Getting History Wrong

I am baffled by the nearly incessant description of our economy today as reminiscent of the Great Depression.  The title of today's Rutland Herald editorial is Revisiting the Depression and it starts

It is the worst financial crisis since the Great Depression. That's the description economists now commonly use for the mortgage meltdown and the larger credit crisis that have wracked the nation.  The crisis hasn't brought us to depression yet

To be fair, it is probably accurate to say that this is the worst financial crisis since the Great Depression, although cleaning up the S&L mess in the early 1990s cost taxpayers about $300 billion (in today's dollars).  The cost to taxpayers thus far to clean up the mess today is $0 (although Fannie and Freddie's problems, and the recently passed bailout plan, could lead to a very expensive cleanup).

But many politicians and commentators, including the editorial, go far beyond the financial sector in the Depression analogy and compare the general state of the economy as the worst since the Depression. Economic indicators are not great, but they are far from the worst we have seen since the 1930s.   They are still better than they were in the early 1990s, for example.

In the process of extending this metaphor they give an economic history of the Great Depression that they may have learned in a high school history class, but it is a history that is far from the consensus among economists and economic historians.

For example, the editorial states

The Depression showed what can happen when policymakers place their trust in the self-correcting magic of the market.

Actually, it's pretty clear that the Depression would have been just a run-of-the-mill recession had it not been for major policy errors, especially on the part of the Federal Reserve.   This view was first articulated by Milton Friedman and Anna Schwartz in the 1960s in a chapter of their book The Monetary History of the United States.  The current Fed Chairman, Ben Bernanke, essentially agrees, although his research has gone beyond Friedman's.  In the 2002 Bernanke speech I cite, Bernanke's closing sentences are worth reading:

Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again.

Comments

[Sheldon Katz]

Art,

Art-fully done, as usual. I would only add that the 1929 Smoot-Hawley Act, which significantly raised import tariffs, was an important contributing factor to the depression. And FDR's interventionist policies prolonged the depression.

Today's economic problems pale in comparison to the depression, a tribute to the resiliency of the (still largely but under daily assault) free market economy.

[Chris Campion]

Why is it newspapers are allowed to print what amounts to lies when they speak to historical events, events where the truth can be easily discovered if one reads a book? The quote from the Herald about Depression-era policies couldn't be more wrong if it said Mickey Mouse was President in 1932. I guess the Opinion page needn't be fact-checked.

[bob hardy]

Hi Art: Well said, born as second mouth to feed of a depression family, father
commuted to work from NJ to NYC and worked for a week's pay of $128 to clothe and feed a family of 4 and he was lucky! Driving over the Pulaski Highway and seeing a whole city of cardboard huts for those living in the Jersey swamps with no other place to go,
one car for 3 generations. Yes, this is difficult but it is no depression. All the best, Bob Hardy

[T. Shea]

Doesn't ANYONE remember the days of Jimmy Carter? How can this be the worst since the depression, when it is not even the worst in my lifetime?

[Woodstock Libertarian]

Yep, I remember, it was the first year I spent in Vermont. 20% prime interest rate. Gas lines with people actually getting killed in the gasoline lines, no jobs for college graduates, what was the word?

Oh ya, 'malaise'...

Doesn't seem quite the same when I'm stuck in the traffic jam that is present-day West Lebanon.

Hmmmm, what's the difference? Oh ya, a Democratic vs. a Republican President. One's at fault, one's a victim.

Then it was karma, now it's an evil conspiracy.

[Daisy Gallop]

My Dear Young Friends,

History, from my end of the spectrum, does have a way of repeating itself.

The Great Depression didn't start at the bottom. This being the equivalent of 1929, 1932 (~2012) is yet to come.

Nobody at Columbia Marble Company would have dreamed of their closure in 1929, but when my grandfather walked to the house with his drafting tools in his arms in 1931, the family knew that times had changed.

Fond Best Wishes
Daisy G.