Magazine article Foreign Affairs

The Second Great Depression: Why the Economic Crisis Is Worse Than You Think

Magazine article Foreign Affairs

The Second Great Depression: Why the Economic Crisis Is Worse Than You Think

Article excerpt

The Second Great Depression Why the Economic Crisis Is Worse Than You Think After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead by Alan s. Blinder. Penguin Press, 2013, 476 pp. $29.95.

Alan Blinder is only the most recent in a series of prominent economists who have produced analytic accounts of the U.S. economic downturn. His crisp narrative lays out the policy options that were available at each stage of the crisis, and his analysis is infused with a deep understanding of macroeconomics. Overall, it is the best general volume on the subject that has been published to date.

Despite its many virtues, however, the book paints an overly optimistic portrait of the state of the U.S. economy. "More than four years after Lehman Brothers went under," Blinder writes, "policy makers are still nursing a frail economy back to health." But the U.S. economy is worse than "frail," and there are few signs that it is being nursed "back to health." Most economists claim at least one silver lining in the economic downturn: that it was not as bad as the Great Depression. Up until recently, I agreed; I even took to calling the episode "the Lesser Depression." I now suspect that I was wrong. Compare the ongoing crisis to the Great Depression, and there is hardly anything "lesser" about it. The European economy today stands in a worse position compared to 2007 than it did in 1935 compared to 1929, when the Great Depression began. And it looks as if the U.S. economy, when all is said and done, will have faced certainly one lost decade, and perhaps even two.

The U.S. economy has enjoyed a recovery only in the sense that conditions have not gotten worse. Blinder notes that the unemployment rate jumped to ten percent at the height of the crisis and is now hovering around eight percent, nearly halfway back to economic health. But this assessment is misleading. In the middle of the last decade, the percentage of American adults who were employed was roughly 63 percent. That figure dropped to about 59 percent in 2009. It remains there today. From the perspective of employment, the U.S. economy is not recovering but flatlining.

Look at the gdp figures: in the 12 years between the beginning of the Great Depression and the United States' entry into World War II, the U.S. economy saw its production drop by an amount equal to 180 percent of the output of one average pre-crisis year. If one assumes, as the Congressional Budget Office does, that U.S. production will return to its pre-2008 form by 2017, the economy will have suffered a shortfall equivalent to only 60 percent of one average precrisis year. But it is unlikely that the economic downturn will be over by 2017: no war or major innovation appears to be looming on the horizon that could propel the country into an economic boom the way World War II did at the end of the Great Depression. If the downturn drags on into a second lost decade, the United States will incur further losses equal to the output of a full average pre-crisis year, bringing the total cost of the crisis to 160 percent of an average pre-crisis year and nearly equal to that of the Great Depression.

Of course, the present downturn has caused far less human misery than the Great Depression did. But that is because of political factors, not economic ones. The great network of social insurance programs established by President Franklin Roosevelt's New Deal, President Harry Truman's Fair Deal, President John F. Kennedy's New Frontier, and President Lyndon Johnson's Great Society, and defended by President Bill Clinton, sharply limits the amount of poverty a downturn can cause.

And what of the future? Only ambitious political action of the kind that created those programs can insure the country against suffering an equal economic calamity down the line. Yet the U.S. political system is dysfunctional. Congress will not support the kind of financial regulation the country sorely needs. …

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