Wikinvest Wire

If only it were 1937 again...

Monday, January 04, 2010

In his most recent commentary at the New York Times, Nobel Prize winning economist and Sunday talk show curmudgeon Paul Krugman says that we're about to make the same mistakes that were made 73 years ago, five years after the depths of the Great Depression, when the entire nation was sure that the worst was behind it.

That 1937 Feeling
Here’s what’s coming in economic news: The next employment report could show the economy adding jobs for the first time in two years. The next G.D.P. report is likely to show solid growth in late 2009. There will be lots of bullish commentary — and the calls we’re already hearing for an end to stimulus, for reversing the steps the government and the Federal Reserve took to prop up the economy, will grow even louder.

But if those calls are heeded, we’ll be repeating the great mistake of 1937, when the Fed and the Roosevelt administration decided that the Great Depression was over, that it was time for the economy to throw away its crutches. Spending was cut back, monetary policy was tightened — and the economy promptly plunged back into the depths.

This shouldn’t be happening. Both Ben Bernanke, the Fed chairman, and Christina Romer, who heads President Obama’s Council of Economic Advisers, are scholars of the Great Depression. Ms. Romer has warned explicitly against re-enacting the events of 1937. But those who remember the past sometimes repeat it anyway.
Yes, there are some similarities between economic conditions today and in 1937, but GDP isn't one of them, a point that is demonstrated quite clearly in the chart below.

By 1937, the nation had experienced three full years of rip-roaring economic growth and was well into its fourth. You can kind of understand why they may have thought that the worst was over, even though unemployment remained high.
IMAGE While the argument that, today, an early end to the stimulus could send the nation's economy back into a recession (or worse) is well founded, the comparison to 1937 is being far too generous to the current state of affairs in the U.S.

What Krugman should have said was, "Look, all we've done over the last year or two with the massive government stimulus programs and money printing, the likes of which the planet has never seen before, is to delay the arrival of 1932. If you want 1932 to occur in 2010, then go ahead and withdrawal the stimulus".

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But What do I Know? said...

Nicely put about 1932 rather than 1937, Tim. What's interesting is the size of GDP growth during the late thirties--supposedly lousy economic times. The PTB would love to have 5% GDP growth today, and yet such a number would have been considered subpar in the late 30's. . .

wayne said...

Tim, this was a real eye opener. I had no idea GDP growth was so strong '34 through '36. I mean, who wouldn't believe it was safe to focus on debt reduction after three straight years of strong gains, two of them in double digits? Your graph also somewhat discounts the notion that only WWII pulled us out of the Great Depression, with almost 8% GDP growth in '39, 8+% in '40 and 17% in '41. You could even argue that debt reduction in '37 did exactly what is was supposed to do - heal the economy with just a bit of pain '38 before it found its footing again.

Tim said...

Yeah, most people think of the 1930s as one long miserable period but it was really a multi-year depression, followed by a few good years, and then a short, but nasty, recession.

Anonymous said...

Unemployment was 24.9% in 33, and was down to 14.3% in 37. Then it went back up to 19% in 38. That's why citizens demanded action (including more public jobs).

A better way would have been to smoothly transition redundant workers over to making innovative new products.

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