COULD WE TALK OURSELVES INTO ANOTHER DEPRESSION?
A revived ‘new modesty’ movement would add to headwinds, Kevin Carmichael says.
Baking has become fashionable during the Great Lockdown, so much so that there have been reports of shortages of flour and yeast. Even I baked a banana-carrot bread last week, which isn’t anything I thought I would ever do. But I responded to a different impulse: frugality. There were a couple of blackish bananas in the fruit bowl and a few limp carrots at the bottom of the fridge. A month ago I would have thrown old produce in the compost.
Now, I can’t stand to waste even a few radishes, which, in case you didn’t know, can be turned into an edible curry.
Students of the Great Depression will be familiar with the psychological urges that are driving some of us to obsess over waste and others to become Instagram bakers. They might even apply what they know to the COVID-19 crisis: Shares of jeans maker Levi Strauss & Co. are up more than 20 per cent from a month ago, while fancy-pants Ralph Lauren Corp.’s stock has only gained about five per cent.
It is generally understood that the trigger for the Depression was the spectacular collapse of a stock-market bubble in 1929. Anyone who has read The Grapes of Wrath will know that the Dust Bowl made the recession worse. And policy geeks will be familiar with the various mistakes that decision-makers committed during the period, such as clinging to the gold standard, which kept interest rates high even as the economy contracted.
These are the classic explanations for what caused the worst economic calamity in modern history. But Robert Shiller, the Yale economics professor and Nobel laureate, thinks the textbooks are missing a shock that was at least as important as any of them. In Narrative Economics, his 2019 book, he argues that a terrible recession morphed into a depression because Americans who remained employed nonetheless chose to curb their spending. Why? Because conspicuous consumption became both unconscionable and unfashionable.
A “new modesty” took hold in the early 1930s, as households were shocked into different spending habits by the brutality of the country’s descent into recession. Shiller’s analysis of newspaper clippings, letters and other documentary evidence suggests that a general attitude of personal austerity persisted into the 1950s, with the Second World War reinforcing the notion that deprivation was a constant threat, not a once-in-alifetime event.
At the same time, genuine worry about the future was mixed up with more superficial concerns about appearances. “Poverty chic” became a thing. There was a bicycle craze at the start of the decade, in part because households didn’t want to be seen buying a new car when they didn’t really need one. Denim went mainstream, as fashionistas expressed their solidarity with the struggling working class by wearing blue jeans instead of tailored suits. Demand for cardboard jigsaw puzzles took off, at first because they were a cheap form of entertainment, and then because families discovered they enjoyed them and kept buying new ones.
“A huge constellation of human tragedy narratives prevailed,” Shiller said in his book. “Under such conditions, the reasonable response even for people who still had a job was to postpone buying a new car, throwing lavish parties, and keeping up with expensive fashions. Such self-imposed austerity helps explain the severe contraction at the beginning of the Depression as well as the contraction of consumer purchases during World War II.”
Comparisons between previous recessions and the coronavirus crisis are “unhelpful,” as Bank of Canada governor Stephen Poloz pointed out last week. Yes, Canada’s economic output plunged in March like never before, but the crash will be cushioned by low interest rates and hundreds of billions of dollars of government support. If the spread of the coronavirus that causes COVID -19 slows by the summer, the economy should make up a lot of the lost ground by the end of the year.
By way of example, economists at Toronto-Dominion Bank see Canada’s gross domestic product collapsing at an annual rate of 42 per cent in the second quarter, then bouncing back by 32.6 per cent in the third quarter and 15.8 per cent in the fourth quarter. Overall, they predict GDP will drop 7.5 per cent this year and grow 7.3 per cent in 2021. That’s not what a depression looks like.
But, as Shiller’s most recent work shows, the stories we tell ourselves now could determine the speed at which economic activity returns to pre-crisis levels. A new “new modesty” movement would add to the headwinds that restaurants already face. A revival of poverty chic, or even a broader embrace of the work-from-home culture, could be good for Levi Strauss, but probably bad for makers of expensive clothes such as Ralph Lauren.
Toronto-Dominion’s economists assume a new degree of personal austerity in their forecasts, predicting Canada’s personal savings rate will spike to 7.4 per cent this year from about three per cent in 2019, and then settle at a rate of about five per cent for a number of years.
The Great Depression wasn’t a decade-long decline. The U.S. economy started to recover in early 1933, and continued to expand through early 1937 before sliding back into a recession that ended with the start of the Second World War. What caused the U.S. prospects to brighten in 1933? For one, the poverty chic craze subsided, according to Shiller’s research. A clever data analyst who wants to track this recession might want to figure out a way to track new postings of baked goods on social media.
If the spread of the coronavirus that causes COVID-19 slows by the summer, the economy should make up a lot of the lost ground by the end of the year.