Economics and the mid-life crisis have much in common: Both dwell on foregone opportunities

C'est la vie; c'est la guerre; c'est la pomme de terre . . . . . . . . . . . . . email: jpalmer at uwo dot ca

. . . . . . . . . . .Richard Posner should be awarded the next Nobel Prize in Economics . . . . . . . . . . . .

Monday, October 24, 2005

Is the U.S. on the Cusp of a Depression?

Russ Winter at the Wall-Street Examiner thinks the U.S. might be on the cusp of a Depression:
    • There are a number of non headline economic reports that now suggest the US is on the cusp of a big depression....
    • We are staring at a very big housing slowdown here, for both building and remodeling. ...
    • Just 18% of Americans believe the economy is getting better while 66% say it is getting worse. That's a more pessimistic assessment than a month ago when 23% said the economy was getting better. A year ago today, 37% thought the economy was getting better.
    • High energy prices also feed into reduced demand, which in turn means less trips to the mall, fewer jet flights, reduced industrial demand...
    •'s not just energy and employment compensation. A credit contraction appears to be under way. ...

I'm not as pessimistic as he is.

My simplistic macroeconomic model says that the long-run Phillips Curve and long-run aggregate supply curves are vertical. Whether, to what extent, and how long an economy goes into a depression (vs. a mild recession) depends on how readily prices and expectations can adjust to underlying changes in reality. And,
  • given all the advance warning we have had,
  • given a renewed sense of the importance of self-reliance that I sense is emerging (possibly following the hurricanes), and
  • given the overall price flexibility in the U.S. economy,

I expect the adjustments in the U.S. economy to be smoother and quicker than they were in the late 1970s and early 1980s.

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