How Close Are We To Another Great Depression?
by Nicholas Adams Judge
Comparisons of today’s economy with that of the Great Depression have become commonplace these days. It is the historical precedent that most closely resembles our current predicament, in terms of the gravity of the situation. But in many ways, the historical analogy is a bit misleading.
Let’s make a more in depth comparison, so we forex traders can bring a more suitable historical context to our reading of today’s economic details.
First things first: Here is the GNP data for the US economy during the pertinent part of the Great Depression:
1929 $104.4
1930 $94.4
1931 $87.8
1932 $74.8
1933 $72.7
1934 $79.5
1935 $87.8
1936 $99.5
We can see from these numbers that, in terms of the macroeconomy, things were in near total free-fall from 1931-1932. That’s an important point. While both todays and 1929’s initial shocks to the economy were of the same general magnitude – 2008’s was actually greater – what morphed the Great Depression from recession to depression was the US government’s inept response. Not only did Hoover prove to be one of the country’s worst presidents, the Democrats were just starting to feel their way towards Keynesian economics.
A good example of the government’s incompetence during the beginning of the depression can be found in the debate over agricultural dumping policies. A bill proposing the government dump excess corn and cotton was rejected by the Hoover Administration, despite the obvious need for such a move. Then, in 1930, the Smoot-Hawley Act was passed, creating tarrifs that everyone knew would lead to retaliatory measures from countries to which we imported our cotton and corn. The result was the government being forced to buy, and then dump, those same two commodities to make up for a flooded domestic market. Losses from the program were around $300 million. All the pain, with none of the gain.
When the Democrats came into power, they began to right the ship of state, but their programs failed to put an adequate dent in the labor market problems in the short term for two reasons. First, mainstream economists now agree, they were far too modest. Second, as they began to slowly work, Roosevelt beat a retreat back to conservative economic principles – a focus on a balanced budget, mainly – in 1936. The result was another two years of a further deepening of the recession.
In comparison, today policy responses to recessions are considerably more developed. We know what works and what doesn’t. Even the Bush Administration responded on a scale the Hoover Administration never would have dreamed of, even if their economic policies are basically –even literally – being run by Goldman Sachs.
More importantly, a responsible – that is, responsive – government is being swept into power just several months after everything started spinning out of control, not three years
Furthermore, there has been no comparable raising of trade barriers that would further deepen the recession, like the Smoot-Hawley act did at the beginning of the Great Depression.
So, in conclusion, the initial blow to the economy was larger in 2008 than it was in 1929. That’s about where the comparison stops, though. The world’s biggest governments are responding with some mild degree of competence this time around. China’s government, for instance, is spending over $500 billion on a stimulus package. Hopefully the US will follow suit immediately.
It will be a depressing sign – Ooooh! Pun! – if the stimulus bill is only $300 billion. That is the bare minimum needed right now, and would be a sign that the new government is favoring political moderation over genuine policy concerns. Even if that’s the size of the final bill, though, the fact that it is happening now will make all the difference, at least in comparison to 1929, and we will likely not see a full depression in this country. If the government acts wisely, it can even avoid a late seventies/early eighties type of malaise.
I’ll believe that when I see it, though.
Tags: depression
About the Author - Nicholas Adams Judge
Nicholas Adams Judge is an editor and analyst for OnlineForexTrading.com. He is a Phd student at the Political Science Department at the University of Wisconsin - Madison. His research interests include political economy, statistical methods and American politics.
December 6th, 2008 at 7:16 pm
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