ECONOMY

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18 March 2009
Is the United States Headed Toward a New Great Depression?

By Burton Bollag
Special Correspondent

Washington — Irene Hobson, 89, remembers scenes of hardship from the Great Depression of the 1930s, like the stream of men peddling apples on the sidewalks in her modest Washington neighborhood.

Her mother earned money to feed the family by doing other people's laundry. That had the added benefit of keeping her and her four brothers and sisters clothed. “People my mother washed for would give her clothes,” she recalled.

Today, as unemployment rises and the recession deepens, growing numbers of people wonder whether the United States could be headed toward a repeat of the Great Depression, when a quarter of the work force was unemployed and millions of Americans fell into poverty.

Forty-five percent of people questioned in a CNN/Opinion Research Corporation survey released March 17 said a depression similar to the one in the 1930s is likely during the next year, up from 38 percent of respondents in December 2008.

A depression is defined as an economic downturn in which the gross domestic product (GDP) — the measure of all the goods and services a country produces — declines by more than 10 percent. A recession is a milder, shorter economic downturn. Since the end of World War II, the United States has not experienced anything close to a depression. The most severe economic downturn occurred from 1973 to 1975 when real GDP fell by 4.9 percent.

Leading U.S. officials say the danger of a depression is remote. In a rare interview, with the CBS television program 60 Minutes, Ben Bernanke, chairman of the Federal Reserve, America's central bank, said the risk of depression has been “averted.”

Still, the current crisis bears disturbing similarities to the 1930s. Then, as now, banks collapsed and credit for businesses and consumers became scarce. Then, as now, big stock market declines sharply reduced the wealth of those who owned stocks. During the last 17 months, the Dow Jones Industrial Average has fallen 52 percent. In the three years following the market's 1929 high, stock prices fell 89 percent.

Christina D. Romer, a key economic adviser to President Obama, has said the earlier calamity was far worse. She compared several key indicators to make her point. The U.S. unemployment rate has reached 8.1 percent. But during the worst period of the 1930s, it was nearly 25 percent. In the 1930s, there were fewer social safety nets than there are today to soften the impact of job loss. Likewise, today's GDP has fallen 2 percent from its peak. During the Depression, it fell by more than 25 percent between 1929 and 1933.

A key difference between the two crises has been the response of the government. Most economists say the policies Washington followed during the first years of the Great Depression made the downturn worse. As the economy slowed and banks had trouble collecting debts, people panicked and withdrew their deposits, causing nearly 50 percent of all banks to fold. Production, lending and personal wealth collapsed.

For the first years after the crisis started in 1929, the government took a conservative approach, keeping the money supply tight, letting banks fail, and doing little to stimulate the economy. “[President Herbert] Hoover thought the downturn was good; it would purge out nonproductive activities,” said Sharyn O'Halloran, a professor of political economy at Columbia University in New York City.

That policy of inaction did not change until 1933 when Franklin Roosevelt became president and created the New Deal, a policy of massive government spending that created jobs and revived some economic activity.

Facing the current crisis, the U.S. government has taken an activist approach. In fall 2008, officials issued dire warnings that inaction could lead to another Great Depression. The government responded with hundreds of billions of dollars to save banks and insurance companies. Since taking office in January, President Obama has expanded that policy and introduced a massive economic stimulus package.

In another contrast to the 1930s, the United States and its trading partners are fighting protectionism. When the Great Depression of the 1930s hit, many countries, including the United States, tried to protect their industries by raising tariffs on imported goods. That led to a devastating fall in world trade and deepened and prolonged the downturn.

Today, world trade has begun to shrink, for the first time in almost 30 years, but unlike the 1930s, governments today are trying to coordinate policies and have promised not to give in to protectionist pressures.

Romer, the president's economic aide, said the interventionist approach sharply reduces the danger of a new depression. “We've had a much better policy response already” compared to the 1930s, she said. “And we've got a new president in place who is saying, ‘I’m hitting this with everything I have.’”

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