Nexus: Chapman's Journal of Law and Public Policy

How close has the current recession come to becoming “The Great Depression 2.0?” If one accepts the premise that “depression” is a term of art used to describe a paralyzing fear of the unknown so severe that consumers, businesses, and investors panic to cause normal self-correcting mechanisms (like lower interest rates, inventory resupply, and cheap prices) to be overwhelmed by a loss of confidence, then perhaps the characterization of the current situation is crucial. If avoidance of a semantic classification can curtail a wave of scared consumer behavior, then one should proceed with caution before announcing the Great Depression circa now. However, for the 9.8 percent of Americans who are currently unemployed, this classification is probably meaningless, for scholastic semantics will not put food on the table or pay the utility bill.

In the day to day battle of semantics and comparisons, people ranging from the foremost public figures to bona fide unknown factory workers discuss the situation of where we stand now in comparison to the plight suffered by our relatives eighty years ago. Perhaps comparisons between the two eras are fruitless musings of avid scholars or perhaps they hold valuable lessons for policy makers navigating the trepid waters of our current economy. Christina Romer, who is the current head of President Obama’s Council of Economic Advisers and a past scholar on the Great Depression, offers an interesting perspective on where we stand today juxtaposed the suffering of the past and what practical lessons can and should be learned.

When comparing 1929 to 2007-2009, Romer posits that the initial blow to consumer confidence was far greater now than then. In 1929, stock prices fell a third from September to December, but far fewer Americans then owned stock than Americans own now. Furthermore, from December 1928 to December 1929, household wealth decreased 3 percent as compared to the 17 percent loss realized across households between December 2007 and December 2008. Furthermore, as credits markets froze, stock prices collapsed resulting in 23 percent decrease in the Dow Jones industrial average from the pre-Lehman Brothers’ bankruptcy. Financial panic infiltrated popular culture and resulted in a decrease in the Conference Board’s index of consumer confidence from 61.4 in September 2008 to 25.3 in February 2009. Consumer spending on big-ticket items dropped at a 12 percent annual rate in the third quarter of 2008 and a 20 percent rate in the fourth quarter.

However, Romer argues that despite such huge declines, we have managed to avoid the free-falling crisis of 1929 largely due to countervailing government actions. Fear of the unknown disarms the stabilizing tendencies of self-correcting private markets and Romer argues that only the government can protect the economy as a whole since most companies and individuals engage in self-defeating behavior of self-protection. In the early 1930s, the government’s inability to perform this role transformed the recession into a depression. Not until Franklin Roosevelt closed all the banks on March 5, 1933 did the government start inducing change. Over the past year, something analogous happened to FDR’s 1933 intervention when current government interventions—like the Federal Reserve buttressing a failing credit system, the Troubled Assets Relief Program, Obama’s “stimulus” plan and bank stress test—aimed to reassure the public, restore confidence, and curb the fear perpetuating a free fall. But have these efforts really restored confidence or just quashed terror? On one hand, the consumer confidence has rebounded to 53.1 in September and housing prices have even increased for the past three months according to the Case-Shiller index. On the other hand, unemployment is an abysmal 9.8 percent according to the most recent figures and the strength of recovery is still unclear.

In uncertain times, Romer suggests we should learn from the past. In an address given to the Brooking Institution in March 2009, Romer stressed the necessity for monetary policy and fiscal expansion while warning about cutting back on stimulus too soon. She also argued that financial recovery and real recovery go hand in hand with worldwide expansionary policy sharing both the burdens and benefits of recovery.

However, Romer posits that despite the political and tactical lessons to be learned from looking at the past, the greatest lesson is perhaps the simplest—the Great Depression eventually ended. Despite the devastation in wealth, financial markets, and overall diminution of confidence in capitalism, the economy eventually rebounded. Such a fact should give Americans hope that not only have we not entered an era of a second great depression, but also that we will weather the storm and come out stronger than before.

Sources:

Christina D. Romer, Lessons from the Great Depression for Economic Recovery in 2009, Presented at the Brooking Institution, Washington, D.C., March 9, 2009

Robert J. Samuelson, Why There Was No Depression, Wash. Post, Oct. 5, 2009, at A19.