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Jon Talton

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

June 24, 2010 at 10:29 AM

Ghosts of recessions past

Not knowing the future, we look to the past. What is this thing called the Great Recession and what can we expect from a recovery? Unfortunately, as much as economists and others try to find comparisons, they’re ultimately unsatisfying. As Mark Twain would put it, history doesn’t repeat itself but it rhymes. Let’s look at a few.

Recent history: The 2001 downturn shared a burst bubble, in that case the dot-com, as well as corporate criminality with the likes of Enron. But it was short-lived and saw nowhere near the damage of the Great Recession. It did see a “jobless” recovery, however — an ominous portent. Only 1 million net new jobs would be created in the expansion that followed. And the big money moved out of dot-coms and into real estate, beginning the mania that would help being on our current calamity.

The S&L downturn: Like the Great Recession, this 1991 event grew out of a financial collapse and one where regulators were forced to look the other way by politicians and ideology. It was also the first sign of the increasing financialization of the economy that had begun in the 1980s. But it’s small potatoes compared with today’s mess and was contained to a small portion of the economy. It was followed by the most robust rebound of the post-World War II era. Today’s globalization and China’s entry as a major economic competitor were years away.

The 1980-82 recessions. These are often compared in severity with the Great Recession, but the differences are important. They began with high interest rates and high inflation and ended with the worst post-World War II downturn to date as Paul Volcker’s Federal Reserve vanquished inflation. It was a Fed-induced recession, rather than the result of a financial or housing bubble. The American industrial base was largely intact and the middle class still strong. The U.S. trade balance was healthy. None of this is the case in the Great Recession. Most significantly, our latest downturn saw far faster job losses and has yet to even begin to see the rebound in employment chalked up after the end of the ’82 recession.

The Great Depression. This is the most similar modern event we have to the Great Recession. A decade of wild speculation, laissez-faire policies and rising income inequality ended in the near collapse of the world economic system. Still, the contrasts are critical. America was much poorer then, more rural, with a small federal government. The financial system was more decentralized. Policymakers were confounded by the crash and tried to fight it by tightening credit and focusing on balancing the budget. This helped turn a severe recession into a depression.

By 1932, “the old order” that had caused the disaster was thoroughly repudiated in the election and even the surviving financial titans had lost confidence in themselves. By contrast, Washington in 2008 was the center of a highly mixed economy with big government and big business in concert. Every policy mechanism was used to save the financial system and, they argued, the world economy. In succeeding, however, we saved what the Depression era called “banksters,” and they are doing business much as before, albeit without an overheated bubble.

Two other interesting differences: In 1929, when the crash hit, America was the world’s largest creditor nation. Through the Depression, it had a large, state-of-the-art productive base and skilled workers waiting for a rebound. That began in the mid-1930s — until FDR, an instinctive budget hawk who didn’t like John Maynard Keynes (who returned the sentiment) cut back the New Deal in 1937, causing a severe recession. Full recovery came with the ramp-up to World War II. Even so, the stock market didn’t recover its old highs until the 1950s and Depression survivors were always suspicious of it.

Finally, in the Depression, this mysterious thing called “the market,” meaning the collection of powerful bankers, investors and the shadow banking industry, didn’t hold the fate of nations hostage. That era’s version of this group had been swept away by the crash. Not so this time.

One common denominator is unemployment. Both the Great Depression and Great Recession mowed down jobs at levels not seen in other downturns of the past century. Depression joblessness was much worse, perhaps 25 percent in 1932. Contrary to the dreams of revisionists, the rate did improve through the New Deal. But it never fully recovered until the early 1940s.

Again, we’re a more affluent nation now and have a tattered but real social safety net. But it looks as if we face years of unemployment for millions of Americans. And that fact in the Depression led to political instability, particularly before 1932. Fascism, socialism and communism were all considered more viable than failed capitalism. To the real left’s eternal dismay, Franklin Roosevelt saved capitalism, even as he battled the “economic royalists.”

As for the “panics” of the 19th century and the Dutch tulip bubble, etc. — all trotted out as comparisons — no, the economy and the world were too different. We’re in undiscovered territory now. We can learn from the rhymes. But we’re also living verses with a new twist.

Today’s Econ Haiku:

That cool new iPhone

Complete with a ball and chain

That would be 3G

Comments | More in Bailout, Great Recession


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