Sunday, October 16, 2011

Can We Credibly Compare the Current Economic Crisis to the Great Depression?

It's long been cliché to remark that our current recession is the worst economic downturn since the Great Depression. Indeed, President Obama, while a candidate and once in office, incessantly harped about how today's economy is the worst since the 1930s. While I think most people realize the magnitude of the current crisis --- my best comparison is to 1990-91, when I can literally recall people fleeing California's recession by the truckload --- it strains reason to endlessly hammer away at the Great Depression analogy. And that's why, as sympathetic as I am to the historical scale of our dislocation, I'm still not convinced by arguments like Joe Nocera's, at New York Times, "The 1930s Sure Sound Familiar." Nocera discusses Since Yesterday, a history of the 1930s by Frederick Lewis Allen. After a bunch of nostalgic whimpering, Nocera gets down to what's really bugging him:
What dominates “Since Yesterday” — as it must dominate any history of the Great Depression — is the government’s responses to the crisis. Herbert Hoover was “leery of any direct governmental offensive against the Depression,” writes Allen. “So he stood aside and waited for the healing process to assert itself, as according to the hallowed principles of laissez-faire economics it should.” Sticking to his convictions, Hoover allowed the country to sink deeper and deeper into Depression, becoming in the process one of its victims — “along with the traditional economic theories of which he was the obstinate and tragic spokesman.”

Then came Roosevelt, untethered to any economic theory and willing to try anything to get people back to work. Allen describes the alphabet soup of agencies he created, the deficits he generated, the regulations he enacted. The economy, which bottomed out in 1932, steadied and then began to grow until, by 1937, it appeared that the Great Depression had ended.

Allen then takes us through the terrible days of late 1937, when the economy collapsed again. “Roosevelt’s Depression,” businessmen called it, blaming it on a business tax they particularly loathed. In fact, Allen makes the convincing case that the real problem was that Roosevelt had tried to do something business wanted: balance the budget. Shrinking government spending dried up demand. And not until the following spring, when he reversed course and decided to “go in for heavy spending again,” did conditions begin to improve.

The tragedy of Washington today, as the supercommittee begins its task of finding $1.2 trillion in cuts, is that nobody seems to remember the lessons of “Since Yesterday” — and most other books about the Great Depression.
When I think back to the 1930s, I don't necessarily pine for the return of Franklin Roosevelt. Economists differ on the downturn of 1937, and from my recollection it wasn't until the economic mobilization of World War II that the American economy really recovered --- and hence it was war mobilization, and not Democrat industrial policies, that finally brought an end to the era. That said, I'm not an economist. But there was a good piece from Bradley Schiller back shortly after Obama took office, "Obama's Rhetoric Is the Real 'Catastrophe'." What's interesting is the incomparability between the scale of crisis then to today:
President Barack Obama has turned fearmongering into an art form. He has repeatedly raised the specter of another Great Depression...

This fearmongering may be good politics, but it is bad history and bad economics. It is bad history because our current economic woes don't come close to those of the 1930s. At worst, a comparison to the 1981-82 recession might be appropriate. Consider the job losses that Mr. Obama always cites. In the last year, the U.S. economy shed 3.4 million jobs. That's a grim statistic for sure, but represents just 2.2% of the labor force. From November 1981 to October 1982, 2.4 million jobs were lost -- fewer in number than today, but the labor force was smaller. So 1981-82 job losses totaled 2.2% of the labor force, the same as now.

Job losses in the Great Depression were of an entirely different magnitude. In 1930, the economy shed 4.8% of the labor force. In 1931, 6.5%. And then in 1932, another 7.1%. Jobs were being lost at double or triple the rate of 2008-09 or 1981-82.

This was reflected in unemployment rates. The latest survey pegs U.S. unemployment at 7.6%. That's more than three percentage points below the 1982 peak (10.8%) and not even a third of the peak in 1932 (25.2%). You simply can't equate 7.6% unemployment with the Great Depression.
It goes on like that (here). And Schiller argues that the administration's economic fearmongering is actually dangerous, in how it perverts economic expectations and consumer confidence.

But then again, things are bad, right? Just not as bad as the 1930s? Well, I'm interested in a different comparison being made, that the U.S. might be entering into a long period of sustained high unemployment, and that the American economy could be resembling the European economies after the oil shocks of the 1970s. The major industrial states like France and Germany became accustomed to long-term (secular) unemployment rates of often 10 percent or more. Thinking about that, David Leonhardt, at New York Times, gives us another reason not to compare the current era to the 1930. The economy of the Great Depression was in fact one of the most technologically productive ever, "The Depression: If Only Things Were That Good." The counter-intuitive economic innovation of the day, combined with the drastic shedding of dead weight bloat and over-appreciation in the economy, laid the basis for the sustained recovery by the 1940s:
UNDERNEATH the misery of the Great Depression, the United States economy was quietly making enormous strides during the 1930s. Television and nylon stockings were invented. Refrigerators and washing machines turned into mass-market products. Railroads became faster and roads smoother and wider. As the economic historian Alexander J. Field has said, the 1930s constituted “the most technologically progressive decade of the century.”

Economists often distinguish between cyclical trends and secular trends — which is to say, between short-term fluctuations and long-term changes in the basic structure of the economy. No decade points to the difference quite like the 1930s: cyclically, the worst decade of the 20th century, and yet, secularly, one of the best.

It would clearly be nice if we could take some comfort from this bit of history. If anything, though, the lesson of the 1930s may be the opposite one. The most worrisome aspect about our current slump is that it combines obvious short-term problems — from the financial crisis — with less obvious long-term problems. Those long-term problems include a decade-long slowdown in new-business formation, the stagnation of educational gains and the rapid growth of industries with mixed blessings, including finance and health care.

Together, these problems raise the possibility that the United States is not merely suffering through a normal, if severe, downturn. Instead, it may have entered a phase in which high unemployment is the norm.

On Friday, the Labor Department reported that job growth was mediocre in September and that unemployment remained at 9.1 percent. In a recent survey by the Federal Reserve Bank of Philadelphia, forecasters said the rate was not likely to fall below 7 percent until at least 2015. After that, they predicted, it would rarely fall below 6 percent, even in good times.

Not so long ago, 6 percent was considered a disappointingly high unemployment rate. From 1995 to 2007, the jobless rate exceeded 6 percent for only a single five-month period in 2003 — and it never topped 7 percent.

“We’ve got a double-whammy effect,” says John C. Haltiwanger, an economics professor at the University of Maryland. The cyclical crisis has come on top of the secular one, and the two are now feeding off each other.

In the most likely case, the United States has fallen into a period somewhat similar to the one that Europe has endured for parts of the last generation; it is rich but struggling. A high unemployment rate will feed fears of national decline. The political scene may be tumultuous, as it already is. Many people will find themselves shut out of the work force.
And if this is so, the solution is not to become more like the European Union nations. That is, the Obama administration's massive debt and deficit policies are more likely to turn the U.S. into France, or heaven forbid, Greece. And thus, back to Joseph Nocera pining for the governmental activism of the 1930s. He's wrong in his comparisons, and he's wrong in his proposals. We need to invigorate the private sector and productive individualism and innovation. We need to see 1000s of Steve Jobs bloom. I'm not so pessimistic that we won't see that happen. I expect the U.S. to have another decade of booming growth similar to the 1990s. We just need to let markets work and get the hell out of the way.

RELATED: At The Hill, "Obama wants $35 billion for teachers, first-responders first" (via Memeorandum). Sounds laudable, but more of the same, unfortunately.


Opus #6 said...

If Obamacare stays in place, we will indeed, I predict, have continued high unemployment.

Get rid of Obamacare, stifling regulations and the union stranglehold on industry and I predict another boom coming to America.