WASHINGTON – Here’s today’s economic quiz: Was the 2007-09 Great Recession more damaging than the Great Depression of the 1930s?
Surely the answer is “no.” In the 1930s, unemployment reached 25 percent. By contrast, the recent peak in the jobless rate was 10 percent. Case closed.
Not so fast, objects economist J. Bradford DeLong of the University of California, Berkeley. “Fifty years from now, historians will ... write that President Franklin Roosevelt, Congress and the Federal Reserve provided a collective policy response that was, if not optimal, at least respectable. ... By contrast, they will [argue] that the responses of President Barack Obama, Congress and the Federal Reserve did not come up to the standard [set by] the mid-1930s policy-makers.”
Could DeLong be correct? The answer matters, because if he’s right, the economy -– despite its present strength -– faces a future of long-term sluggishness.
Writing in The Milken Institute Review, DeLong accepts that the rapid response of the Federal Reserve and Congress to the Great Recession prevented a second Great Depression. But his praise stops there.
We are now 11 years after the start of the crisis in 2007, and income per worker has risen only 7.5 percent. It had risen 10.5 percent 11 years after the 1929 crash.
What explains the gap, he argues, is a psychological hangover: “We are haunted by our Great Recession ... No unbiased observer projects anything other than slow growth, much slower than the years during and after World War II.”
“We seem to have fumbled the recovery from the recession,” he adds, blaming bad policy.
I’m sympathetic to DeLong’s analysis, but I think private caution may have some public virtue. It can dampen financial speculation and boom-bust cycles..
The slowdown has two main causes: first, reduced growth of the labor force, as baby boomers retire; and second, slower growth in productivity -– the economic efficiency that raises wages, salaries and profits. In the 1950s, productivity growth averaged nearly 3 percent a year; in the last decade, the average is less than 1 percent.
The slowdown in productivity growth – reflecting technology, management and worker skills – is not well understood but may also be independent of the Great Recession.
What’s particularly misleading is the contrast with the decades after World War II. Fifteen years of depression and war had left a huge backlog demand for cars, homes and appliances. The onset of the postwar baby boom further inflated demand. New technologies (television, plastics, air-conditioning, jet travel) boosted productivity.
All these developments triggered a strong expansion. The circumstances today are much different. Households are trying to restore their savings after the excesses of the housing bubble more than a decade ago. The demographics – mainly aging – have also moved against a stronger recovery.
The lesson of history remains that the World War II economic boom played an essential role in ending the Depression. It wasn’t that policy-makers were smarter then than they are now. In fact, the opposite may be true. In 1940, the unemployment rate still exceeded 14 percent. It’s doubtful that many Americans would trade today’s economy for its pre-war predecessor.
Robert Samuelson is a columnist for The Washington Post.