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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

March 12, 2009 at 8:00 AM

Don’t be depressed: A primer on the 1930s and our very own special mess

A new Rasmussen poll says a majority of Americans believe the nation is at least somewhat likely to fall into a 1930s-style depression in the next few years. Given the state of history instruction in our schools, I take this to mean most poll respondents are really, really scared, rather than making an informed comparison with the Great Depression. I’m agnostic on the issue. So here’s a quick cheat sheet:

Ways the current unpleasantness is like the Great Depression: It came after years of lax regulation, unsustainable bubbles, widening income disparity, widespread fraud and collapses in housing prices and banking. Interestingly, both times in history were marked by a “crisis of the old order,” in Arthur Schlesinger Jr.’s apt phrase, where the gurus of the free market came to grief and were ultimately baffled by the turn of events.

How it’s different (in a good way): America doesn’t face an agricultural crisis when half the population lives on farms; we’re a much more affluent nation than in the 1920s and 1930s; we’re unlikely to repeat the policy mistakes of 1930, such as the Smoot-Hawley tariff, the gold standard, and the Hoover (and sometimes FDR) belief that a balanced budget would bring recovery (it wouldn’t). Thanks to the response to the Great Depression, government has many more tools to avoid the worst of the 1930s; among them are federally insured bank accounts, Social Security and the realization that government must stimulate the economy when the private sector has collapsed.

How it’s different (in a not-so-good way): The world economy is much more intertwined than in the ’30s — when Roosevelt could publicly torpedo a world economic conference (he wanted to focus on domestic issues, and not be bound by gold-standard purists). Such a stance is unthinkable today. China owns $2 trillion in U.S. debt and depends on us as a market, to use one wee example. Yet nasty downturns have a way of creating discord and instability — so stay tuned. America and Europe are divided over first pushing for more coordinated stimulus or more coordinated regulation. China faces potential unrest if it enters a serious downturn.

The financial system is much more complex than 80 years ago, much larger, and fixing it will take more than a bank holiday, sorting out the good banks and providing federal insurance. Also, average Americans have a lot to lose, having been encouraged into the stock market and given 401(k)s in place of pensions — things the Depression generation never would have trusted. Now we’re poorer than a few years ago, and it will pinch. And America is deeply in debt, arguably overstretched in its international commitments (but what’s the alternative?), no longer endowed with a huge supply of cheap oil at home, and facing follow-on challenges of world peak oil and climate change.

So this is our very own mess. Congratulations! It will bring tremendous challenges, reshuffle our lives much more than we realize, and present amazing opportunities if we care to take them. It won’t be a repeat of the 1930s, I can promise that.

Today’s Econ Haiku:

At the G-20

Will it be more stimulus

Or a cold shower?

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