NCPA - National Center for Policy Analysis


December 19, 2008

The difference between recession and depression is simple.  Recession is when you lose your job; depression is when I lose mine, says Amity Shlaes, author of "The Forgotten Man: A New History of the Great Depression."  These days recession is starting to feel like depression.

But in recent years, scholars have been making a different argument, saying that the high-wage method of fending off economic depression can make a depression more likely.  In other words, joblessness created the decline in the economy, not the other way around:

  • Early in the Great Depression of the 1930s, unemployment hit 25 percent, and it fell all the way to 13 or 14 percent in the mid-1930s; that was a huge shift from the preceding decade, when unemployment averaged less than 5 percent.
  • At this same time, the Roosevelt administration continued the high-wage trend started by Herbert Hoover and passed the Wagner Act giving unions the power to organize Detroit and threaten sit-down strikes.
  • According to researchers, in the late 1930s, manufacturing wages were 20 percent above the trend for the rest of the century; they posit that employers were unable to cut wages, so they simply fired or failed to hire.
  • Employers knew what was going on and when executive were asked to rank what New Deal laws they wanted repealed, the Wagner Act was high on the list.

Fast forward to today's auto industry and the famous $74 hourly package, and everyone knows the U.S. automakers would have a better chance of survival if that package were pared.  But manufacturing price and labor are not allowed to adjust; instead the pressure is, as in the 1930s, to address trouble via other methods, says Shlaes.

But with gas prices declining, U.S. automakers and their workers can make reasonable packages their goal.  Then we're all less likely to have our own personal depression, adds Shlaes.

Source: Amity Shlaes, "When My Recession Becomes Your Great Depression," Bloomberg, December 17, 2008.

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