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The Second Great Depression Bogeyman

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Dean Baker
TPM Café, February 1, 2010
Truthout, February 1, 2010

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Our political leaders continually assert that we should be thanking them that we are not in a second Great Depression rather than complaining about how bad things are. The second Great Depression theme came up repeatedly in the debate over the reappointment of Federal Reserve Board Chairman Ben Bernanke. It also featured prominently in Treasury Secretary Timothy Geithner's defense of his handling of the AIG bailout.

While we should all be thankful that we are not in a second Great Depression, just as we should be thankful that the world has not been destroyed by nuclear war, the "Great Depression” defense is a tool of fools and liars. Exactly what set of events in the world would have given us a second Great Depression, defined as a decade of double-digit unemployment?

It is almost certainly true that if we had let the cascade of bank collapses continue in the fall of 2008, taking down not just Lehman, but also Goldman Sachs, Morgan Stanley, Bank of America and Citigroup, along with many smaller banks, that the current downturn would have been more severe. But what would have prevented the Fed from subsequently flooding the system with liquidity and the government from boosting the economy and employment with large-scale jobs programs? There is certainly nothing obvious that would have interfered with these efforts to boost the economy and restore employment.

We do know how to create demand. It is really very simple - you just have to spend money; most people are willing to work for it. Since Keynes we have known how to create jobs and reduce unemployment in a downturn, even if politicians may lack the courage to act. There never was any basis for a fear of a second Great Depression. This is simply an invention by those who are trying to justify their disastrous economic policy. The second Great Depression line is then repeated by people who consider themselves to be knowledgeable about economics, but in reality don't have a clue as to what they are saying.

It is important to come to grips with this second Great Depression bogeyman, since obviously anything is better than a second Great Depression. As long as people believe that our leaders saved us from this horror, then they won’t be sufficiently outraged about a bailout that left Goldman Sachs and the rest of the Wall Street crew richer than ever. They also won’t be nearly as angry as they should about economic policies that are projected to leave us with excessive rates of unemployment for many years into the future. And the public will not be nearly as mad as it should be about the incredible ineptitude of policymakers and economists that allowed for this collapse in the first place.

The reality is that we got into this mess because of an overwhelming excess of greed and stupidity on the part of the Wall Street bankers and the people deciding economic policy. We continue to face excessive rates of unemployment because of a continuing reluctance to pursue policies that can restore the economy to health.

Very briefly, one of these policies is more government spending to create jobs. The government can employ people directly, it can give companies incentives to employ people and it can give tax cuts that give people more money to spend. Mix and match in large enough quantities and we will get the unemployment rate down to more acceptable levels.

Similarly, the Federal Reserve Board can target a moderate inflation rate (3-4 percent) with its monetary policy. This would both lower real interest rates and help to alleviate the debt burden that is preventing many households from spending.

Another route to boost the economy would be to deliberately push down the value of the dollar against other currencies. This would boost U.S. net exports and get our trade deficit closer to balance.

Finally, if we can’t boost the economy to levels of output that support full employment, we can go the other way and adopt policies that encourage people to work fewer hours. Germany and the Netherlands have aggressively pushed “work-sharing” policies that have kept unemployment from rising in the downturn. Thanks to work-sharing, the unemployment rate in the Netherlands is less than 4.0 percent even though they have had a larger loss of GDP than the United States.

For political reasons the President and Congress are reluctant to pursue these paths. However, a population that is suffering through double-digit unemployment may not be very sympathetic to the political concerns of its leaders.

However, the public will be hesitant to demand stronger action if they are convinced that they should be thankful that we have avoided a second Great Depression. So it is important that the people know that they have nothing to be thankful for: Our leaders wrecked the economy, end of story. It’s time that they take the measures necessary to set things right, even if it is a bit unsettling to the Wall Street boys and other powerful interests.

Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University.