Recession or Depression? Part 1

 

“Unlike during the Great Depression the government is now a huge part of the economy. And officials have moved quickly, if clumsily, to contain the crisis.” – Robert J. Samuelson.

In the October 13th Newsweek, Robert J. Samuelson asks a provocative question – Is This a Replay of 1929?  The short answer is No. There are many differences.

Watching the slipping economy and Congress’s epic debate over the Treasury’s unprecedented $700 billion financial bailout, it is impossible not to wonder whether this is 1929 all over again. Even sophisticated observers invoke the comparison. Martin Wolf, the chief economic commentator for the Financial Times, began a recent column: “It is just over three score years and ten since [the end of] the Great Depression.” What’s frightening is not any one event but the prospect that things are slipping out of control. Panic—political as well as economic—is the enemy.

There are parallels between then and now, but there are also big differences. Now, as then, Americans borrowed heavily before the crisis—in the 1920s, for cars, radios and appliances; in the past decade, for homes or against inflated home values. Now, as then, the crisis caught people by surprise and is global in scope. But unlike then, the federal government is now a huge part of the economy (20 percent vs. 3 percent in 1929) and its spending—for Social Security, defense, roads—provides greater stabilization. Unlike then, government officials have moved quickly, if clumsily, to contain the crisis.

Unlike postwar recessions, the Depression submitted neither to self-correcting market mechanisms nor government policies. Why?

Capitalism’s inherent instabilities were blamed—fairly, up to a point. Over borrowing, overinvestment and speculation chronically govern business cycles. Herbert Hoover was also blamed for being too timid—less fairly. In fact, Hoover initially expanded public works to combat the slump. The real culprit was the Federal Reserve. Depression scholarship changed forever in 1963 when economists Milton Friedman and Anna Schwartz argued, in a highly detailed account, that the Fed had unwittingly transformed an ordinary, if harsh, recession into a calamity by permitting a banking collapse and a disastrous drop in the money supply.

The Great Depression resulted from the perverse mix of a weak economy and government policies that magnified the weakness and that were only partially neutralized by the New Deal. If we can avoid a comparable blunder, the great drama of these recent weeks may prove blessedly misleading.

photo credit: jillclardy