Allan H. Meltzer: What Happened to the 'Depression'?
[Mr. Meltzer is a professor of economics at Carnegie Mellon University and the author of "A History of the Federal Reserve" (University of Chicago Press, 2004).]
Day after day, economists, politicians and journalists repeat the trope that the current recession is the worst since the Great Depression. Repetition may reinforce belief, but the comparison is greatly overstated and highly misleading. Anyone who knows even a bit about the Great Depression knows that this is false.
The facts we face today are very different than the grim reality Americans confronted between 1929 and 1932. True, this recession is not over. But it would have to get improbably worse before it came close to the 42-month duration of the Great Depression, or the 25% unemployment rate in 1932. Then, the only safety net was the soup line.
The current recession is also much less severe than the 1937-38 Depression. A more accurate comparison is to the 1973-75 recession. Today's recession is as deep and most likely won't be much longer than the one we experienced some three decades ago. By pointing this out, I do not intend to minimize the damage that the economic crisis has had on individuals and businesses. But as policy makers make decisions in order to alleviate the recession, they are not helped when economists overstate its severity.
The table nearby compares the current recession, the 1937-38 depression and some past severe postwar recessions. If the recession ends this summer—as many experts predict—the record will show that it was not very different from other postwar recessions, but very different from the 1937-38 and 1929-32 Depressions.
So why do many opinion makers insist on inaccurate and frightening analogies that overstate the severity of present conditions? I believe there are several reasons.
First, there is a strong political motivation to make this recession out to be worse than it actually is. The Obama administration wanted to make it appear as though it saved us from an incipient disaster, so it overstated its achievements. The White House also wanted to foist its huge "stimulus" program on the country in order to redistribute income. That pleased many Democrats, but did very little to restore growth.
Many others repeated the administration's hyperbolic claims. One reason is because there is genuine uncertainty about what has happened and what is likely to come. Short-term forecasts have major errors, and extrapolation of current data adds to misinformation. Then there are economists who would like to see government take a larger role in the economy. They've chosen to use the recession as a pretext for arguing for this change.
New York Times columnist Paul Krugman and the International Monetary Fund repeatedly proclaimed that more government spending was a necessity. Most economists now believe that the recession is expected to end before much of the government spending takes hold. And while the improvement in recent GDP data reflects a big increase in government spending, consumer spending declined again in the second quarter. The $787 billion of fiscal stimulus has done little for consumers. Keynesian economists always fail to recognize the powerful regenerative forces of the market economy. The financial press—many of whom share their same political assumptions—endlessly reproduces their beliefs...
Read entire article at The Wall Street Journal
Day after day, economists, politicians and journalists repeat the trope that the current recession is the worst since the Great Depression. Repetition may reinforce belief, but the comparison is greatly overstated and highly misleading. Anyone who knows even a bit about the Great Depression knows that this is false.
The facts we face today are very different than the grim reality Americans confronted between 1929 and 1932. True, this recession is not over. But it would have to get improbably worse before it came close to the 42-month duration of the Great Depression, or the 25% unemployment rate in 1932. Then, the only safety net was the soup line.
The current recession is also much less severe than the 1937-38 Depression. A more accurate comparison is to the 1973-75 recession. Today's recession is as deep and most likely won't be much longer than the one we experienced some three decades ago. By pointing this out, I do not intend to minimize the damage that the economic crisis has had on individuals and businesses. But as policy makers make decisions in order to alleviate the recession, they are not helped when economists overstate its severity.
The table nearby compares the current recession, the 1937-38 depression and some past severe postwar recessions. If the recession ends this summer—as many experts predict—the record will show that it was not very different from other postwar recessions, but very different from the 1937-38 and 1929-32 Depressions.
So why do many opinion makers insist on inaccurate and frightening analogies that overstate the severity of present conditions? I believe there are several reasons.
First, there is a strong political motivation to make this recession out to be worse than it actually is. The Obama administration wanted to make it appear as though it saved us from an incipient disaster, so it overstated its achievements. The White House also wanted to foist its huge "stimulus" program on the country in order to redistribute income. That pleased many Democrats, but did very little to restore growth.
Many others repeated the administration's hyperbolic claims. One reason is because there is genuine uncertainty about what has happened and what is likely to come. Short-term forecasts have major errors, and extrapolation of current data adds to misinformation. Then there are economists who would like to see government take a larger role in the economy. They've chosen to use the recession as a pretext for arguing for this change.
New York Times columnist Paul Krugman and the International Monetary Fund repeatedly proclaimed that more government spending was a necessity. Most economists now believe that the recession is expected to end before much of the government spending takes hold. And while the improvement in recent GDP data reflects a big increase in government spending, consumer spending declined again in the second quarter. The $787 billion of fiscal stimulus has done little for consumers. Keynesian economists always fail to recognize the powerful regenerative forces of the market economy. The financial press—many of whom share their same political assumptions—endlessly reproduces their beliefs...