April 05, 2020
With the economy going into a shutdown mode for at least month, and possibly quite a bit longer, we’re again hearing the cries from elite economics columnists about a Second Great Depression. These are pernicious, not only because they are wrongheaded, but they can be used to justify bad things, like giving hundreds of billions of dollars to the bankers who wrecked the economy with their recklessness during the housing bubble.
The basic and simple error made by the Second Great Depression gang is that they imagine we can be condemned to a prolonged period of high unemployment and slow growth by a single bad event. Their story is that letting the banks fail caused the first Great Depression and that we would have had round two if we let the market work its magic in 2008-09 on Goldman Sachs, Citigroup, and the rest. The uncontrolled bank failures were indeed very bad news for the economy at the start of the Great Depression, and a wave of major bank failures in 2008-09 would undoubtedly have made the initial slump worse in the Great Recession, but neither necessitated a prolonged slump.
What got us out of the Great Depression was the massive spending associated with World War II. There was no economic reason we could not have had this spending in 1931 rather than 1941, except have it focused on building roads, schools, hospitals, and other socially useful projects. We didn’t have massive spending in 1931, or 1932, or even during the New Deal, for political reasons, not economic ones.
So let’s stop the game-playing. We need good policy right now to keep people whole through a shutdown period and then to get people back to work when we reopen. Ideally, we will also be addressing long-neglected needs, like universal health care, child care, and slowing global warming, but this Second Great Depression stuff is just silly.