Revisiting the Second Great Depression


As President Obama’s re-election campaign heats up, there are several new accounts of his track record finding their way into print. One item for which he is undeservedly given credit is saving the country from a second Great Depression.

The political elites believe in the salvation from the second Great Depression myth with the same fervency as little kids believe in Santa Claus. And, it has just as much grounding in reality.

While the Obama Administration, working alongside Ben Bernanke at the Fed, deserves credit for preventing a financial meltdown, a second Great Depression was never in the cards. The first Great Depression was brought about not only from misguided policies at the onset of the financial crisis, but also from an inadequate policy response.

The spending associated with World War II ultimately got us out of the depression. There is nothing magical about spending on war; spending of the same magnitude on road, schools, hospitals or anything else also would have lifted out the economy out of the depression at any point after the initial collapse in 1929-1930.

The problem was the lack of the political will to spend in these areas, whereas there was plenty of political support for fighting the war after the attack at Pearl Harbor. The lesson from this period is that the United States could have gotten out of the Great Depression any time it was prepared to spend the money to do so. This means that a financial meltdown could not have possibly condemned us to a decade of double-digit unemployment, since that would require a decade of ongoing policy failures after the original collapse.

All this should be obvious to anyone familiar with the history of the depression, however, we don’t have to go back 70 years for lessons on recovering from financial crises; we just have to look to the south. In December of 2001 Argentina broke the link between its currency and the dollar and defaulted on its debt. The result was a financial meltdown that was certainly at least as severe as the worst-case scenarios that the United States might have faced in the dire days after the collapse of Lehman.

Following this default, Argentina’s economy went into a freefall for roughly three months. Banks were insolvent, families and businesses could not get access to their savings, and normal business-dealing became almost impossible.

However, by the second quarter of 2002, the government had largely pasted things together to the point that the economy had stabilized. It began growing rapidly in the third quarter of 2002 and continued to grow rapidly until the world recession slowed the economy in 2008. By the middle of 2003, it had recovered all the ground it had lost in the initial crisis after the default.

Based on the experience of Argentina, we can say that in the case of a full meltdown, we might have seen three months of freefall (even worse that we actually experienced from September of 2008 to April of 2009), followed by three months of stability and then a return to growth six months out. Of course it’s possible that our policy crew of Ben Bernanke, Larry Summers, and Timothy Geithner may not be as competent as the team in Argentina, but even if we double the time periods, we get six months of freefall and three years to get back to pre-crisis levels of output. That’s bad news for sure, but quite a bit short of anything that could merit the title of a “Great Depression.”

The attack on the second Great Depression myth is not simply an exercise in semantics. The Obama Administration and the political establishment more generally want the public to be grateful that we managed to avoid a second Great Depression. People should realize that this claim is sort of like keeping our kids safe from tiger attacks. It’s true that almost no kids in the United States are ever attacked by tigers, but we don’t typically give out political praise for this fact, since there is no reason to expect our kids to be attacked by tigers.

In the same vein, we all should be very happy we aren’t in the middle of a second Great Depression; however, there was never any good reason for us to fear a second Great Depression. What we most had to fear was a prolonged period of weak growth and high unemployment. Unfortunately, this is exactly what we are seeing. The only question is how long it will drag on.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy and False Profits: Recoverying From the Bubble Economy.

This article originally appeared in The Guardian

Weekend Edition
November 27-29, 2015
Andrew Levine
The Real Trouble With Bernie
Gary Leupp
Ben Carson, Joseph in Egypt, and the Attack on Rational Thought
John Whitbeck
Who’s Afraid of ISIS?
Michael Brenner
Europe’s Crisis: Terror, Refugees and Impotence
Ramzy Baroud
Forget ISIS: Humanity is at Stake
Pepe Escobar
Will Chess, Not Battleship, Be the Game of the Future in Eurasia?
Vijay Prashad
Showdown on the Syrian Border
Dave Lindorff
Gen. John Campbell, Commander in Afghanistan and Serial Liar
Colin Todhunter
Class, War and David Cameron
Jean Bricmont
The Ideology of Humanitarian Imperialism
Dan Glazebrook
Deadliest Terror in the World: the West’s Latest Gift to Africa
Mark Hand
Escape From New York: the Emancipation of Activist Cecily McMillan
Karl Grossman
Our Solar Bonanza!
Mats Svensson
Madness in Hebron: Hashem Had No Enemies, Yet Hashem Was Hated
Walter Brasch
Terrorism on American Soil
Louisa Willcox
Grizzly Bears, Dreaming and the Frontier of Wonder
Michael Welton
Yahweh is Not Exactly Politically Correct
Joseph Natoli
A Politics of Stupid and How to Leave It Behind
John Cox
You Should Fear Racism and Xenophobia, Not Syrian Refugees or Muslims
Barrie Gilbert
Sacrificing the Grizzlies of Katmai: the Plan to Turn Brooks Camp Into a Theme
Rev. William Alberts
The Church of “Something Else” in “an Ecclesiastical Desert”
Andrew Gavin Marshall
Bank Crimes Pay
Elliot Murphy
Cameron’s Syrian Strategy
Gareth Porter
How Terror in Paris Calls for Revising US Syria Policy
Thomas S. Harrington
Jeff Jacoby of the Boston Globe and the Death of Ezra Schwartz
Michael Perino
The Arc of Instability
Yves Engler
Justin Trudeau and Canada’s Mining Industry
Tom H. Hastings
ISIS and Changing the Game
Lars Jørgensen
Vive la Résistance
John Halle
A Yale Education as a Tool of Power and Privilege
Norman Pollack
Syrian “Civil War”?: No, A Proxy War of Global Confrontation
Sheldon Richman
Let the Refugees In
James Anderson
Reframing Black Friday: an Imperative for Déclassé Intellectuals
Simon Bowring
UN Climate Talks 2009: a Merger of Interest and Indifference
Ron Jacobs
Rosa Luxemburg–From Street Organizer to Street Name
Aidan O'Brien
Same-Sex Sellout in Ireland
David Stocker
Report from the Frontline of Resistance in America
Patrick Bond
China Sucked Deeper Into World Financial Vortex and Vice Versa, as BRICS Sink Fast
Majd Isreb
America’s Spirit, Syrian Connection
James A Haught
The Values of Jesus
Binoy Kampmark
British Austerity: Cutting One’s Own Backyard
Ed Rampell
45 Years: A Rumination on Aging
Charles R. Larson
Chronicle of Sex Reassignment Surgery: Juliet Jacques’s “Trans: a Memoir”
Jeffrey St. Clair - Alexander Cockburn
CounterPunch’s Favorite Films
November 26, 2015
Ashley Nicole McCray – Lawrence Ware
Decolonizing the History of Thanksgiving