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January 7, 2009, 6:30 am
October Hysteria in Hindsight
By Casey B. Mulligan

Casey B. Mulligan is an economist at the University of Chicago.

After Lehman failed and “credit markets froze” in the second half of September 2008, many people proclaimed that a second Great Depression would unfold. In hindsight, we readily see that at least one of the purported pathways to depression was never followed.

During the first days of October 2008, it was claimed that businesses would not be able to borrow from banks even for basic operational expenses, such as making their payrolls. As employees had to work without pay (so the story goes), the businesses patronized by those employees would suffer, and the downward spiral would continue. As a presidential candidate, Barack Obama said that “the credit market is seized up and businesses, for instance, can’t get loans to meet payroll.” It was even suggested that “recession-proof” employers like colleges and municipalities would not be able to pay their employees.
It is true that payroll employment fell by about 850,000 in October and November — and that’s serious as compared with the last couple of recessions — but the payroll spending data show that the employment loss was small compared to the spending collapse that was forecast in early October. The fact is that more than 136 million workers received their paychecks — more than $1.3 trillion worth in October and November combined — essentially the same aggregate payroll that was paid out in the two months prior to Mr. Obama’s warning.

None of the above denies or confirms that our economy is headed for economic depression, because there are multiple pathways for getting there. Nor does it deny that the Treasury TARP might help in some way. But it does refute one of the scariest pathways to Depression — a collapse of payroll spending — that politicians from both parties alarmingly described to the American public in order to justify spending $700 billion of taxpayer funds on a bailout of American banks.

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