Massive government bailouts and stimulus plans have done little so far to stem the worst recession in decades, fueling worries about just how deep the battered U.S. economy could sink.
In interviews with News Bureau Business & Law Editor Jan Dennis, two economic experts weigh in on whether the nation is still at risk of another Great Depression, or whether tax cuts, jobs programs and other recent moves might ultimately jump-start the economy.
Larry DeBrock, interim dean of the College of Business and a professor of economics and business administration
Larry DeBrock, interim dean of the College of Business and a professor of economics and business administration
It is very unlikely the current recession would deepen to the level of the Great Depression. The Great Depression was the result of a stock market crash, an event that is similar to the housing crash and subsequent stock market reversals we are now facing. But the similarities end there.
In the Great Depression, the government made a remarkable series of mistakes. The Federal Reserve did not intervene as 40 percent of all banks closed operations. Without Federal Deposit Insurance Corp. protection, U.S. households saw their accounts vanish and they responded by buying less. Facing increasing federal budget deficits, President Hoover increased taxes, which further reduced consumer spending. Congress exacerbated the downturn by passing the memorable Smoot-Hawley Tariff Act in a misguided attempt to protect American producers. Prices plummeted, unemployment soared, and gross national product fell.
Today, the Federal Reserve has followed a path of protecting banks and easing money supply. On the fiscal side, the stimulus package represents an extremely large increase in federal spending as well as some tax relief. Unlike the era of the Great Depression, unemployment insurance will mean that incomes of those laid off in the current recession will be partially protected. These actions are supported by decades of economic research on the mistakes that were made in the 1930s.
Jeffrey R. Brown, a professor of finance
Jeffrey R. Brown, a professor of finance and senior economist with the President’s Council of Economic Advisors in 2001-2002
The likelihood of an outcome as severe as the Great Depression is very small. On the positive side, we have learned an enormous amount in the last 70 years about what caused and contributed to the Great Depression, and I am reasonably confident that we will not make the same economic policy mistakes. Of course, because we are in somewhat uncharted waters, no one can say with certainty that we will not make other mistakes, and thus experience further economic decline. But I truly believe that the odds are stacked against anything as precipitous as the Great Depression, a period during which we saw gross domestic product decline by nearly 30 percent and the unemployment rate rise to over 25 percent.
One of the great policy mistakes in the early 1930s was the fact that we allowed the money supply to contract dramatically. From 1929 to 1933, the money supply contracted by somewhere between 25 and 30 percent as banks failed en masse across the country. The policy response to the current environment has been quite different. The government insures bank deposits, thus preventing bank runs. The Federal Reserve has significantly eased monetary policy through a wide range of mechanisms, including very low interest rates.
The stimulus package should have a short-term, positive impact on GDP. The tax cuts allow individuals to spend more of what they earn, thus partially offsetting some of the decline in consumption that resulted from the drop in stock and housing markets. Increases in direct government spending also contribute to GDP in the short run.
Of course, it is important to point out the obvious fact that none of this stimulus is free. The boost that we receive in economic activity over the next couple of years will essentially be paid for in the form of reduced economic activity in the long run. The additional trillions of dollars in deficit spending will raise long-term interest rates, and will ultimately require higher taxes on future generations, thus reducing long-term economic growth. The difficult challenge facing the Obama administration, Congress and the Federal Reserve is to find the right balance between the present and the future. Too little economic stimulus now, and we run the risk of sliding into an even deeper recession. Too much debt-financed spending today, and our children and grandchildren pay the price.
We also have to be very careful to guard against “nationalist” economic policy at times like these. Freely flowing international trade in goods and services is important to our economy and the world economy, and restrictions on trade are precisely the wrong medicine for what ails us.
