The Guardian Unlimited, February 16, 2012
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As President Obama’s re-election campaign heats up, there are several new accounts of his track record finding their way into print. One item for which he is undeservedly given credit is saving the country from a second Great Depression.
The political elites believe in the salvation from the second Great Depression myth with the same fervency as little kids believe in Santa Claus. And, it has just as much grounding in reality.
While the Obama Administration, working alongside Ben Bernanke at the Fed, deserves credit for preventing a financial meltdown, a second Great Depression was never in the cards. The first Great Depression was brought about not only from misguided policies at the onset of the financial crisis, but also from an inadequate policy response.
The spending associated with World War II ultimately got us out of the depression. There is nothing magical about spending on war; spending of the same magnitude on road, schools, hospitals or anything else also would have lifted out the economy out of the depression at any point after the initial collapse in 1929-1930.
The problem was the lack of the political will to spend in these areas, whereas there was plenty of political support for fighting the war after the attack at Pearl Harbor. The lesson from this period is that the United States could have gotten out of the Great Depression any time it was prepared to spend the money to do so. This means that a financial meltdown could not have possibly condemned us to a decade of double-digit unemployment, since that would require a decade of ongoing policy failures after the original collapse.
All this should be obvious to anyone familiar with the history of the depression, however, we don’t have to go back 70 years for lessons on recovering from financial crises; we just have to look to the south. In December of 2001 Argentina broke the link between its currency and the dollar and defaulted on its debt. The result was a financial meltdown that was certainly at least as severe as the worst-case scenarios that the United States might have faced in the dire days after the collapse of Lehman.
Following this default, Argentina’s economy went into a freefall for roughly three months. Banks were insolvent, families and businesses could not get access to their savings, and normal business-dealing became almost impossible.
However, by the second quarter of 2002, the government had largely pasted things together to the point that the economy had stabilized. It began growing rapidly in the third quarter of 2002 and continued to grow rapidly until the world recession slowed the economy in 2008. By the middle of 2003, it had recovered all the ground it had lost in the initial crisis after the default.
Based on the experience of Argentina, we can say that in the case of a full meltdown, we might have seen three months of freefall (even worse that we actually experienced from September of 2008 to April of 2009), followed by three months of stability and then a return to growth six months out. Of course it’s possible that our policy crew of Ben Bernanke, Larry Summers, and Timothy Geithner may not be as competent as the team in Argentina, but even if we double the time periods, we get six months of freefall and three years to get back to pre-crisis levels of output. That’s bad news for sure, but quite a bit short of anything that could merit the title of a “Great Depression.”
The attack on the second Great Depression myth is not simply an exercise in semantics. The Obama Administration and the political establishment more generally want the public to be grateful that we managed to avoid a second Great Depression. People should realize that this claim is sort of like keeping our kids safe from tiger attacks. It’s true that almost no kids in the United States are ever attacked by tigers, but we don’t typically give out political praise for this fact, since there is no reason to expect our kids to be attacked by tigers.
In the same vein, we all should be very happy we aren’t in the middle of a second Great Depression; however, there was never any good reason for us to fear a second Great Depression. What we most had to fear was a prolonged period of weak growth and high unemployment. Unfortunately, this is exactly what we are seeing. The only question is how long it will drag on.