Atlantic Monthly Crashed-and-Burned Watch (Mendacious Judicial Xenophobia from Clive Crook and the Odious Stuart Taylor, Jr. Edition)
links for 2009-08-11

Why Aren't We Undergoing Another Great Depression?

Paul Krugman's answer:

Averting the Worst: So it seems that we aren’t going to have a second Great Depression after all. What saved us? The answer, basically, is Big Government.... [T]he economic situation remains terrible... we’re... nine million jobs short of where we should be. And the job market still hasn’t turned around....

For all that, however, the latest flurry of economic reports suggests that the economy has backed up... from the... abyss. A few months ago the possibility of falling into the abyss seemed all too real.... [I]n the 1930s the trend lines just kept heading down. This time, the plunge appears to be ending after just one terrible year. So what saved us from a full replay of the Great Depression? The answer, almost surely, lies in the very different role played by government.

Probably the most important aspect of the government’s role in this crisis isn’t what it has done, but what it hasn’t done: unlike the private sector, the federal government hasn’t slashed spending.... All of this has helped support the economy in its time of need, in a way that didn’t happen back in 1930.... In addition to having this “automatic” stabilizing effect, the government has stepped in to rescue the financial sector. You can argue (and I would) that the bailouts of financial firms could and should have been handled better... while acknowledging that without these bailouts things would have been much worse. The point is that this time, unlike in the 1930s, the government didn’t take a hands-off attitude while much of the banking system collapsed. And that’s another reason we’re not living through Great Depression II.

Last and probably least, but by no means trivial, have been the deliberate efforts of the government to pump up the economy... the American Recovery and Reinvestment Act... was too small. Nonetheless, reasonable estimates suggest that around a million more Americans are working now than would have been employed without that plan — a number that will grow.... All in all, then, the government has played a crucial stabilizing role in this economic crisis. Ronald Reagan was wrong: sometimes the private sector is the problem, and government is the solution.

And aren’t you glad that right now the government is being run by people who don’t hate government?...

[W]e appear to have averted the worst: utter catastrophe no longer seems likely.

And Big Government, run by people who understand its virtues, is the reason why.

The loose end in Krugman's article is why there weren't more Great Depressions back in the old days, before big government. The answers, I think, are two:

  1. Business cycles are a disease of the post-agricultural economy--of the nonfarm economy. If you look back at the nonfarm unemployment rate before 1930, things look not as bad as the Great Depression but still pretty bad.

  2. Most countries had a form of "big government"--a military large in size relative to its nonfarm economy and an activist, interventionist central bank--reaching far back into the past.

  3. The U.S. was the only major industrial power without an activist, interventionist central bank before 1913--but the U.S. Treasury did give the baton to run monetary policy to the Morgan-Belmont syndicate in the 1890s and to Morgan in 1907, so we were not always without an activist, interventionist central bank.

  4. And the U.S. looks like the worst as far as pre-1930 business cycles are concerned, with 1874 and 1885 matching 1893 in terms of nonfarm unemployment and industrial distress.

For example, this shows the Weir-basis nonfarm unemployment rate back to 1890:


Fun and games in 1921-22, 1914-15m, 1907-08, and 1893-6 as well as 1885 and 1874...