in what they are capable of, they can be affected by their surroundings to inflame that passion or to bring it into balance with other human potentials that are equally present in their make-up. It seems that boom times stir only one aspect of what people are capable of, viz. excitement, accomplishment, and taken to unhealthy extremes, greed, lust, lust for power. Qualities that are foregone in this milieu include those fostered by human needs for tranquility and transcendence such as depth, intimacy, reflection, understanding, style, beauty, conservation of the natural or cultural world in which people live, appreciation, savoring, dwelling, love, friendship, godliness, faith, honor and integrity. These goods that we humans have the potential to cultivate are less likely to be developed at breakneck speeds. These other pursuits require the time and quiet that is less possible during times when people are feverishly stimulated to act in the moment or risk feeling that they have lost out on some grand opportunity.

For some reason, people in the past, for example in the last “Gilded Age” or the Renaissance, capitalism fueled a cultural, scientific, artistic, literary, educational, and philosophical explosion. People demanded greater freedom to express themselves in responsible and creative ways. For some reason, as economic growth as expanded opportunities for people in recent decades, it seems that only in the scientific and technological areas have we witnessed the responsible and fruitful expression of human potential. The popular culture of one-hundred years ago far exceeds what we are subjected to nowadays. We simply do not produce or, if they are out there, honor people such as Enrico Caruso, Sarah Bernhardt, Picasso, Oscar Wilde, and others who shaped the popular mind of a generation 100 years ago. Now freedom is confused with license and irresponsibility. It might take another depression to begin to require more of the young who have shaped popular culture with their free time, interests, and independent sources of income that were not so prevalent in the past. The unbridled expression of sexual impulses of any sort, the coarseness that results from constant stimulation seeking even more and more extreme intensities of stimulation, the depersonalizing effects that these raw pursuits of pleasure have on people over time are more likely to be moderated and redirected if people feel the press of constraints on their actions. Limits in accessibility to increasing amounts of stimulation as well as more time to absorb the subtleties produced by more delicate pleasures distill the human psyche so that it is more receptive to the higher end of the diminishing marginal utility of pleasure curve. In this process of slowing down and focusing more on what there is less of, a chance to refine tastes can occur.

Charles Sanders Peirce, writing one hundred years ago, coined an intriguing triplet of what he termed, “Firstness,” “Secondness,” and “Thirdness.” Firstness is the pure experience without reflection. Peirce goes so far as to characterize it as “blind compulsion.” Secondness is when one hits a roadblock or feels jolted from his immediate expectation of what he is experiencing as one bumps into actuality. Secondness is reaction to a cessation or interruption of pure experience. Thirdness is the reflection upon the loss of immediacy in firstness and the frustration or shock of encountering secondness. Without secondness, we would never reflect and reconsider ourselves, others, or our environment. We would be like mere animals. Thirdness is where we develop intellectually, emotionally, and spiritually. Culture, customs, laws result from thirdness. It is the shock and disappointment of secondness that makes development possible. As Peirce comments, “Secondness is existence.” Recessions and depressions can serve as the necessary secondness that jolts us out of our protective cushion created by excessive wealth forcing us to look at ourselves and the world around us as it is, not as the fantasy we have deluded ourselves into as we were stuck in unabated pursuits of wealth and euphoric splurges of consumption. This is the main reason that I oppose bailouts per se. They only protect us against secondness and thirdness, where our personal development can unfold.

As we become mired in only firstness, we are prone to become inauthentic. To the extent that we think of ourselves and others at all in any substantive way, we tend to overestimate ourselves and overlook the flaws of others to avoid conflict or discomfort. I am afraid that type of person shaped by the business ethos of cooperation at any cost, as long as I am making money, is corrosive to truth. While there is a role for buying and selling goods and services and seeking common ground in business transactions, the truth need not be sacrificed. But if one’s only goal is to make money and to buy an easy life, then it is all too easy to sell one’s integrity to enter the dream world of unrelenting firstness. We can see how and why a drug culture has emerged in a generation growing up in affluence. The price to be paid, if one can manage to achieve this chimera, is honesty. I mean the honesty to see oneself as who one is, to see others as they are, not as we wish they were, and to see the world, socially and naturally, as it is. Recession or depression can reintroduce reality into a person’s experience so that they can live in the world and with others as they really are. Authentic people tend to be raw at times. This feature may be bad for business in a particular moment as well as very politically incorrect, but over time, it is what makes us human and leads to genuine freedom.

We can especially see this type of self-deception in a person’s relationship with God. As we neglect a sense of the transcendent, our relationship with God fades from our direct awareness into obscurity. Blaise Pascal noticed that people go further than simply overlooking God. They actively seek to suppress it since the awareness of God is likely to damage one’s sense of self-esteem as well as one’s self-sufficiency—God is holy and I am not; God is omnipotent and I am not—I need God and other people. Pascal observed that if people can find the means to do so, they will actively seek to distance themselves from God and then create “diversions” to protect themselves from the recognition that someday they will die and all on earth will be lost to them. If they have rejected God throughout their lives, then they will naturally find themselves in Hell, which is the absence of God. In Hell, God grants them an eternity without his presence as they have chosen in their “revealed preference” for a relationship with him (or lack thereof). Here, once again, we can see the advantage of “the saving grace of a catastrophe” as Judge Posner puts it where “one catastrophe avert[s] worse catastrophes.” We have found that as people encounter troubles, including economic troubles, they are more likely to turn to God. Again, existence is found not in undisturbed pleasure, but in suffering and disappointment. That is, if people choose properly in the respite of thirdness as they take time to reflect on their spiritual standing before God. Depression, the economic and even the psychological variety, can provide this respite from the frenetic activity produced by a financial bubble.

".. The fall in the price of oil has reduced the wealth of the oil-producing nations—a goal that should be central to U.S. foreign policy ..."

The goal of the US is to reduce wealth of countries we don't like? "Good guys - bad guys" economics?

I agree with Chris Graves in large measure. In addition might I suggest that economists consider moral implications in their musings and pronouncements. They might begin with the principalist theory of autonomy, beneficience, nonmalefecience and justice but as you know there are other theories of morality which could be considered. I am sure that should they include "morality" yhey would be accused by their collegues of "polluting the art (not science)".

Vince, Are you guys still advocating that tired old regressive tax scheme of equality of tax. Say five percent on the dollar. So what's the percentage of tax on the gross income of say 5,000 dollars a year versus 21 million? The Progressives killed that off years ago with a progressive tax scale.

Get with the program, what I'm advocating goes beyond an archaic Income Tax structure and reformulates it on a whole new basis. Fitting in perfectly with the likes of the new Heterodox Economic Systems. Such as Thermoeconomics, Bioeconomics, Ecological Economics, etc.. Welcome to the New School Of Economic Theory, tailor fitted to the needs of the 21'st Century, not the 19th or 20th. As some wise man once said, "It has come time to think anew and act anew."

Dan, before this thread succumbs to the archives, be advised that if Congress chose to float ruinous debt in furtherance of the public welfare, they could confiscate any private property deemed necessary to back repayment as a function of constitutional full faith & credit. To elide individual property owners' Fifth Amendment "takings" claims, Congress could issue scrip as compensation to the (former) owners. New Deal precedents like the Gold Clause Cases (1930's) opened the door to the United States of Argentina, even Cuba, if that's where our elected politicians decided to take us.

Assume nothing beneficial to your standard of living or your economic opportunities from federal government bailouts, past, present, or prospective. This is dangerous stuff.

"pretty dresses and fancy cars" -- such Posner writing. Where is Maureen Dowd when we need her. It is quaint for Judge Posner to believe there are silver linings to a 2008/2009 depression. We stand from where we sit. The comments to this post are educational. Becker is more realistic and down to earth about this situation. Glad to see JP is using the word depression rather than recession. What good are economists anyway? To me it seems they are just educated authors. Judge Posner pretty much hit it on the head when he said that the 'economists' didn't see this coming....like they are some special periodic table of the element product unlike the rest of us. (Lawyers like to think this way, like they are the only ones who can think and whose opinion matters.)

Saint, what we need now is more pretty dresses on femmes who like to look pretty. For years now, many women as well as men have let their appearance go to pot. That general sloppiness could come from the success of the computer industry, not known for their sense of style. It could also come from the influence of people seeking the lowest price and forgetting about quality as well as the opportunity cost of fixing oneself up to go out. I suppose it is part of the social slack that needs to be worked out of the system. That is another reason that we need a correction.

I am thankful for Judge Posner's lack of PC awareness. Part of the joie de vivre is to admire pretty girls.

Brian, if Congress tried to take the 401(k) retirement savings of the Baby Boomers and give it to Social Security, we would see a Grey Panthers revolutionary movement that would put the Black Panthers and Weathermen to shame.

I see little old ladies detonating remote devices with their "I've-fallen-and-can't-get-up" necklaces, seniors engaging in drive-bys via three-wheeled scooters, a retired Air Cav officer looking at the smoking wreckage of Washington saying, "I love the smell of joint balm in the morning!"

So if you're going to talk about raw political muscle, my money is on the American elderly, not Congress.