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Home Publications Blogs Beat the Press The Economy Did Not Bounce Back from the 2001 Recession and We Did Not Face Another Great Depression in 2008

The Economy Did Not Bounce Back from the 2001 Recession and We Did Not Face Another Great Depression in 2008

Monday, 26 August 2013 04:30

Robert Samuelson repeats two common myths in his discussion of the battle over the successor to Ben Bernanke as Fed chair. He tells readers that the 2001 recession was mild by historical standards and that Bernanke might have prevented another Great Depression with his actions in 2008-2009.

While the length and severity of the official recession in 2001 would imply that it was mild, at the time it was the longest period without job growth since Great Depression. Arguably the Fed was up against the zero bound with its monetary policy as it reduced the federal funds rate to 1.0 percent for two years. While there was still room to go further since the rate was still above zero, most economists see little additional benefit from the drop from 1.0 percent to 0.0 percent. In fact, many economists have said that the European Central Bank was against the zero lower bound when it had lowered its overnight rate to 1.0 percent.

FRED Graph

It's difficult to see how anything Bernanke did or did not do in 2008-2009 could have condemned the country to another Great Depression, defined as a decade of double digit unemployment. The United States eventually got out of the last Great Depression through the massive spending associated with World War II. There is no economic reason that the United States cannot undertake the same sort of spending today.

If Bernanke had allowed a complete financial collapse (putting the Wall Street banks forever out of our misery), the government could have begun to pump up the economy the next day with a massive burst of spending. If there were political obstacles, these could have been overcome by telling people that spending on education, infrastructure, energy conservation and other areas was necessary to protect us from an invasion by Martians, as Paul Krugman has suggested. 

Comments (11)Add Comment
Great Depression definition
written by Steve Bannister, August 26, 2013 7:27
Dean, I propose we could re-define a Great Depression as the ratio of what we do to fix high unemployment equilibria to how much we know about how to fix them. The lower the ratio, the closer to a Great Depression. We have a very low ratio right now.
written by Last Mover, August 26, 2013 7:48

Looking forward to the day Samuelson gets the boot by Bezos and writes about it as a freelance journalist as part of the tough choice changes necessary for economic recovery.
Samuelson spreads 3 increasingly common news myths
written by JaaaaayCeeeee, August 26, 2013 7:53

Actually, Samuelson spreads 3 increasingly common news myths:

The two myths you note, that 2001 was a mild recession, and the nonsense that the Fed should have, but failed to stimulate a strong recovery 2008-2009.

But the 3rd, a pernicious myth, is that Congress can't do anything except wait for recovery. This zombie keeps growing!

Samuelson then tells readers to blame whomever is Fed chairman for any resentment and discontent that Congress's inaction engenders.
Zero private sector employment growth for 12.5 years, 2000 to 2012
written by B L, August 26, 2013 11:45
Private sector employment was zero growth between December 2000 and July 2012, go to http://data.bls.gov/timeseries/CES0500000001 -- check for yourself. During the 12 year period an additional 30.7 million enlarged the "working age population". The CNIP grew by 14% over 12 years, employment was 0%, meaning the expected 16 million private sector jobs did not materialize. Only in the last 13 months has the # employed in private enterprise exceeded the 2000 #, it's up 2.5 million which is 2% growth over 13 years.
I think that CNIP growth since 2000 indicates that that population grows at 2.5 million a year (213,000 per month). Normally the labor participation rate over the last 20 years has been 66%, so the labor force would/should increase by 141,000 per month. Job growth has been 175,000, which is 36,000 more than population growth. We have a 16 million job deficit and we are expanding 36,000 a month (400,000 to 500,000 per year) more than population growth. It will take about 30 years to before we return to the conditions of 2000 when employment to population ratio was at its peak. I see no reason why this society would not achieve that ratio if the jobs were there. Only government direct job creation could create that condition, just as it did in the 1930s and certainly did in the 1940s when the number of employed workers increased by 40% in six years.
The silence
written by D12345, August 26, 2013 12:21
This column is invaluable. The distortions of the Times and the Washington Post
exposed with pristine clarity.
Question: What about the stories that aren't written? In particular I am thinking of the TPP. Except for Bloomberg's Op ed, there has been virtual silence. And incidentally, one of the worst offenders has been Paul Krugman, who has limitless energy to consider the political ramifications of ACA and not so much as a column inch for TPP.

Very few people have even a vague concept of this astonishing giveaway to the richest of the rich. Dean....We need you!
Thanks for a great column,
Fed Did Save The World from another Great Depression
written by Barkley Rosser, August 26, 2013 1:21
I uaually agree with you, Dean, and when in disagreement it is minor. But on this one, I think you are way off. I think the Fed (not Bernanke personally) did save the world from another Great Depression.

The policy after Sept. 2008 cannot be measured just by the interest rate, nor even by the massive and sudden increase in the Fed balance sheet, which was important. More important was the content of that balance sheet, partly supported by alternative vehicles wheeled out by the NY Fed that had been prepared ahead of time, but most importantly for certain portions of that increased balance very poorly publicized, possibly even passing your notice.

The biggie was the bailout of the ECB in the immediate aftermath of the the Sept. 18 Minsky Moment. The euro was collapsing due to the ECB being unable to bail out top European banks (including Deutsche Bank and BNP Paribas) who were in trouble because of the AIG CDO collapse. The Fed bailed them out by picking up more or less overnight about $600 billion in eurotrash assets. These were quietly moved off the books to be replace by US MBSs (still there) within about six months, after things calmed down.

This was the save, and the moment when Bernanke's knowledge about the aftermath of the collapse of the Creditanstalt in May, 1931 came into play. Yes, the global financial system could have gone down as it did in 1931, the year the unemployment rate in the US went from 8% to over 15%, the year a bad recession turned into the Great Depression. And, yes, the Fed did save us from that outcome, although it is easy to forget it or dismiss it now, if one was even really aware of what went down.
Assume the system went down in 2008
written by Dean, August 26, 2013 1:51
What would prevent the United States from spending $10 trillion in 2009 and jump-starting the economy again. The argument is not over whether the system could have gone down. The question is what stops governments from re-starting it?
So, Fed Should Have Just Let It All Go Down?
written by Barkley Rosser, August 26, 2013 9:43

Sure, in theory. But, remember that it took nearly a decade for anyone to convince Congress to jack up spending that much, and in that case it was a very real and serious war, not just some madeup Martian invasion. If the Fed had let the system collapse, there would have been immense suffering by millions all around the globe. Heck, just as in the 1930s, that suffering might well have led to the rise of political leaders who would have led the world into such a war, killing millions. Right, Dean, great proposal.
Let's Try a Little Logic Here
written by Dean, August 27, 2013 3:57
Okay Barkley, so you're using your expertise on politics to determine that it would not be possible to have a major stimulus package without a decade of double-digit unemployment and the rise of fascist movements. That could be right, neither you or I know. But that is a prediction about politics, it is not a statement about economics.

So, as economists, why don't we try telling people the truth about the economics of the situation. And you and I both agree is that there is nothing about the situation in the fall of 2008 that would have required the economy to endure a second Great Depression. The only risk was that the Samuelsons of the world might be able to use their power to keep the country from taking the measures needed to restore full employment. I consider that an important distinction.

But Should Fed Have Counted On Rationality From Congress?
written by Barkley Rosser, August 27, 2013 10:10
That is all fine, Dean, a nice exercise for people like you and I to wag our fingers at most of the profession, not to mention lots of politicians. The original premise here was what should the Fed have done and was there a serious alternative? Given that nothing was done immediately in 1931, and the ex post facto fact that even in the midst of a very hard crash it appears that probably Summers was right that Obama got about as big a fiscal stim out of Congress as he could get, was it not reasonable of Fed decisionmakers to forecast that there the probability of a sufficient response from Congress was extremely low and therefore to cover for this as much as they could to minimize the potential damage, which they did? You seem to think that they should not have just to prove some point, but I prefer to see fewer people suffer. It has been bad enough as it is, and careful reading of testimony to Congress by Bernanke has had him clearly calling for more fiscal stim, even as the politicians have roundly ignored him and gone in the opposite direction, including those in the White House.
stimulus is not a one-time show
written by Dean, August 27, 2013 10:22
The question is not what Obama could have gotten out Congress in February of 2009 given the circumstances we faced at the time. The argument that proponents of the 2nd Great Depression theory have to make is that we would not be able to get more stimulus out of Congress even with a decade of double digit unemployment.

I don't have the answer to that, nor do I think does anyone else. The experience of 2009 tells us about as much as the winner of the Nats game last night.

In terms what is a nice exercise for you and me, let's start by telling people the truth about 2008-2009. There was nothing about the economics of that situation that would have condemned us to a decade of double-digit unemployment. It is possible that political leaders who are either corrupt or too dumb to breathe could have given us this outcome.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.