The Depression: If Only Things Were That Good (Published 2011) (2024)

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News Analysis

The Depression: If Only Things Were That Good (Published 2011) (1)

David Leonhardt is The New York Times Washington bureau chief.

UNDERNEATH the misery of the Great Depression, the United States economy was quietly making enormous strides during the 1930s. Television and nylon stockings were invented. Refrigerators and washing machines turned into mass-market products. Railroads became faster and roads smoother and wider. As the economic historian Alexander J. Field has said, the 1930s constituted “the most technologically progressive decade of the century.”

Economists often distinguish between cyclical trends and secular trends — which is to say, between short-term fluctuations and long-term changes in the basic structure of the economy. No decade points to the difference quite like the 1930s: cyclically, the worst decade of the 20th century, and yet, secularly, one of the best.

It would clearly be nice if we could take some comfort from this bit of history. If anything, though, the lesson of the 1930s may be the opposite one. The most worrisome aspect about our current slump is that it combines obvious short-term problems — from the financial crisis — with less obvious long-term problems. Those long-term problems include a decade-long slowdown in new-business formation, the stagnation of educational gains and the rapid growth of industries with mixed blessings, including finance and health care.

Together, these problems raise the possibility that the United States is not merely suffering through a normal, if severe, downturn. Instead, it may have entered a phase in which high unemployment is the norm.

On Friday, the Labor Department reported that job growth was mediocre in September and that unemployment remained at 9.1 percent. In a recent survey by the Federal Reserve Bank of Philadelphia, forecasters said the rate was not likely to fall below 7 percent until at least 2015. After that, they predicted, it would rarely fall below 6 percent, even in good times.

Not so long ago, 6 percent was considered a disappointingly high unemployment rate. From 1995 to 2007, the jobless rate exceeded 6 percent for only a single five-month period in 2003 — and it never topped 7 percent.

“We’ve got a double-whammy effect,” says John C. Haltiwanger, an economics professor at the University of Maryland. The cyclical crisis has come on top of the secular one, and the two are now feeding off each other.

In the most likely case, the United States has fallen into a period somewhat similar to the one that Europe has endured for parts of the last generation; it is rich but struggling. A high unemployment rate will feed fears of national decline. The political scene may be tumultuous, as it already is. Many people will find themselves shut out of the work force.

Almost 6.5 million people have been officially unemployed for at least six months, and another few million have dropped out of the labor force — that is, they are no longer looking for work — since 2008. These hard-core unemployed highlight the nexus between long-term and short-term economic problems. Most lost their jobs because of the recession. But many will remain without work long after the economy begins growing again.

Indeed, they will themselves become a force weighing on the economy. Fairly or not, employers will be reluctant to hire them. Many with borderline health problems will end up in the federal disability program, which has become a shadow welfare program that most beneficiaries never leave.

For now, the main cause of the economic funk remains the financial crisis. The bursting of a generation-long, debt-enabled consumer bubble has left households rebuilding their balance sheets and businesses wary of hiring until they are confident that consumer spending will pick up. Even now, sales of many big-ticket items — houses, cars, appliances, many services — remain far below their pre-crisis peaks.

Although the details of every financial crisis differ, the broad patterns are similar. The typical crisis leads to almost a decade of elevated unemployment, according to oft-cited academic research by Carmen M. Reinhart and Kenneth S. Rogoff. Ms. Reinhart and Mr. Rogoff date the recent crisis from the summer of 2007, which would mean our economy was not even halfway through its decade of high unemployment.

Of course, making dark forecasts about the American economy, especially after a recession, can be dangerous. In just the last 50 years, doomsayers claimed that the United States was falling behind the Soviet Union, Japan and Germany, only to be proved wrong each time.

This country continues to have advantages that no other country, including China, does: the world’s best venture-capital network, a well-established rule of law, a culture that celebrates risk taking, an unmatched appeal to immigrants. These strengths often give rise to the next great industry, even when the strengths are less salient than the country’s problems.

THAT’S part of what happened in the 1930s. It’s also happened in the 1990s, when many people were worrying about a jobless recovery and economic decline. At a 1992 conference Bill Clinton convened shortly after his election to talk about the economy, participants recall, no one mentioned the Internet.

Still, the reasons for concern today are serious. Even before the financial crisis began, the American economy was not healthy. Job growth was so weak during the economic expansion from 2001 to 2007 that employment failed to keep pace with the growing population, and the share of working adults declined. For the average person with a job, income growth barely exceeded inflation.

The closest thing to a unified explanation for these problems is a mirror image of what made the 1930s so important. Then, the United States was vastly increasing its productive capacity, as Mr. Field argued in his recent book, “A Great Leap Forward.” Partly because the Depression was eliminating inefficiencies but mostly because of the emergence of new technologies, the economy was adding muscle and shedding fat. Those changes, combined with the vast industrialization for World War II, made possible the postwar boom.

In recent years, on the other hand, the economy has not done an especially good job of building its productive capacity. Yes, innovations like the iPad and Twitter have altered daily life. And, yes, companies have figured out how to produce just as many goods and services with fewer workers. But the country has not developed any major new industries that employ large and growing numbers of workers.

There is no contemporary version of the 1870s railroads, the 1920s auto industry or even the 1990s Internet sector. Total economic output over the last decade, as measured by the gross domestic product, has grown more slowly than in any 10-year period during the 1950s, ’60s, ’70s, ’80s or ’90s.

Perhaps the most important reason, beyond the financial crisis, is the overall skill level of the work force. The United States is the only rich country in the world that has not substantially increased the share of young adults with the equivalent of a bachelor’s degree over the past three decades. Some less technical measures of human capital, like the percentage of children living with two parents, have deteriorated. The country has also chosen not to welcome many scientists and entrepreneurs who would like to move here.

The relationship between skills and economic success is not an exact one, yet it is certainly strong enough to notice, and not just in the reams of peer-reviewed studies on the subject. Australia, New Zealand, Canada and much of Northern Europe have made considerable educational progress since the 1980s, for instance. Their unemployment rates, which were once higher than ours, are now lower. Within this country, the 50 most educated metropolitan areas have an average jobless rate of 7.3 percent, according to Moody’s Analytics; in the 50 least educated, the average rate is 11.4 percent.

Despite the media’s focus on those college graduates who are struggling, it’s not much of an exaggeration to say that people with a four-year degree — who have an unemployment rate of just 4.3 percent — are barely experiencing an economic downturn.

Economic downturns do often send people streaming back to school, and this one is no exception. So there is a chance that it will lead to a surge in skill formation. Yet it seems unlikely to do nearly as much on that score as the Great Depression, which helped make high school universal. High school, of course, is free. Today’s educational frontier, college, is not. In fact, it has become more expensive lately, as state cutbacks have led to tuition increases.

Beyond education, the American economy seems to be suffering from a misallocation of resources. Some of this is beyond our control. China’s artificially low currency has nudged us toward consuming too much and producing too little. But much of the misallocation is homegrown.

In particular, three giant industries — finance, health care and housing — now include large amounts of unproductive capacity. Housing may have shrunk, but it is still a bigger, more subsidized sector in this country than in many others.

Health care is far larger, with the United States spending at least 50 percent more per person on medical care than any other country, without getting vastly better results. (Some aspects of our care, like certain cancer treatments, are better, while others, like medical error rates, are worse.) The contrast suggests that a significant portion of medical spending is wasted, be it on approaches that do not make people healthier or on insurance-company bureaucracy.

In finance, trading volumes have boomed in recent decades, yet it is unclear how much all the activity has lifted living standards. Paul A. Volcker, the former Fed chairman, has mischievously said that the only useful recent financial innovation was the automated teller machine. Critics like Mr. Volcker argue that much of modern finance amounts to arbitrage, in which technology and globalization have allowed traders to profit from being the first to notice small price differences.

IN the process, Wall Street has captured a growing share of the world’s economic pie — thereby increasing inequality — without doing much to expand the pie. It may even have shrunk the pie, given that a new International Monetary Fund analysis found that higher inequality leads to slower economic growth.

The common question with these industries is whether they are using resources that could do more economic good elsewhere. “The health care problem is very similar to the finance problem,” says Lawrence F. Katz, a Harvard economist, “in that incredibly talented people are wasting their talent on something that is essentially a zero-sum game.”

In the short term, finance, health care and housing provide jobs, as their lobbyists are quick to point out. But it is hard to see how the jobs of the future will spring from unnecessary back surgery and garden-variety arbitrage. They differ from the growth engines of the past, which delivered fundamental value — faster transportation or new knowledge — and let other industries then build off those advances.

The United States has long overcome its less dynamic industries by replacing them with more dynamic ones. The decline of the horse and buggy, difficult as it may have been for people in the business, created no macroeconomic problems. The trouble today is that those new industries don’t seem to be arriving very quickly.

The rate at which new companies are created has been falling for most of the last decade. So has the pace at which existing companies add positions. “The current problem is not that we have tons of layoffs,” Mr. Katz says. “It’s that we don’t have much hiring.”

If history repeats itself, this situation will eventually turn around. Maybe some American scientist in a laboratory somewhere is about to make a breakthrough. Maybe an entrepreneur is on the verge of creating a great new product. Maybe the recent health care and financial-regulation laws will squeeze the bloat.

For now, the evidence for such optimism remains scant. And the economy remains millions of jobs away from being even moderately healthy.

See more on: International Monetary Fund

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The Depression: If Only Things Were That Good (Published 2011) (2024)

FAQs

What was the Great Depression answers? ›

The Depression was the longest and deepest downturn in the history of the United States and the modern industrial economy. The Great Depression began in August 1929, when the economic expansion of the Roaring Twenties came to an end. A series of financial crises punctuated the contraction.

What good things came out of the Great Depression? ›

UNDERNEATH the misery of the Great Depression, the United States economy was quietly making enormous strides during the 1930s. Television and nylon stockings were invented. Refrigerators and washing machines turned into mass-market products. Railroads became faster and roads smoother and wider.

What was the cause of the Great Depression very short answer? ›

What were the major causes of the Great Depression? Among the suggested causes of the Great Depression are: the stock market crash of 1929; the collapse of world trade due to the Smoot-Hawley Tariff; government policies; bank failures and panics; and the collapse of the money supply.

What was the global explanation of the depression offered by Hoover in his memoir? ›

In his memoirs, President Herbert Hoover tried to explain the Depression's impact on the United States by blaming the aftermath of the European war a decade earlier and the financial crisis that beset European banks in 1931.

What was the Great Depression in short summary? ›

What was the Great Depression? The "Great Depression " was a severe, world -wide economic disintegration symbolized in the United States by the stock market crash on "Black Thursday", October 24, 1929 . The causes of the Great Depression were many and varied, but the impact was visible across the country.

How was the Great Depression solved? ›

When Japan attacked the U.S. Naval base at Pearl Harbor, Hawaii, on December 7, 1941, the United States found itself in the war it had sought to avoid for more than two years. Mobilizing the economy for world war finally cured the depression.

What two things ended the Great Depression? ›

The Great Depression was a worldwide economic depression that lasted 10 years. GDP during the Great Depression fell by nearly half. A combination of the New Deal and World War II lifted the U.S. out of the Depression.

How did things get better after Great Depression? ›

The money stock began to expand, which fueled increased spending and production as well as rising prices. Economic recovery was slow, but at least the bottom had been reached and the corner turned. History books often credit Roosevelt's New Deal for leading the economic recovery from the Great Depression.

Was the 1930s a good decade? ›

The decade was defined by a global economic and political crisis that culminated in the Second World War. It saw the collapse of the international financial system, beginning with the Wall Street Crash of 1929, the largest stock market crash in American history.

Who got rich during the Great Depression? ›

Not everyone, however, lost money during the worst economic downturn in American history. Business titans such as William Boeing and Walter Chrysler actually grew their fortunes during the Great Depression.

Could the Great Depression have been avoided? ›

Many economists and historians believe that the Great Depression could have been avoided, or at least mitigated, with better policy decisions and quicker government actions. Some economic downturns were inevitable due to excessive stock market speculation and consumer overspending. How did the Great Depression end?

How many banks failed during the Great Depression? ›

In all, 9,000 banks failed--taking with them $7 billion in depositors' assets. And in the 1930s there was no such thing as deposit insurance--this was a New Deal reform.

Who was blamed for the Great Depression? ›

By the summer of 1932, the Great Depression had begun to show signs of improvement, but many people in the United States still blamed President Hoover.

How many Americans could not find work in 1930? ›

By 1930, 4 million Americans looking for work could not find it; that number had risen to 6 million in 1931. Meanwhile, the country's industrial production had dropped by half.

What did the Great Depression highlight? ›

The U.S. economy shrank by a third from the beginning of the Great Depression to the bottom four years later. Real GDP fell 29% from 1929 to 1933. The unemployment rate reached a peak of 25% in 1933. Consumer prices fell 25%; wholesale prices plummeted 32%.

What was the Great Depression quizlet? ›

Great Depression. The economic crisis and period of low business activity in the U.S. and other countries, roughly beginning with the stock-market crash in October, 1929, and continuing through most of the 1930s.

What was the Great Depression in a paragraph? ›

The Great Depression was the worst economic downturn in US history. It began in 1929 and did not abate until the end of the 1930s. The stock market crash of October 1929 signaled the beginning of the Great Depression. By 1933, unemployment was at 25 percent and more than 5,000 banks had gone out of business.

What is the meaning of great depression? ›

Great Depression, worldwide economic downturn that began in 1929 and lasted until about 1939. It was the longest and most severe depression ever experienced by the industrialized Western world, sparking fundamental changes in economic institutions, macroeconomic policy, and economic theory.

What questions do people have about the Great Depression? ›

Backdrop
  • What were the primary causes of the Great Depression?
  • What economic conditions were prevalent prior to the Great Depression?
  • What political issues did America face prior to the Great Depression?
  • What social issues did America face prior to the Great Depression?

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