Bryan Caplan  

Recession During the Cold War: What Was It Like? What's Wrong With Us Now?

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Unemployment is 6.1%, and we're running around like chickens with our heads cut off.  It makes me wonder: What were recessions like during the Cold War?  Back in those bad old days, the Worst Case Scenario was truly grim.  With a little imagination, you could spin a horror story in which economic crisis led to unrest, unrest led to deeper crisis, and the West spiraled down to communist revolution or Soviet invasion.  I know I would have been losing sleep about this sort of thing during the 30s.

So here's my question for people who remember the Cold War better than I do: Did elites seriously worry that economic downturns might spin out of control and end in communist despotism?  If not in the U.S., how about countries like France and Italy with a serious communist presence?

And here's my question for readers of all ages: If we were able to retain our composure during downturns in the bad old days when we could hear Bolshevik wolves howling in the night, what happened to us?  Why are we now afraid of our own shadow, muttering about the end of the world?


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COMMENTS (25 to date)
SB7 writes:

I think humans are just wired to live with a certain amount of fear. No matter how bad things are in absolute terms we're always going to be about as frightened as we always have been. (I would say the same goes for stress levels.) When things are really bad we rely on some subconscious self-denial to keep from going completely off the rails, and when things are good we invent bogeymen to keep from becoming too comfortable.

Evolutionarily, being overly afraid even when things are okay may be safer than being overly complacent when things aren't.

Frejus writes:

"we're running around like chickens with our heads cut off."

"Why are we now afraid of our own shadow, muttering about the end of the world?"

It's hard to answer a question that is so extremely hyperbolically posed.

Unit writes:

More people are paying attention?

Lance writes:

People are probably accustomed to the 'peace dividend', whereas we no longer have to fear an existential threat (for those who downplay the risk of Iran and non-state terrorists), so we should be continually advancing economically as opposed to facing the vicissitudes of the business cycle.

JM Keynes said long-term expectations were adjusted contingent upon short-term realities, it seems Americans have seen a future of unlimited prosperity, a 4.5ish% unemployment rate, rising home prices, and a benevolent government there to smooth the rough spots. Subsequently, they have not taken the obligation of adjusting their long-term expectations, causing for them to be panic-stricken.

I mean, it's analogous to the threat the Soviet Union posed. After WWII, many Americans expected future peace (with the establishment of the UN, the Marshall Plan, etc) to be more than ephemeral. With the rising power of the USSR posing a threat to US supremacy and security, many Americans did not adjust their long-term expectations, rightly so, and feared Soviet expansionism. Of course, this led to silly exercises such as students diving under their desk to shield themselves from a nuclear blast.

However, in this case, the repercussion of policy actions will not be a silly tape of a student diving under his desk, but probably a more fragmented economy due to extensive regulations, less reliance on private initiative, and redemption of the view markets are not to be trusted.

MattYoung writes:

It is the suits who are in a panic, using Arnold's term.

Emma Zahn writes:

I guess economic threats were not that frightening when compared to the continually hyped threat of nuclear annihilation; the Cuban missle crisis; the assassination of a President, a presidential candidate, an influential community leader/icon and the attempted assassination of a leading third party candidate; non-stop images of war on the nightly news; race riots in major cities; terrorist organizations around the world kidnapping people and blowing things up; the Cultural Revolution in China; the 1956 Hungarian revolution; Prague Spring; Munich Olympics.....

Jesse writes:

So over the course of a year the housing market crashed, stock market's down 40%, America's biggest insurance company and the investment banking sector got wiped out, and the rest of the world is doing even worse. Why would anyone be worried? I mean, who cares about money? Is it really that important to have material wealth? I think Bryan is trying to tell us that we overvalue economic success; we should focus on the important things in life, like keeping positive.

I mean, 50 million people died during the influenza epidemic of 1918. 40 million people died during World War I. And you have heard about this guy named Hitler? Pol Pot?

Let's keep our heads here.

Jorge Landivar writes:

Really the only thing I can link the fear to is the Obama candidacy. It sounds strange, but he is the closets thing we have had to a Marxist in a very, very long time. The thought of him winning sends fear tingling up the spines of free market minded people.

J P writes:

For the 'all ages' question:

If the market is being rational, then perhaps it is a factoring in of Kurzweil’s Singularity, the idea that modern technologies quickly compound causing exponential situations.


However, there’s also an argument for the market being systemically irrational right now compared to rational during the Cold War:

If capital markets are thought of populated by two dimensional voters, where voters have both x, the binary ability to vote*, and y, a greater than zero capital potential, then Mr. Caplan, your ‘Irrational Voter’ model could explain the situation if the systemic bias had amassed currently in the y variable and was in the processes of being corrected.

Under normal circumstances (say during the Cold War) the market would not allow for irrational actors to accrue large y, as the means of attaining y were always rational and therefore require rationality. However if one allows that over the last 15 years all ‘y’ (potential capital) accrued via government programs driven housing price gains have been non-market driven, then there is currently a large portion of capital that has been amassed via irrational means and in large part to irrational actors. And if capital has been amassed irrationally to those who are irrational then we have a systemic bias.

*(regular political democracies would be populated by one dimensional voters who only have an x variable (y=0).)

Les writes:

Could it be that politicians have mastered the art of scaring the pants off us, so that they can pose as saviors, ride to the rescue like the cavalry, and continue to be re-elected to pick our pockets?

Alex J. writes:

The fear of the communists was like the fear of an enemy tribe. So long as we are vigilant, and stand together if they attack, we will survive. The fear of a new depression is more like fear of contagious disease. We're not sure what the cause is or what the solution might be. We don't know how bad the consequences will be, but they could very well be terrible.

Gary Rogers writes:

I will preface this by saying that my perspective has changed considerabley between the two periods in question. In the 60s I was in school, had my whole life ahead of me and considered myself pretty much invincible. Today I am looking at retirement and worried about my savings as well as the wellfare of my kids and grandkids. This difference in perspective may bias my memories, but here is what I remember:

In the sixties I had confidence in myself, my family, my community and our leaders in government to do what needed to be done no matter what happened. We did not look for government to help us live our lives. We knew that we would take care of ourself and our neighbors. I paid my own way through college by working every other semester. We paid our own medical bills and saw insurance only as protection against the unexpected. It was not a time of worry. It was a time when we had lots to do but knew what needed to be done. Even with the cold war, we knew what we were fighting for and what we were fighting against.

Today I look at how our government has spent our wealth and left a debt that is so huge, my grandkids will spend their whole lives trying to repay it. This was not done as an investment in our country, but as a bidding war to buy more and more votes and increase the power of politicians. This by itself is reason for worry, But the result of buying votes by throwing public money into medical care, education and housing has created an economy where citizens cannot afford these things without government assistance. Everyone now looks to the government to provide healthcare, college education and subsidized mortgages. The recipients of these subsidies worry because they know they cannot handle these expenses on their own leading to a feeling of helplessness. I worry because I barely have enough for retirement but I see a corrupt government that will be coming for whatever I have left in an attempt to satisfy that unquenchable thirst for more handouts by irrational voters. In short I have very little confidence left in government to do the right thing, nor do I feel that the government will give me the freedom to take care of myself and my family.

Where does this stop? Only by shrinking government. How do we do that? That is what truly worries me.

Lawrence writes:

It's the Baby Boomers that are running around like their heads were cut off. They've heard the horror stories of The Great Depression from their elders and now they want to protect their children. The scariest part is that they think BIG GOVERNMENT ended, not prolonged the Depression.

Come on Baby Boomers, there's no such thing as a free lunch. Guess who's paying for your piece of cake lives?

Helder writes:

Why are we now afraid of our own shadow, muttering about the end of the world?

Information overload

Dr. T writes:

I agree with Les that the people in power in the federal government create fear and use it for their own ends (with Paulson being the most prominent example). In the previous times of financial downturns, some politicians exercised leadership to dispel fear and put the problems in perspective. We have not seen that in this crisis.

A second factor is the modern media. We now have too much media. They compete for our attention, and the most effective way to do that (other than showing nearly nude bodies of beautiful women and handsome men) is with crises. Every storm is a potential Katrina, every shooting is a potential massacre, and every financial problem is a potential Great Depression 2.

The well-to-do in the 1970s and 1980s didn't worry about stock market downturns as much because past history indicated that those who rode out a downturn (instead of dumping stocks) did well. However, I don't believe this will work now. The share prices of most companies are based heavily on expected quarterly profits (and not on the actual values of the companies to buyers). It's likely that the 'riding out the downturn' strategy will fail this time, resulting in permanent loss of wealth for most investors. This possibility contributes to the greater gloom and pessimism of this crisis compared with other post-WW II financial crises.

A related but different topic: Schadenfreud. Have you encountered people who talk about this crisis with glee in their voice, especially when they know you have lost much of your wealth? These are people who never saved a dime and have little equity in their homes. Their behavior (have fun, spend everything, don't save) appears to have been more sensible than mine. (My wife and I had over one million dollars saved and fully owned our home.) They are reveling in this crisis, because it brought down the wealthy and the savers/investors. The crisis affects them only a little, and they're happy to pay the price to be in this drama. (Remember those gambling behavior experiments where some people would pay money just to decrease the take of the biggest winner? This is a real example of such behavior.)

ISAAC writes:

Instead of boosting our confidence,
some panic-striken guys are pushing people's bullshit metre on high alert!

We aren't in 1930,
neither the panic-striken "Okies"
nor in the face of a "defining moment".

Govt. should support the Unemployment compensation, PP and social security.

Monte Davis writes:

"Could it be that politicians have mastered the art of scaring the pants off us, so that they can pose as saviors..?"

US politicians doing what Romans ("you don't want to go back to Marius and Sulla or the Civil War, do you?"), new Chinese dynasties ("warlords or my Mandate of Heaven, take your pick"), et al have been doing for millennia? You think?

Greg writes:

I think this post suffers slightly from the anxiety it describes. The current economic situation isn't great, but I would bet my last dollar people were losing more sleep and more worried during the Depression. There's a lot of anxiety and fear out there right now, but it's more often about making the next mortgage payment or being able to retire on time, not whether there'll be anything to eat.

spencer writes:

In 1974 I left government to work as an economist in a Boston investment management firm.

There were serious worries in the 1974 recession, bear market that we did not know how it would end and that it would end in rioting in the streets and hanging wall street economists from the lamp poles.

That type of serious consideration to an end of the capitalist system only happened in 1974, it did not happen in other recessions.

But it means that 1974 was more like the current cycle than the other ones. A few weeks ago at a lunch of mostly retired investment professionals we discussed how this downturn reminded all of us of 1974. The big point we found in common is that we did not know how it would end now just as we did not know how it would end in 1974. Other business cycles/bear markets were a product of Fed tightening and we were confident that once the Fed quit tightening and eased that things would return to normal. But now we have a cycle where the Fed has been easing for a year and it is not causing the cycle to turn or the stock market to bottom.

People who do not understand how this crises is so different do not understand how serious it is.

dcpi writes:

Bryan. Take a history course! Of course people were worried during the 1930s. That was the Depression. In the 40s people were busy fighting fascism rather than communism, though I recall Patton pushing for the invasion of Eastern Europe and a little police action called the Korean War.

Did you mean the 50s? Ever hear of Joe McCarthy? The Red Scare? The blacklists? Of course people were worried over communism then. Of course they worried over the economy. Follow baseball? Remember the Cincinnati Redlegs? ("Reds" was too political in the late 50s).

I personally remember the 70s and 80s, and yes people were more worried then than now. The 80-82 recession was pretty grim. There used to be ads on TV comparing the US to the fall of Rome. Phil Donoghue ran shows on the terrible economy. Nixon set wages and prices to calm nerves. How much more socialist can a Republican get?

As bad as things are, I do not see fear today as being as great as in the 70s or 80s and from talking with my grandparents while they were here, I know they thought the 70s and 80s were not as bad as some of the times prior.

That written, people are growing more fearful of communism and socialism on a daily basis, so the trend is moving in a worrying direction. They may have a point too, Obama is most certainly going to win the presidency and his background assuredly suggests that he is a late 70s early 80s fellow traveler of an earlier generations of change pushers better known as "reds".

Greg writes:

If we're going to go back to red scares, courtesy it seems of the McCain campaign, can we at least do away with asinine terms like "fellow traveler?"

Caliban Darklock writes:

We're scared because people keep saying things are terrible, but somehow we look around and don't see things being all that different. Oh! It's terrible! This thing happened! It will affect all of us!

Really? Because... um... since the "recession" started, my career has advanced, my pay has gone up, and in general I'm pretty happy. Am I just fooling myself? Are things about to get really bad for me? The media want me to think so.

But then, the media always want me to think things are terrible. They need a world in crisis, so they can tell me what to do. They never give me good advice, so I don't listen to them anymore. They are the proverbial boy who cried wolf.

This may be why I'm so willing to vote for Obama. I've heard doom and gloom for so long, I'll vote for someone saying "hope" whether I believe it or not. I want to believe it, but I'm also skeptical. In any case, "change" is inevitable, and the candidate who recognises it gets a leg up regardless.

Randy writes:

Lawrence,

"Come on Baby Boomers, there's no such thing as a free lunch. Guess who's paying for your piece of cake lives?"

You're painting with a pretty broad brush dude. It was our parents and grandparents who created and expanded the socialist state, and it is they who took most of the gravy. The boomers are the independant minded folks who said first, never trust anyone over 30, and then brought on the Reagan reactionary era. There's a reason that Obama is preaching to the younger generations. They don't know any better than to subscribe to his socialist nonsense. The boomers definitely do.

Randy writes:

As for scared, people have always been easily scared. If they weren't the political class would not be thriving.

Bill writes:

I would say that the fact that the press has been promoting the idea that we are in a bad recession for over a year has some factor in it.
What is scaring me personally are the unprecedented actions by the treasury and the way bank panics are hitting countries like Iceland, Brazil,Australia, Hungary, and Ukraine etc.

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