The Great Depression of 1930-1940 looms into view

Implications
Paul Krugman editorialized in the New York Times issue of May 25 that California is said to be where the future first appears. The recession has deeply affected the state. In particular, their housing bubble was larger than anywhere else in the nation. Unemployment is running at 11%. This has impacted state revenue. The alarming observation is that the political system is dysfunctional. With the resources available no reason exists for California’s debt burden. Does the state of California indicate what will soon be coming to the nation as a whole? California’s tax system is inequitable and unstable. Taxes are almost impossible to raise except on personal incomes which plummet with unemployment. The political tide has turned against Republicans, yet enough remain in office to block needed legislation. Professor Krugman asks if the rest of the nation will follow California. Will California soon become a banana republic? California’s problems exist at the national level too.

Analysis
Professor Krugman is clearly concerned by what he can see happening in the Golden State As a Nobelist, an economist and an original thinker, he can clearly see links to the federal budget although he is careful not to address that directly. Others do. David Walker, president of the Peter G. Peterson Foundation is frequently vocal. Nouriel Roumeni is too, famously. Even Bill Gross, CEO of Pimco and a leading player in the fixed income segment sees danger ahead. In short, as the financial crisis deepens, steadily expanding into as yet untouched or lightly touched segments of the national economy, more and more observers and commentators are speaking their piece. When General Motors enters bankruptcy in a few days, another wave of unemployment will sweep across the nation. State pension funds across the country have lost huge sums on worthless investments. Those few individuals with various types of savings plans have seen their nest eggs cut by 40%. Wages and salaries are falling month by month. The “green shoots” often alluded to by government functionaries are ephemeral. Now you see them, now you don’t. The reality is that they are illusions. The U.S. Treasury and the Federal Reserve, charged with the almost hopeless task of restoring stability are, like everyone else, at a loss to come to grips with the reality of the situation. The reality is that a high standard of living financed by borrowing is no more. The government, not knowing what to do, does what it knows. What it knows are the remedies of the New Deal and similar programs of the past. More and more, the Great Depression of 1930-1940 looms into view as the most credible model for conditions that exist today. Among the various proposed remedies for California, the convening of a state constitutional convention has emerged. Such a convention would drastically alter the financial structure of California with the objective of restoring the state to financial health. If it is true that California is a bellwether state, it is not unreasonable to think that other states will reexamine their constitutional systems too and a national constitutional convention might be on the boards as well. Many other states beside California feel the duress. Are there enough of them to put through a national referendum calling for such a convention? Would the people support one? Much depends on how far the economy falls below flattening out. Observers who have looked closely at the deterioration that continues day by day have any confidence that prosperity will return in late 2009 and few think 2010 will be any better. In looking back at the Great Depression, it is important to remember that the population at 123-132 million people was about a third of today’s population. America was then still largely rural with citizens growing vegetable and raising livestock. Even town folk had chickens running in the back yard. Hunting and fishing were not only sports but a method of augmenting meager household budgets. Some sections of the U.S. are already seeing the homeless and sorely distressed families in need of fundamentals. So far there have been no serious riots but they will surely come. Only now are questions arising about the ability of government agencies and departments to restore prosperity. Patient people can quickly become impatient when see that conditions are not improving. When it becomes clear that 2010 will look much like 2009, calls for extreme action will rise. The times are not only “interesting” but also dangerous.
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.

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