Politics & Government

Q&A: How today is — and isn't — like the Great Depression

WASHINGTON — When President Barack Obama nominated Christina Romer to head the White House Council of Economic Advisers, he picked one of the world's foremost academic experts on the Great Depression. Now she's busily trying to prevent the very circumstances that she's spent much of her adult life studying.

The National Bureau of Economic Research, to which Romer belonged until recently, is the official arbiter of the beginning and end of recessions, generally defined as two successive quarters of contraction in economic activity.

There's no similar textbook definition for an economic "depression." It's generally shorthanded as a greater than 10 percent contraction in economic activity over a period of 12 months or more.

In a lively address and forum Monday at the center-left Brookings Institution, the former economics professor at the University of California-Berkeley drew some eerie parallels between the Depression era and today. She also highlighted some very important distinctions.

Here's some of what she said, edited into a question-and-answer format.

Q: Are we nearing a shift from recession to depression?

A: Friday's employment report showed the unemployment in the United States has reached 8.1 percent — a terrible number that signifies a devastating tragedy for millions of American families. But, at its worst, unemployment in the 1930s reached nearly 25 percent. And that quarter of American workers had painfully few of the social safety nets that today help families maintain at least the essentials of life during unemployment.

Q: What does today have in common with the Depression era?

A: Most obviously, like the Great Depression, today's downturn had its fundamental cause in the decline in asset prices and the failure or near-failure of financial institutions. In 1929, the collapse and extreme volatility of stock prices led consumers and firms to simply stop spending. In the recent episode, the collapse of housing prices and stock prices has reduced wealth and shaken confidence, and has led to a sharp rise in the saving rate as consumers have hunkered down in the face of greatly reduced and much more uncertain wealth.

Q: Any other similarities?

A: Another parallel is the worldwide nature of the decline. A key feature of the Great Depression was that virtually every industrial country experienced a severe contraction in production and a terrible rise in unemployment. This past year, there was hope that the current downturn might be mainly an American experience, and so world demand could remain high and perhaps help us through. However, during the past few months, we have realized that this hope was a false one.

Q: You've written that fiscal policy didn't end the Great Depression. Does that mean you don't think it won't work now?

A: Nothing could be further from the truth.

Q: But you've said that President Franklin D. Roosevelt's spending didn't end the Great Depression?

A: The key fact is that while Roosevelt's fiscal actions were a bold break from the past, they were nevertheless small relative to the size of the problem. When Roosevelt took office in 1933, real GDP (gross domestic product) was more than 30 percent below its normal trend line. For comparison, the U.S. economy (today) is somewhere between 5 percent and 10 percent below trend.

Q: So what does that mean for today?

A: This is a lesson the administration has taken to heart. The American Recovery and Reinvestment Act, passed less than 30 days after the inauguration, is simply the biggest and boldest countercyclical fiscal action in history. The nearly $800 billion fiscal stimulus is divided roughly equally between tax cuts, direct government investment spending, and aid to the states and people directly hurt by the recession.

Q: Any other lessons learned from the Depression?

A: Despite the devastating loss of wealth, chaos in our financial markets, and a loss of confidence so great that it nearly destroyed Americans' fundamental faith in capitalism, the economy came back. Indeed, the growth between 1933 and 1937 was the highest we have ever experienced outside of wartime.

Q: So once things turn around, they could really turn around?

A: This fact should give Americans hope. We are starting from a position far stronger than our parents and grandparents were in 1933. And the policy response has been fast, bold, and well-conceived.

Q: Today's financial system is so much more sophisticated and complex than the 1930s. Doesn't this limit the application of lessons learned from the Depression era?

A: This is the kind of situation and the kind of instruments . . . (that) are just infinitely more complicated, and that's part of why this is hard. It's part of why coming up with a Financial Stabilization Plan is not a one-week thing and it's a monumental task . . . All of the modern innovations, we know they are a complicating factor . . . and one I think we will just power through.

Q: During the Depression, FDR didn't try to deal with health care and tax carbon emissions. How can you push these now amid crisis?

A: President (Barack) Obama at the health care summit that we had (last week) . . . got exactly the same question. . . . The first thing he said is how can we not? We know that it's going to bankrupt the government. It's going to bankrupt businesses. It's going to bankrupt households. We just have to deal with it. And then you say, why do it now, can't we do it next year? And his response was we didn't do it in peacetime, we didn't do it in prosperity, we didn't do it in wartime. When are we going to do it? . . . A bit of me says maybe the middle of the crisis is the right time as we are all focused on the economy.


Romer's prepared remarks


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