John B. Judis: Doom! Our Economic Nightmare is Just Beginning
John B. Judis is a senior editor at The New Republic and a visiting scholar at the Carnegie Endowment for International Peace.
...TODAY’S RECESSION does not merely resemble the Great Depression; it is, to a real extent, a recurrence of it. It has the same unique causes and the same initial trajectory. Both downturns were triggered by a financial crisis coming on top of, and then deepening, a slowdown in industrial production and employment that had begun earlier and that was caused in part by rapid technological innovation. The 1920s saw the spread of electrification in industry; the 1990s saw the triumph of computerization in manufacturing and services. The recessions in 1926 and 2001 were both followed by “jobless recoveries.”
In each case, the financial crisis generated an overhang of consumer and business debt that—along with growing unemployment and underemployment, and the failure of real wages to rise—reduced effective demand to the point where the economy, without extensive government intervention, spun into a downward spiral of joblessness. The accumulation of debt also undermined the use of monetary policy to revive the economy. Even zero-percent interest rates could not induce private investment.
Finally, in contrast to the usual post-World War II recession, our current downturn, like the Great Depression, is global in character. Financial disturbances—aggravated by an unstable international monetary system—have spread globally. During the typical recession, a country suffering a downturn might hope to revive itself by cutting its spending. That might temporarily increase unemployment, but it would also depress wages and prices, simultaneously cutting the demand for imports and making a country’s exports more competitive against those of its rivals. But, when the recession is global, you get what John Maynard Keynes called the “paradox of thrift” writ large: As all nations cut their spending and attempt to devalue their currencies (which makes their exports cheaper), global demand shrinks still more, and the recession deepens.
Politicians today might not want to remember, but, in the first phase of the Great Depression, the major economies, oblivious to the paradox of thrift, took steps that made things much worse. In the United States, Hoover, who was a Republican progressive in the tradition of William Howard Taft rather than Calvin Coolidge, responded initially to the stock market crash and the drop in employment by proposing a tax cut and a modest public works program. He also tried to bring industry together to agree to invest and to maintain wages and prices. But, when firms continued to cut back, unemployment continued to rise, and tax revenues dropped—creating a budget deficit—Hoover and the Republicans turned to cutting government spending and raising taxes on the assumption that a government, like a business, should not respond to hard times by going further into debt. In a news conference in December 1930, Hoover declared, “Prosperity cannot be restored by raids upon the Public Treasury.” In fiscal year 1933 (which began in June 1932), federal spending actually decreased. By March 1933, when Franklin Roosevelt took office, the unemployment rate had climbed to 24.9 percent from 3.2 percent in 1929.
In Great Britain, the economy had begun to decline after 1925, when the Tory government, rejecting Keynes’s advice, decided to go back on the original pre-World War I gold standard. By raising the price of the pound in dollars or francs, the Tories priced British exports out of the world market. In May 1929, the Labour Party ousted the Conservative Party, whom voters blamed for the downturn. But Labour Prime Minister Ramsay MacDonald pursued many of the same policies as the conservatives. MacDonald was a socialist and blamed a “breakdown” in world capitalism for Britain’s ills, but he thought that as the head of capitalist Britain, he had to adhere to the gold standard and free trade, while cutting the budget....