If a depression by any other name would feel as bleak, what do you call the current state of the U.S. economy? A number of influential American economists are no longer mincing words: They argue that deficit-obsessed politicians in Washington are setting the United States up for a repeat of the 1930s.
“What we're experiencing may not be a full replay of the Great Depression, but that's little consolation for the millions of American families suffering from a slump that goes on and on,” insists Nobel laureate Paul Krugman.
“At some point, the pain of high unemployment may lead to some new thinking in Washington – but until that time, welcome to the second Great Depression,” adds Dean Baker of the Center for Economic and Policy Research.
At first blush, the analogy seems ludicrous. The U.S. unemployment rate hit 25 per cent during the Dirty Thirties. It's now at 9.1 per cent, after peaking at 10.1 per cent in late 2009. So-called automatic stabilizers – from unemployment benefits to food stamps – mean economic downturns now resemble a big pothole more than a bottomless pit. There are no bread lines.
Still, the Depression mystique has an irresistible lure. It informs (and invariably illustrates) our understanding of economic suffering in ways statistics cannot. A CNN poll this week found that 48 per cent of Americans expect another Great Depression within a year. Who are experts to tell them otherwise?
“The use of the word ‘depression' is an abuse of the language,” says Sebastian Mallaby, director of the Maurice Greenberg Center for Geoeconomic Studies at the Council on Foreign Relations. “But that doesn't mean I'm happy about where we are. There is a painful problem of long-term unemployment.”
And on that level, the U.S. job market may actually be in worse shape than during the Depression. More than six million Americans, or about 45 per cent of the unemployed, have been out a job for more than six months. That's a higher proportion than at any point during the 1930s. In all, about 25 million Americans are unemployed or underemployed.
And Washington may be about to make the situation worse.
Neglecting the lessons of 1937
A slew of stimulus measures have expired and more will soon. Unless Congress acts otherwise, the last of them – extended unemployment benefits and payroll tax cuts – will end on Dec. 31.
Even before then, their impact may nullified if Republicans get their way and force the adoption of massive, immediate spending cuts in exchange for a deal to raise the $14.3-trillion (U.S.) federal debt ceiling by Aug. 2.
For economists of the Krugman-Baker school, 2011 is shaping up to look worryingly like 1937. Then, as now, politicians and policy makers mistook the absence of negative growth for a nascent recovery. They turned to slashing deficits and snuffing out the perceived threat of inflation. That Mistake of 1937 drove the economy back into the red.
Politicians on Capitol Hill seem strangely impervious to warnings of 1937 redux. Neither the news that the U.S. economy grew at an anemic 1.8 per cent in the first quarter, nor the fact that job creation in May was four times below the rate needed to keep up with population growth, tempered calls for spending cuts.
The White House is increasingly worried. No postwar president has won re-election with an unemployment rate above 7.2 per cent. But the policy debate on Capitol Hill, to the extent there has been one, is over. Congress is hell bent on deficit reduction. The best Barack Obama's administration can hope for is to moderate the pace of spending cuts.
