Before the rescue and even in its early stages, the global economy was falling into a bottomless abyss. In the first months after the panic on Wall Street, world trade and industrial production fell at least as fast as they did during the first months of the Great Depression. Global capital flows declined by a staggering 90 percent. The Federal Reserve, with some assistance from other central banks, arrested this decline. The Obama fiscal stimulus also helped to break the fall. Tooze points out that almost all serious analyses of the stimulus conclude that it played a significant positive role. In fact, most experts believe it ended much too soon. He also points out that large parts of the so-called Obama stimulus were the result of automatic government spending, like unemployment insurance, that would have happened no matter who was president. And finally, he notes that China, with its own gigantic stimulus, created an oasis of growth in an otherwise stagnant global economy.The thing that puzzles me most about America over the past fifteen years is that the mood of the people has consistently been worse than circumstances seem to warrant, and our rage has been directed in all sort of strange directions. You will recall that the Tea Party began as a protest, not against Wall Street misbehavior, but against plans to help out homeowners who had lost big because of that misbehavior. Since then quite a few conservative intellectuals have tried to make the whole thing into a parable about government overreach, railing against federal mortgage guarantees and trying to shift the blame from Wall Street to the Federal Reserve. The bailouts have been the object of more ranting than the crisis itself. Fear of Middle Eastern terrorists somehow metamorphosed into panic about the Mexican border, with local officials in Texas and Arizona demanding help against al Qaeda forces they feared would sweep through the desert and attack them. Obama's stimulus plan caused outrage on the right and a sense of unease among many of the apolitical who felt in their guts that the response to such a crisis out to be belt-tightening and retrenchment, not expansive new government programs. As the economy has improved, the mood has hardly gotten better at all. More than a third of Americans think we are still in a recession, and as I often note people on both the left and the right think that their side is losing most of the battles.
The rescue worked better than almost anyone imagined. It is worth recalling that none of the dangers confidently prophesied by legions of critics took place. There was no run on the dollar or American treasuries, no hyperinflation, no double-dip recession, no China crash. American banks stabilized and in fact prospered, households began saving again, growth returned slowly but surely. The governing elite did not anticipate the crisis — as few elites have over hundreds of years of capitalism. But once it happened, many of them — particularly in America — acted quickly and intelligently, and as a result another Great Depression was averted. The system worked, as Daniel Drezner notes in his own book of that title.
But therein lies the unique feature of the crash of 2008. Unlike that of 1929, it was not followed by a Great Depression. It was not so much the crisis as the rescue and its economic, political and social consequences that mattered most. On the left, the entire episode discredited the market-friendly policies of Tony Blair, Bill Clinton and Gerhard Schroeder, disheartening the center-left and emboldening those who want more government intervention in the economy in all kinds of ways. On the right, it became a rallying cry against bailouts and the Fed, buoying an imaginary free-market alternative to government intervention. Unlike in the 1930s, when the libertarian strategy was tried and only deepened the Depression, in the last 10 years it has been possible for the right to argue against the bailouts, secure in the knowledge that their proposed policies will never actually be implemented.
I can think of a few explanations. One is the continued decline of manufacturing employment, which slowed for a while in the 1990s but accelerated after China joined the WTO in 2001. Many small cities really have been hit hard by these losses, and many workers have seen their livelihoods yanked away. Another is the news industry, which has been pumping out ever darker stories in a desperate battle for viewers and readers. In this they are only echoing many of our politicians, who talk darkly about the nation sliding off a cliff. Maybe terrorism contributes, and the epidemic of mass shootings, especially in combination with the constant news coverage of everything bloody and bad. Lately there has been a lot of focus on the absence of wage growth, which I am sure is a contributor. It is also a puzzle; so far as I can tell, economists have no clue why wages have not risen at all over the past two years of impressive economic growth. My own take on this comes from experience in my own company, and it is that wages are being held down by savage competition; the thought of my own salary going up mainly makes me worry that I won't be able to win any more projects.
But whatever the reason, the facts are stark: we didn't get an economic depression, but we did get a psychological one.