My recession, your great depression

COMMENTARY

The difference between recession and depression is simple. Recession, goes the saying, is when you lose your job; depression is when I lose mine.

These days, recession is starting to feel like depression to a lot of people. Recession starts to feel like depression every night at General Motors Corp when they turn off the escalators and turn down the lights in the faint hope that one more person will get to keep his wage and benefits one more day.

Ron Gettelfinger, head of the United Auto Workers union, knows that worker packages, which cost carmakers $74 an hour in wages and benefits, are way out of line with deflationary reality. But most of Gettelfinger’s proposals aren’t about slashing those packages. Instead, Gettelfinger is emphasising plans for federal assistance to manufacturers, or federal cash to improve terms of auto loans.

These latter approaches aim to fortify the overall economy. In a recovered economy, the logic runs, worker pay won’t seem so egregious. Behind Gettelfinger stand economists who argue that bringing down wages isn’t right or possible, even in a troubled period. Wages, economists says, may move up, but they are “sticky downward.”

These economists cite the UK’s John Maynard Keynes. They also often cite one of the parents of modern economics, Irving Fisher of Yale. Around World War I, Fisher wrote up a then-novel plan: index wages to the growth of the economy so that raises are automatic.

But in recent years, scholars have been making a different argument. Lee Ohanian and Harold Cole of the University of California, Los Angeles, say the high-wage method of fending off economic depression can make a depression more likely.

The model Ohanian and Cole use is the ultimate depression, the Great Depression of the 1930s. Early in that depression, unemployment hit 25 per cent.

It fell all the way to 13 per cent or 14 per cent in the mid-1930s, only to head up to 19 per cent in the later 1930s. This was a huge shift from the preceding decade, when unemployment averaged less than 5 per cent.

What was transpiring at GM or Ford Motor Co in those days? In the 1920s, Henry Ford pushed for wage increases in the faith that they would enable workers to buy more cars.

A young labour leader named John L Lewis was also pushing for higher wages. Lewis convinced Herbert Hoover, who, first as Commerce secretary, and then as president, insisted higher was better. After the stock market crash of 1929 — the equivalent period to now, more or less — Hoover sought to block wage cuts.

In the 1930s, the Roosevelt administration continued the trend, leading Congress in passing the Wagner Act. This gave unions the power to organise Detroit and threaten sit-down strikes. At the same time, unemployment was heading up.

Until now, many economists have tended to blame broad monetary forces for a general decline, and hence the new joblessness.

(Amity Shlaes is a Bloomberg News columnist.)