Great Depression…I Mean, Recession.

by Ashley Muchow Depression. Great Recession. Trough. We’ve heard it all in reference to the struggling state of the U.S. economy. President Barack Obama has insisted his policy moves and $787 billion-plus spending initiatives staved off a second Great Depression. The National Bureau of Economic Research declared late last month that the recession ended in June of 2009, after less...

by Ashley Muchow

Depression. Great Recession. Trough. We’ve heard it all in reference to the struggling state of the U.S. economy. President Barack Obama has insisted his policy moves and $787 billion-plus spending initiatives staved off a second Great Depression. The National Bureau of Economic Research declared late last month that the recession ended in June of 2009, after less than 25 percent of federal stimulus funds were spent. All the while, Americans face stubbornly high unemployment and an economic environment struggling to revive.

So what’s the deal? Were we in a depression? A recession? The answer depends on who you talk to. What many individuals overlook is the impact intensity measurements have on policy decisions.

The 18 months between December 2007 and June 2009 have been officially dubbed the ‘Great Recession.’ These 18 months marked the longest recessionary period since the Great Depression. But stark contrasts between the current Great Recession and the infamous Great Depression exist. The Great Depression lasted nearly 10 years; unemployment peaked at 25 percent and by some estimates at a third of the U.S. labor force. As rough as the past few years have been, unemployment peaked at 10.2 in October 2009.

Confronting the similarities and differences are extremely important for economic policy. Samuel Staley writes in the National Review:

For all practical purposes, the Obama administration’s entire economy-policy framework is built on bolstering aggregate demand by goosing consumer spending and ramping up government spending.

In a world where national output has declined by nearly half—as it did from 1929 to 1933—this approach is plausible (if still controversial). But in an economic climate that is characterized by recession, not depression, this aggregate-demand-driven approach is far more suspect. Recessions are typically caused by industrial restructuring or realigning supply and demand, not massive, across-the-board declines in output or income.

Staley points out that the Recessions of 1973-1975 and 1980-1981 saw shifts in international competitiveness requiring American industry to readjust, innovate, and become more competitive. The Great Recession of recent years was handled in a much different manner. The Great Recession was confronted by our President and top economic advisers as a beast worthy of as much Keynesian stimulus as was politically viable.

Victor Davis Hanson’s satiric “How to Turn a Recession into a Depression” article touches several strategies found in Washington’s current economic playbook. One that stood out included Hanson’s 7th “to do.”

Seventh, gorge the beast. Try to get annual federal deficits up to the $1.3–$1.5 trillion range. Reagan tried to “starve the beast”—that is, to lower federal spending by lowering taxes. Why not do the inverse and borrow so much money, pile up so much debt, that even fiscal hawks will concede that higher taxes are necessary? It is a win/win/win/win/win proposition: Bigger deficits mean more federal spending, which means more federal employees, who will find more regulations to impose, which will cost employers more money and require higher taxes.

As forward as Mr. Hanson’s statement may be, he has a valid point. Spending was, and still is, focused on as a silver bullet to a problem that has not improved despite record levels of spending. Are we really going to continue on this path of self-destruction?