Bad, But No Great Depression: Taking Stock of the Opening Days of the Great Recession

The following interview was conducted November 20, 2008, part of a series of discussions called “44,” with people of varied background about their reactions to the 2008 election of Barack Obama. This interview is with Rik Hafer, Phd, a Distinguished Research Professor of Economics and Finance at Southern Illinois University Edwardsville. Dr. Hafer’s research focus is in monetary and macroeconomics as well as financial markets.

I’ve been here at SIUE since 1989, so going on twenty years. My expertise is macroeconomic monetary policy, which fits what’s going on with the economy.

How did you become interested in economics?

I actually came out of the humanities as an undergraduate, from the arts and science economic major, not the business economic major. It looked at economics more from a political science approach. The framework for the discipline made sense. It’s logical and it fits, how resources get allocated and how people react to one another, as well as using models to explain behavior in what we see in the economy.

What is your personal economic philosophy.

Probably much closer to a free market economist than not. That’s a philosophy. Part of it is where you get trained and how you get trained. I’ve always had the perspective that the markets seem to do a pretty good job. Not a perfect job, but everything I’ve seen they do a better job than alternative mechanisms. Not perfect, but better.

How have you then viewed these last new months as government has intervened in the market?

Free market economics is an ideal. And it’s a messy world; there are no ideal situations out there. In some sense there’s not a pure free market out there. But I think it’s instead one of the benchmarks from which you can compare whatever is going on to.

I think a lot of the current reaction—unbridled, free market capitalism at its worse—well, it’s not. There was a lot of regulation, a lot of other things going on. And there were regulations that were not being enforced. So it’s not that it was free markets, it was regulators not necessarily doing their jobs, within the framework of a free market capitalist system.

Should an economic outlook be situational?

It always is, and there’s a lot of cultural things to the economics. Aside from the pure mathematics of the model-driven aspects of what we do, there’s a debate within economics of what economists should do: should we be policy makers, or should we just be advisors? I may simply advise you what to do, but a policy maker, rather than the actual politicians, might make the final decision.

How would you characterize the present economy? Do you have a good metaphor?

Well, it’s pretty bad. But I think you have to be careful with journalistic metaphors. I was talking to a journalist the other day about the language of journalism, and how everybody, yourself included, reads the headlines, and the headlines say the economy is worse off than any time since the Great Depression. And the problem is, unless you’ve studied the era, or lived through it, you’ll get a simplistic understanding of its connections. And it’s not like the Great Depression. It’s actually like 1980–1984. That period. The downturn is bad, and it’s not going to get better any time soon.

But it’s not the Great Depression when output went down 30%. That’s just not going to happen. It’s very long odds, anyway, that it ever would. That’s why I’m leery to make those type of predictions. But it’s bad—we haven’t been to this point in 25 years. But we have been here. We have been through these kinds of situations before.

On NPR this morning there was a discussion about the irony of bailouts to help corporations who notoriously want government to stay out of their affairs.

Sure, and we’ve done it before. We’ve done it for Chrysler, we’re done it for Lockheed Martin. But “bailout” has to become an overused and misused term. “Bailout” to me suggests that because you can’t pay the rent your parents give you money, and that’s it. When in fact what’s happening is that the money is a loan. The question is whether firms will actually be able to pay it back. So in a sense what is the government getting? If I make you a loan there’s usually some kind of collateral. If the government makes a loan what will GM pay back? These are the things that don’t get talked about in public, but there is a line the government gets, to make sure it gets its funding back. If GM goes bankrupt it can then liquidate their assets.

Even with a plan in place, does having to receive a bailout denotes a certain amount of irresponsibility, to have been put in that position?

That’s what a lot of people are concerned about. If you are bailing an individual out then you assume they hit a bad patch and will continue on. The issue I think with GM is that maybe they shouldn’t have in fact continued as they were, up to this point. You know, are they made to retool their business plan? That’s a very important question. Auto companies are in a bad situation. Think about trying to figure out what kind of cars and vehicles to sell in the future when you don’t know what, for example, gasoline prices are going to be. At four or five dollars a gallon you of course don’t want to produce lots of trucks and SUVs. It the gas price is $1.59, then trucks and SUVs again become pretty sell-able in the marketplace.

Attempting to put myself in the place of a GM executive, even a few years ago demand for SUVs were still high—what did we do wrong by providing customers what they wanted?

Nothing. But at the same time if you weren’t producing other vehicles people wanted as well, essentially basing our whole operation’s revenue on truck and SUV sales without taking care of the other segments of the market, then you have a diversification problem. When truck and SUV sales fell off, then your revenue stream was shot. You cannot survive on the other parts of your firm, and that’s part of the problem we face. This is why Chapter 11 bankruptcy protection allows them a chance to dig out of the hole. And that’s the debate right now. Should they be bailed out—i.e., giving money—or should they be given bankruptcy protection so they can still operate while slicing off the parts of the business that weren’t profitable?

The last year we’ve heard about how terrible things are, such as the high cost of food, soaring fuel prices. And then today the front page of the Post-Dispatch reads, “Prices are Down, and that’s Bad.” High cost, low cost, what’s right?

That’s what sells newspapers today, that journalistic approach. The commercial consumer price index fell last month 1.2%—the biggest one month decline. Now what caused that was the biggest all-time one month decline in gas prices. Which is great, from the consumer’s standpoint. It’s no longer $4 a gallon as it was during the summer, it’s now $1.60. But the bad part is, and the headline—and of course the author of the article didn’t write the headline—might be something different than the article of you were to read it.

But we become fascinated by what’s happening now. The CPI comes out monthly, and economists focus on that monthly statistic. And it’s done now. But there’s a 95% confidence interval around that statistic. What that means is that when it comes out—let’s say it’s zero—that there’s so much noise and uncertainty about this monthly statistic that it could actually be anywhere from a +0.1 to a -1.0. That might not sound like a lot, but for a monthly basis that’s almost like one percentage point, that change in the CPI on an annualized basis. On an annualized basis a plus-one or a minus-one percentage point change to the CPI is really big.

This is like looking at the day-by-day weather. Each high temperature. There’s a lot of variance involved, so if I look at yesterday’s high compared to the day before’s that percentage is going to be huge. Yesterday is was 60, and today is 44. That change is huge, and it’s down, so do I suddenly think we’re going into an Ice Age?

That’s why you can’t look at the day-to-day. Just like you can’t look at today’s temperature as a predictor of long-term trends. And that’s why this one monthly statistic of the CPI is nonsensical to look at, to assume that this one-time downward movement of the CPI portends a plunge.

Is that the same with consumer confidence?

Well, consumer confidence is a different thing. Consumer confidence is the people of Michigan and the survey center calling you up and asking, “Do you think the economy is going to to be better off, worse off, or the same in a year?” That’s generally the nature of the question.

It’s a survey. They survey a representative sample of the Unites States, basically asking this question. No, how are you going to answer if your neighbor just lost his job? You still have a job, but in October that talked about financial meltdowns and inflation being around the corner. Everyone keeps saying there’s going to be another Great Depression. Well, this is all being said when you answer the survey question, you’re naturally going to think you’re going to be worse off.

Studies have been done where they looked at national opinions like, “Is the economy going to be worse off?” But when asked, “Are you going to be worse off?” many times people responded they will be fine or better off than the wider economy.

Everybody’s surprised that the confidence index went down in September when the stock market was dropping, while it was said we were facing the next Depression. Well, why wouldn’t you think this way?

As modern markets branch out into other segments of the world, are these developments an updated form of colonialism? And regardless, what, if anything, do we owe to the consumers and workers and foreign states?

I’m not sure we do own them anything, because I’m not sure that’s in the realm of economics. Why do we have foreign aid—we have it because part of our worldview suggests we should help people in need. Or, more cynically, because we went to develop relationships with these countries to keep out power at a certain level.

Other non-capitalist countries also provide aid, so foreign aid is not merely market-driven. That’s the same question as “What responsibility do I have towards other’ economic well-being?” I might put money in the Salvation Army kettle. Others might feel they don’t have a responsibility. I don’t think economics has to do with that kind of decision process. The question is really more a political one: “Should we provide aid to the nastiest regime you can think of?” The answer would probably be no. The question could also be divided into, “Should we provide aid to the Cuban people, if not the Cuban government?” The discussion has always revolved around the helping of people even if you don’t agree with the government.

We normally may not for a Third World nation for our health, but for the raw resources that can be extracted.

Potentially, but there are also countries we got no resources from. Israel is a country that receives a large portion of foreign aid, and I don’t know that real resources we receive in return, except for maintaining political stability in the area.

I don’t think it’s also going in for oil, or gold, or the bananas, coffee, or whatever. Sometimes it’s more political, which the political may have economic undertones, such as with the Middle East. If you were cynical enough you could find economic reasons for everything.

What are you thoughts are Obama’s economic plans?

The great question is: where is he in the political spectrum? That usually defines your economic stance. He;s going to be less free-market oriented than a Ronald Reagan, of course. But it’s sort of always a misnomer to use labels. Bill Clinton was supposedly this “left-wing liberal” would govern like a “Democrat,” and he turned out to be more of a fiscal conservative in the sense he was more of a free-market guy. He did sort of generate N.A.F.T.A., he did alter the welfare system in the United States. So I think you have to be careful about those kinds of labels.

                 Republican candiate Sen. John McCain, far left, President George W. Bush, center, and                            Democratic candidate then-Sen. Barack Obama, meet at the White House to discuss                                bailout measures, September 25, 2008.

More than anything I think most people are free-market oriented than most would be led to believe or want to admit. The question is, who do you do in the margins? Some of the margins are pretty big: health care, regulation, the financial industry, etc.

Care to guess at some possible accomplishments or what hurdles might be faced?

I don’t think in the first year he’s going to accomplish anything associated with campaign pledges, simply because of what he has to deal with is going to overwhelm any new social programs he wants.

Why, in your opinion, did the public begin to favor the Democratic candidate as the markets soured in September? I’ve been trying to understand if it was the candidate, the party, combination of the two. And regardless, why did the scales tip Democrat instead of sliding Republican as the economy went down? How much is reality and how much is perception?

A lot of analysis had been done of voting behavior as it relates to the stock market. It is primarily this issue people vote on. Any number of studies come to mind: Ray Fair was the first to compare economics with voting behavior, its patterns, and national elections. And gradually it’s always been the case that economic perception often times trumps everything else. It’s what allowed Clinton to win his first term, while it turned out the economy was coming out of the recession as he was being elected. As such he come into office the recipient of a growing economy for Bush policies he had nothing to do with. Being at the right place at the right time he could take credit for it.

If this time around, Obama hadn’t been in the mix, Hillary most likely would have been the candidate. My guess is Hillary would have beaten McCain. In bad times there’s almost a materialistic desire to be taken care of. These being pretty bad times, people aren’t looking for a free-market philosophy that dictates it will all straighten out on its own.

***For more oral history interviews concerning the 2008 election of Barack Obama, click here:

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