The terms “recession” and “depression” were once used to suggest that a downturn was not as bad as a “panic” or “crisis.” In fact, for the first years of his presidency, Herbert Hoover chose to refer to the downturn as a “depression” in an effort to convey that what the country was experiencing was just a temporary indentation. Only in 1931 did Hoover begin to speak of a “Great Depression.”
Our current downturn has also been plagued by word games. Faced with the fear that the U.S. was about to suffer another “great depression,” commentators and economists revived the term “great recession” that had been used to describe the recession of 1982. The intent was to distinguish the current downturn from the graver one of the 1930s. At an economists’ forum in February 2009, Nariman Behravesh, chief economist and executive vice president for IHS Global Insight, said, “This is the Great Recession, not the Great Depression 2.0, and not Japan in the last decade.”
There are, indeed, obvious differences between the current downturn and the Great Depression. The unemployment rate, for one thing, was much higher in the Great Depression. But for the purpose of deciding what to do next, the term “Great Recession” is deeply misleading, and has led to a continued underestimation of the challenges facing the United States and the world. In its basic contours, the current downturn is much more similar to the depressions of the 1890s and the 1930s than to the post-World War II recessions. Until our policymakers in the White House and on Capitol Hill acknowledge this, and convey the depth of the crisis to the public, it is going to be very difficult to get out of the economic hole in which we find ourselves.
The current downturn resembles the great depressions rather than the post-World War II recessions in three significant ways:
1) The Financial Crisis: The downturns of 1893, 1929, and 2007-8 were precipitated, and deepened, by a financial crisis. In 1893, gold outflows resulting from a downturn in Europe (in the 1890s, London was the center of world finance) caused deflation and a spate of bank runs. In 1929, it was the stock market crash, and in 2007-8, the subprime mortgage crisis.
2) Overcapacity in a Leading Industry: After the Civil War, railway construction had driven the development of capital goods industries. In the years before 1893, it started to slack off, leading to a slowdown in private investment. Before 1929, the production of automobiles and streetcars tapered off, and before 2007, the growth of computer/telecommunications/Internet industries began to slow, along with construction, housing, and auto sales.
3) The Global Dimension: During recessions, a downturn in one country has been eased by prosperity in another, but in depressions, the downturns have been global. During the early 1890s, the downturn spread from Europe to the United States; in the 1930s and late 2000s, it spread from the United States to Europe and Asia.
Each of these features contributes to the most salient feature of depressions: their sheer length and intractability. Overcapacity in leading industries and the growth of indebtedness discourage consumption and investment; global instability holds back trade. The recovery of the private sector is slow and tortuous, and an increase in employment must be achieved primarily through public investment. During the Great Depression, new private investment in factories and offices did not rise to the level of the 1920s until 1946. Until then, whatever growth in employment occurred was largely the result of public investment.
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