‘Contained Depression’

To the Editor:

David Levy and I were flattered by Robert Heilbroner’s use of the term “contained depression” in his article, “The Deficit: A Way Out” [NYR, November 19], but we would have appreciated his acknowledgement of its origin. We coined the term in November 1990 in our monthly report, Industry Forecast. Early next year we plan to publish the book, The Contained Depression of the 1990s, and we would not want readers to assume that we borrowed the title from Professor Heilbroner.

“Contained depression,” as we intended the term, has a clear and specific meaning which Robert Heilbroner may not fully grasp. When we introduced the term, we explained the difference between a depression and a recession: “The primary imbalances in a recession are in inventories; in a depression they are structures and productive capacity. Inventory imbalances can be corrected quickly; excess structures and capacity take years to absorb.”

The contained depression, as we have repeatedly explained in numerous issues of Industry Forecast and in other publications of The Jerome Levy Economics Institute of Bard College, resulted from the ill conceived investments of the 1980s. Among the monuments to these investments are see-through office buildings, idle automobile plants, and straitened and bankrupt firms that were among the takeovers and leveraged buyouts of the last decade.

The Levy Institute’s monograph, “Outlook for the 1990s: The Contained Depression,” published in January 1991 summed up the situation: “The economy is suffering from having too many of the wrong assets built at the wrong time at excessive prices and paid for with too much debt.”

The changes in the distribution of income that favored the wealthiest members of our society while the purchase power of most households declined did little if anything to cause the contained depression, Dr. Heilbroner notwithstanding. This maldistribution could persist long after a firm recovery is underway if political decisions do not alter structural influences on our economy.

Professor Heilbroner says, “The depression has been contained only because the economy has deposit insurance, social security, and unemployment benefits.” He’s one third right. Our economy also has a central bank that is willing to furnish credit to forestall financial disaster. The Federal Reserve did just that when it came directly to the rescue of the stock market and indirectly to the aid of other financial institutions in October 1987.

Of crucial importance in containing the depression is the size of the federal government. In 1929 its budget was 3 percent as large as GDP; today it is almost 25 percent as large. Washington acts as a huge fly-wheel on the economy, tending to keep it up to speed. The economic potency of government outlays and the importance of unemployment insurance and other safety nets in no way de-emphasizes the vital roles of deposit insurance and the Federal Reserve.

The most important aspect of the government’s fiscal activity is the deficit, a huge stimulus. By pouring hundreds of billions a year into the economy, the federal government is to a significant degree offsetting the decline in private investment. Indeed, without this support, the economy would sink into an abyss as deep as the Great Depression of the 1930s. Burgeoning bank failures would overwhelm deposit insurance. Despite its frightening implications, the deficit is containing the depression.

S. Jay Levy
The Jerome Levy Economics Institute
Bard College
Annandale-on-Hudson, New York

Robert Heilbroner replies:

There was no larcenous intent in using the term “contained depression” originally coined by David and S. Jay Levy. Like many others I am a great admirer of the work of the Jerome Levy Economics Institute.