Sunday, December 7, 2008

The Top Ten reasons there won't be a Depression

"Worst economic crisis since the Great Depression" is a phrase getting tossed around a lot these days. While it does seem to be technically accurate, I recently read two books on the Great Depression and New Deal and was surprised to learn two things. One: the reasons for the Depression seem frighteningly similar to some of the reasons for the current economic crisis. That scared me, but then I realized that Two: the reaction, response and consequences are going to be totally different. Here are 10 reasons (counting up to the most important) why the current crisis, as bad as it may become, won't hold a candle to the Great Depression.

10) Information flow: during the Great Depression, investors rarely had accurate information about companies. At best, it was very delayed. The government didn't even have an accurate estimate of GDP. Today, of course, we're swimming in data.

9) 2-income families: women work now. If a husband loses his job, the family still has an income. Not so in the 1930s. (Which put a lot more social and psychological pressure on the man to support his family, as well.)

8) Diversification of labor: when 30% of the country is employed in agriculture, and there is a Dust Bowl (partly because of poor agricultural practices), lots of people are out of work. Comparatively, today only 3% of the nation is employed as farmers, and we're still feeding everyone. So in general, if any one industry crashes, today it affects a smaller number of people. I heard yesterday that the unemployment rate just jumped to 6.7%; this is still lower than most countries have during good times. During the Depression, the US unemployment rate at its height was 26%.

7) Global cooperation. In particular, the economic integration of Europe through the EU enables a high level of coordinated action. Not so much cooperation in the 1930s, to say the least.

6) Our government's willingness to act has been impressive so far. Even if they make mistakes, they’re working on it. Compare this to Hoover, who took public pride in not doing anything: the markets will take care of themselves, after all.

5) To continue that thought, president-elect Obama's getting ahead of the game and doing lots of work before his "100 days" even begins. From the New York Times: “President-elect Barack Obama promised Saturday to create the largest public works construction program since the inception of the interstate highway system a half century ago … Mr. Obama began highlighting elements of the economic recovery program he is trying to fashion with Congressional leaders in hopes of being able to enact it shortly after being sworn in on Jan. 20.”

4) Even with last year’s bump in food prices, commodities are a ton cheaper now than then. We also have a lot more infrastructure, such as our highway system, and people just have a lot more “stuff” too. The average middle-age man in the 1920s could afford just 6 outfits, and ate a lot fewer calories a day (this sounds like a good thing, but it wasn’t.) We have refrigerators, microwaves, and air conditioners. Health care expenses will be one of the major pains that people feel during a recession today, but the quality of health care during the Great Depression was laughable even for the rich. Believe me, it’s better now.

3) Other emerging economies, particularly China and India, spread the problem thinner. The US generates a smaller percentage of world GDP now. While our growth might slow from 3% to 1%, even the worst prediction has China slowing from like 10% to 5%, still pretty amazing. And the government of China has shown initiative and willingness to address the economic crisis so far.

2) 75 years of learning from other financial crises. We've been here before. 8 recessions since WWII, if I'm not mistaken. And we've always pulled out of it. The average length of those recessions, in fact, is only 10 months.

1) Roosevelt was smarter than us. We were stupid enough to repeat another financial mess. But like some sort of cigarette-smoking Hari Seldon, he (and the rest of the government over the years) figured that might happen. The New Deal put programs in place not only to mitigate the Depression, but to prevent future ones. We’ve got the FDIC, Social Security, Medicare, and unemployment insurance, just to name the big ones that come to mind. Imagine living in a world without those.

So, calm down everyone! It might be bad, but it could be worse. A lot worse.

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