Lessons from the Great Depression
[via Greg Mankiw]
Christina Romer, current Chair of the Council of Economic Advisers, presented this talk today at the Brookings Institute. Although the adjective ‘Great’ is returning to our lexicon when describing the current crisis - Ms. Romer assures us that no, we’re not in another Great Depression. The Great Recession, perhaps, but we are a long way removed from 25% unemployment and bread lines.
Yet history is no doubt an excellent guide. The markets have now fallen more than at any time since the Great Depression. (And it’s worth noting - they’ve fallen further than in the same amount of time.) So we’re in need of a few lessons. Ms. Romer outlines the following:
- One crucial lesson from the 1930s is that a small fiscal expansion has only small effects.
- A second key lesson from the 1930s is that monetary expansion can help to heal an economy even when interest rates are near zero.
- This discussion of fiscal and monetary policy in the 1930s leads me to a third lesson from the Great Depression: beware of cutting back on stimulus too soon.
- The fourth lesson we can draw from the recovery of the 1930s is that financial recovery and real recovery go together.
- The fifth lesson from the Great Depression is that worldwide expansionary policy shares the burdens and the benefits of recovery.
One of the most interesting aspects of the Great Depression was it’s longevity, due in part to the fact that the United States switched away from critical policies just as the economy was beginning to grow. Both fiscal policy (through the first employment taxes and the rescinding of Veteran’s bonuses) and monetary policy (through restricting the money supply) turned contractionary simultaneously, and, Mrs. Romer contents, added nearly two years to the recovery. So the five points above are actionable for our policy makers: keep on the same path of intelligent, expansionary fiscal and monetary policies or we risk losing any growth we find.
The last lesson is a call for hope and confidence, key traits that are currently in short supply:
The final lesson that I want to draw from the 1930s is perhaps the most crucial. A key feature of the Great Depression is that it did eventually end.
So even in the face of odds much, much worse than those we currently face, we persevered. Yes, it is hard and will be for some time to come. But we have unprecedented safety nets and pro-active policies in place.
Mr. Romer says it better than I can: “there is every reason to believe that we will weather this trial and come through to the other side even stronger than before.”
