Robert J. Samuelson: The Shadow of Depression





[Robert J. Samuelson is a contributing editor of Newsweek and Washington Post.]

We live in the shadow of the Great Depression. Americans' gloom does not reflect just 8.1 percent unemployment or the loss of $13 trillion worth of housing and stock market value since mid-2007. There is also an amorphous anxiety that we are falling into a deep economic ravine from which escape will be difficult. These worries may prove ill-founded. But until they do, they promote pessimism and the hoarding of cash, by consumers and companies alike, that further weaken the economy.

Our only frame of reference for this sort of breakdown is the Great Depression. Superficially, the comparison seems absurd. We are a long way from the 1930s, as Christina Romer, head of President Obama's Council of Economic Advisers, noted recently in a useful talk. Unemployment peaked at 25 percent in 1933. At its low point, the economy (gross domestic product) was down 25 percent from its 1929 high. So far, U.S. GDP has dropped only about 2 percent.

What's more, the Depression changed our thinking and institutions. The human misery of economic turmoil has diminished. "American workers [in the 1930s] had painfully few of the social safety nets that today help families," Romer said. Until 1935, there was no federal unemployment insurance. At last count, there were 32 million food stamp recipients and 49 million on Medicaid. These programs didn't exist in the 1930s.

Government also responds more quickly to slumps. Despite many New Deal programs, "fiscal policy" -- in effect, deficit spending -- was used only modestly in the 1930s, Romer argued. Some of Franklin Roosevelt's extra spending was offset by a tax increase enacted in Herbert Hoover's last year. The federal deficit went from 4.5 percent of GDP in 1933 to 5.9 percent in 1934, not a huge increase.

Contrast that with the present. In fiscal 2009, the budget deficit is projected at 12.3 percent of GDP, up from 3.2 percent in 2008. Some of the increase reflects "automatic stabilizers" (in downturns, government spending increases and taxes decrease); the rest stems from the massive "stimulus program." On top of this, the Federal Reserve has cut its overnight interest rate to about zero and is lending directly in markets where private investors have retreated, including housing.

Government's aggressive actions should reinforce some of the economy's normal mechanisms for recovery. As pent-up demand builds, so will the pressure for more spending. The repayment of loans, lowering debt burdens, sets the stage for more spending. Ditto for the runoff of surplus inventories.

So, are Depression analogies far-fetched, needlessly alarmist?..



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