WHAT HAPPENED TO THE 'DEPRESSION'?

September 2, 2009

The facts we face today are very different than the grim reality Americans confronted between 1929 and 1932.  True, this recession is not over.  But it would have to get improbably worse before it came close to the 42-month duration of the Great Depression, or the 25 percent unemployment rate in 1932, says Allan H. Meltzer, professor of economics at Carnegie Mellon University.

The current recession is also much less severe than the 1937-38 Depression.  A more accurate comparison is to the 1973-75 recession.  Today's recession is as deep and most likely won't be much longer than the one we experienced some three decades ago.  So why do many opinion makers insist on inaccurate and frightening analogies that overstate the severity of present conditions?  I believe there are several reasons.

First, there is a strong political motivation to make this recession out to be worse than it actually is

  • The Obama administration wanted to make it appear as though it saved us from an incipient disaster, so it overstated its achievements.
  • The White House also wanted to foist its huge "stimulus" program on the country in order to redistribute income.
  • That pleased many Democrats, but did very little to restore growth.

Many others repeated the administration's hyperbolic claims:

  • There is genuine uncertainty about what has happened and what is likely to come.
  • Short-term forecasts have major errors, and extrapolation of current data adds to misinformation.
  • Then there are economists who would like to see government take a larger role in the economy -- they've chosen to use the recession as a pretext for arguing for this change.

New York Times columnist Paul Krugman and the International Monetary Fund repeatedly proclaimed that more government spending was a necessity.  However, most economists now believe that the recession is expected to end before much of the government spending takes hold.

Many experts argue that we need another stimulus package.  I disagree. The proper response now is to repeal what remains of the misguided stimulus and avoid the cap-and-trade program, says Meltzer.

Source: Allan H. Meltzer, "What Happened to the 'Depression'," Wall Street Journal, August 31, 2009.

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