The Great Depression and the Great Recession (1)

Blogging for me is a way to express some thoughts and reactions to things I read or learn about.  As I’ve note before one doesn’t have to know something to blog, one only has to have an opinion which one is willing to express.  So I’m going to venture off onto economic issues because I recently read about them, first in  the WILSON QUARTERLY 2012 article “Revisiting the Great Depression” by Robert J. Samuelson.   I found interesting his thesis that

The role of the welfare state in today’s economic crisis recalls the part played by the gold standard in the calamitous 1930s.”

“Just as the gold standard amplified and transmitted the effects of the Depression, so the modern welfare state is magnifying the effects of the recession.”

I’ve read different comparisons between the 20th Century’s Great Depression and the recent Great Recession of the 21st Century, but Samuelson is the first I’ve seen indicate that the current “welfare state” may have the same drag on the economy that the gold standard had in the 1930’s.   The gold standard is thought by some to have hamstrung the economy in the 1920’s and 30’s limiting growth by limiting the amount of capital available to be invested in the economy.    Samuelson defends comparing the effects of the gold standard on the economy of the 1920’s with the effects of the modern welfare state on the modern economy:

 “Casting the welfare state in this role will strike many as outrageous. After all, the welfare state—what Americans blandly call ‘social spending’—didn’t cause the 2007–09 financial crisis. This dubious distinction belongs to the huge credit bubble that formed in the United States and elsewhere, symbolized by inflated real estate prices and large losses on mortgage-related securities. But neither did the gold standard directly cause the 1929 stock market crash. Wall Street’s collapse stemmed, most simply, from speculative excesses. Stock prices were too high for an economy that was already (we now know) entering recession. But once the slump started, the gold standard spread and perpetuated it. Today, the weakened welfare state is perpetuating and spreading the slump.

What has brought the welfare state to grief is not an excess of compassion, but an excess of debt.”

Samuelson goes on to describe how the US pulled out of the depression because of certain demographic truths.  But he also notes what factors today are not exactly the same as in the time after the Great Depression.  Our climb out of the Great Depression had some factors in its favor which are not true today.

“But this system required favorable economics and demographics—and both have moved adversely. A younger population was needed to lighten the burden of supporting the old, the largest claimants of benefits. Rapid economic growth was needed to generate the tax revenues to pay for benefits. Indeed, the great expansion of benefits started in the 1950s and ’60s, when annual economic growth in Europe and the United States averaged about four percent or more, and the expectation was that this would continue indefinitely. Long-term economic growth is now reckoned closer to two percent a year…”

But the unfavorable demographics in Europe and the US during the current economic crisis are not those of the post-Great Depression times.  So modern governments have tried a different set of solutions to the economic crisis:

“The means of escape from these unhappy trends was to borrow. Some countries with extensive welfare systems that didn’t borrow heavily (examples: Sweden and Finland) have fared well. But most governments became dependent on bond markets.”

The results of government efforts have to date not been totally successful, though some would argue a point harder to prove: what was done prevented an even worse economic disaster.    Samuelson offers a moral to the story:

“The mistake, popularized largely by economists, was to believe that regulation of the economy could be derived from theory and converted into practical precepts for policy. The reality is that economic life is not solely described or dictated by rhythms suggested by economic models. It moves in response to institutions, technologies, beliefs, and cultures that follow their own logic, sometimes with completely unexpected, mystifying, and terrifying consequences.”

The world’s economy has proven to be more difficult to push into recovery than many had hoped.  President Hoover in the 20th Century was criticized for not doing enough to stimulate the economy because of his conservatism; President Obama has been criticized for doing too much because of his being liberal.  But the two crises represent different times with efforts made having results that cannot exactly be compared to each other.   As in chaos theory, there are so many factors, and so many unpredictable factors that shape the world’s economy that trying to predict the exact effects of certain “stimulus” efforts  may not be possible.

In the next blog I will look at another WILSON QUARTERLY article, “The Debt Bomb”,  which analyzes the causes of the ongoing Great Recession.

Next:  The Great Depression and the Great Recession (2)

6 thoughts on “The Great Depression and the Great Recession (1)

  1. kay

    Thank you for posting this. I realize the welfare state, today’s golden calf, or cash cow, has separated charity, responsibility and community from aspects of personal commitment – placing them instead into aspects of Leviathian. This destroys people individually, while destroying their society at large – a twofer.

  2. quote ~ “Casting the welfare state in this role will strike many as outrageous. After all, the welfare state—what Americans blandly call ‘social spending’—didn’t cause the 2007–09 financial crisis. This dubious distinction belongs to the huge credit bubble that formed in the United States and elsewhere, symbolized by inflated real estate prices and large losses on mortgage-related securities.”

    Might it be that all of us, raised on “social spending”, created the market demand for credit instruments that were ultimately damaging to the whole because of the expectations that we deserved a “chicken in every pot” whether we earned that chicken or not?

    So…no, I don’t think tying the welfare state to the gold market is all that outrageous insofar that the market demand for gold and the subsequent market instability is predicated on the same greed that created the market demand for McMansions, cars, boats, goods, and holidays amongst a people that hadn’t had the buying power for these things in the past. Media created a market for goods that, before, where not in the commonplace realm. Like Pavlov’s dog, we began to salivate after these goods. So credit was there to make it happen…

    Now here we are. I heard on story on NPR of a homeless couple, sleeping on the streets of Las Vegas. But, thank God!, they were able to keep their down comforters for warmth during the cold nights…

    1. Fr. Ted

      In as much as politicians care about getting elected, they are often making decisions which they perceive to be the will of the people. So there is no doubt that we each and all together contribute to ongoing political morass. Politicians avoid making the hard decision as they attempt to appease voters. It is a downside of democracy which still may be the best system of government available to humankind.

      So yes demand for more credit creates a phenomenal and unsupportable debt crisis which we want to blame on politicians who in turn are trying to give us what we demand.

      The image which comes to my mind is the snake swallowing its own tail.

      Just personally, I have never understood how an economy which is based on ever increasing consumption is in fact sustainable. First because many natural resources are limited, 2nd because of the amount of waste and toxic waste we create and have to deal with, and 3rd because at some point we can ask how many cars, refrigerators, computers, whatever do we actually need? At some point things become saturated – with goods and with trash.

      In the ancient world they assumed the poor were needed because those who are hungry are willing to do the hard labor in order to eat. It was pointed out that it is not the rich who actually construct the roads or clean away the trash/waste or who plow the fields and harvest the crops. The rich don’t cobble shoes nor haul goods to market. The poor do those things in order to earn enough to live on.

      Christian moralists thought the poor served the purpose of preventing the rich from being self centered. The poor were needed for the rich to attain heaven – as the rich learned compassion and mercy and charity. Chrysostom is a prime example of someone who felt the poor were the salvation of the rich. To give to the poor is to lend to God, who will repay the debt.

      In the modern world the poor are viewed purely in terms of their consumption. If they consume enough, they help keep the economy going. If they consume only enough to survive they are of no value. The “welfare system” really is a way of giving them money to consume more, not produce more.

      1. cindy

        Your mention of labor practice in the ancient world brings me to this point, the vocational opportunities were bound more by family tradition, such as farming which would pass from father to his heirs. The opportunity to be anything outside of your traditon really was non-existent or at least reduced to a minimum. These people were able to sustain themselves and certainly only lived a modest lifestyle but that doesn’t mean it was pure misery. In order for the cobbler to make a living, there first must be someone who can afford shoes. Why do we always assume that because someone is working at a job that might seem unattractive to us, that it is degrading to them?

  3. Pingback: The Great Depression and the Great Recession (2) | Fr. Ted's Blog

  4. Pingback: Courage and one economic forecaster who predicted the 2008 crash, financial crisis, and housing collapse « JRFibonacci's blog: partnering with reality

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