Recessions do not have hidden virtues

I wasn’t originally going to write about the Michael Gerson piece from the other week where he talks about the “hidden virtues” of a recession.  Leaving aside the irony of a relatively well off speech writer for George W. Bush telling us how the recession caused by his boss’s policies will be good for us, I just assumed that the idea of a virtuous recession was self-obviously wrong and wouldn’t be taken seriously.  But since then, I’ve heard other people, even more liberal people, make the same arguments.  In several of those cases, the argument is that a recession will help (force?) Americans to lead simpler lives, to save more and to focus on what is really important.  I’m offended by that sentiment because, while I have often thought, and said, that people need to focus on what’s important and that they should save more, there is a huge difference between doing so as a choice and being forced into it due to scarcity.

Dealing specifically with Gerson’s opinion piece, the facts are that he’s just wrong.  He notes that Christopher Ruhm, a researcher at UNC-G, found that, while mental health problems increased (yay?), physical health improved during recessions.  Of course, that’s not exactly a majority opinion in public health.  Other researchers have noted that as many people start eating fast food as start cooking healthfully at home.  Moreover, gym memberships decline and cheap vices increase.  Health care is often pushed aside and in the U.S., those who lose their jobs often lose their insurance and therefore much of their preventative care.  None of this suggests improved health.  Moreover, Ruhm’s study was not longitudinal – he didn’t study people before and after suffering the effects of a recession.

Gerson also claims that it is a paradox even though crime is correlated to poverty, the Great Depression was a time of lower crime rates:

There is a parallel debate about the influence of economic hard times on the nation’s moral health. Without question, the most acute social problems — crime, illegitimacy, etc. — are concentrated in areas of highest poverty. But sociologists and criminologists have long pondered an apparent paradox. During the Great Depression — with about a quarter of Americans out of work — crime and divorce declined. During the relative prosperity of the 1960s and 1970s, crime rates shot up and families broke down.

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Recessions and depressions are brutal beasts that stalk the stragglers, especially retirees and the poor. There is too much inherent suffering during a recession to ever welcome it. But times of economic stress, it appears, can also be times of cultural renewal. “One reasonable hypothesis,” argues James Q. Wilson, “is that the Depression pulled families together, and this cohesion inhibited crime.” Many Americans who struggled through the Depression adopted a set of moral and economic habits such as thrift, family commitment, savings and modest consumption that lasted through their lifetimes — and that have decayed in our own. The Depression generation controlled the things it could control — including its own consumption and character.

But aparently, it’s not that great of a paradox.  Social science researchers have demonstrated that the Roosevelt administration’s relief efforts, which were intended in part to reduce crime, did have that effect. The researcher’s “estimates suggest that a 10 percent increase in per capita relief spending lowered crime rates by roughly 5.6 to 10 percent at the margin.”  In other words, while families may have pulled together during the Great Depression, the social spending that allowed people to feed their families was demonstrably useful in lowering the crime rate.  The republican govenors should consider that before turning down extended unemployment benefits for their states.

So, what about savings?  People definitely need to save more.  So, why aren’t we?  For a while, the U.S. had a savings rate close to 0%, sometimes it was even negative.  Over the past couple of years, the savings rate has increased, and is now around 3%.  But wait, during a recession, we need to increase spending, that’s part of the purpose of a stimulus bill.  And given that personal spending drives the U.S. economy (roughly 65-70% of all spending), will increased savings doom us to a poor economy?  Will we all just have to get used to less?  Should we learn to enjoy the current economic levels, because that’s where we’ll always be?  Nope.  Or more accurately, hopefully no.

A part of the problem is that over the past thirty years, *real* median income for men has been roughly flat.  It’s been a little better for women, but that’s mostly because of a reduction in wage descrimination.  Household income has increased, but that’s because there are more two income households.  For thirty years, households have been improving their standard of living, first by having multiple earners, then in the nineties by investing in the stock market, then by borrowing from their homes during the real estate bubble.  Savings were certainly eaten into over that period of time.  So, the way to actually increase savings would be to allow people to improve their standard of living without borrowing – i.e., if wage gains rose at the levels of productivity gains, the median wage would be probably 50% higher.  That would allow people the ability to improve their standard of living while still saving.  Instead, we’ve seen companies hoard more cash, spend less and keep the benefits of productivity gains for the CEOs.  In part, you can see this in the weakness of the last recovery.  The recovery was weak, and took quite a long time, in part because companies refused to spend.  Consumer spending had to pull us out of the recession, and it took borrowing to do so.

So what about the last idea, that the recession will help us to live a simpler and more enjoyable life?  Unfortunately, it’s not true.  More to the point, the amount of spending is not necessarily correlated to “simpleness.”  You can have a robust economy wherein people are spending money on things that matter to them.  For example, K and I don’t go to movies and we seldom eat out.  However, we probably spend more each year on books than most people do on movies.  We don’t eat out, but we do eat well.  Other people I know whose lives I admire make an effort to eat at locally owned restaurants or spend money at the farmer’s markets or on their hobbies.  All of these people are making a useful economic contribution while still living an enjoyable and “simple” life.

On the flip side, just because you have less to spend doesn’t mean that you will magically start saving more and leading a simpler life.  Sure, there’s less money available, but that could just as easily mean that you stop visiting local restaurants and start eating fast food.  It could mean that instead of telecommuting, you have to work multiple jobs at different locations around town in order to make ends meet.  Simplicity is a lifestyle choice and is not well correlated with financial situation.

Everyone has to live within their means, but as a society, our goal should be to increase those means.  We shouldn’t have a country where 20% of the benefits of society go to the top 1%.  We should work to ensure that all people have better access to the benefits of society.  We shouldn’t be “rooting” for a recession to teach us moral values.  If people choose to live a simple life and to save more, great.  If not, that’s their choice too, regardless, a recession is good for no one.

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