On the Use of the "D" Word

I noted in an earlier comment that the word "Depression" is rearing its head in the mainstream commentary on business and economics.

When people use it, however, most listeners assume the word to simply mean a Very Bad Thing, with little concept as to the magnitude of the event-let alone how our situation since has compared with it.

According to the National Income and Product Accounts Tables of the Bureau of Economic Analysis, the U.S. economy shrank by roughly a third between 1929 and 1933. It recovered afterward, to its 1929 level, by 1936. From 1936 to 1940 the economy then grew at an average rate of 4.7 percent a year above its 1929 level.

In other words, for the decade thought of as the Depression as a whole, U.S. GDP expanded at an average of 1.7 percent a year during the 1929-1940 period-or 0.93 per cent per capita.

That is only very slightly less than the 1 per cent per capita growth the U.S. saw during the 1973-1995 period as a whole, which virtually no one in the mainstream refers to as a Depression. Growth improved after that (1995-2006 seeing 1.6 per cent per capita growth), but the figures for the 2000s have been frequently criticized for understating inflation, with some suggesting little or no real GDP gain in the years since the '90s boom had run its course; and even the official data now has the U.S. in a recession from December 2007 on.

Put plainly, the period since 1973 has, when taken as a whole, seen a rate of economic growth roughly comparable to that of the 1929-1940 period.1

Now, the idea that we have been in something like a Depression for so many decades may seem ridiculous, and it would be a mistake to overlook some important differences. One is that nothing like the sharpness of the shock of 1929-1933 has been evident since 1973. Rather than a sharp, deep drop in output, followed by a period of rapid growth later, these years have seen prolonged, very slow growth.

Another reason is the severity of the blow to private investment as a share of GDP during these years. It fell from 16 percent of Gross Domestic Product in 1929 to a mere 2.2 percent of it in 1932. By the end of the decade, it still hadn't returned to its earlier level, returning to just 13.4 percent by 1940.

Instead, the growth of the late 1930s reflected the massive expansion of the U.S. government. Government expenditures went from $9.4 to $15 billion between 1929 and 1940, nearly doubling in real terms (from $119 to $232 billion in today's dollars). In particular it was a matter of the growth of Federal spending and investment, which nearly quintupled from $22 to $100 billion, after adjustment for inflation-expenditures paid for by borrowing that raised the ratio of national debt to GDP from 16 percent in 1929 to 52 percent by 1940 (which, of course, enlarged the demand that enabled and propped up the recovery of private investment, unsteady and incomplete as it was).

Private investment has never fallen as low in the post-1973 period as it did then, the worst moment perhaps 1991, which roughly matched the level of 1940, at the Depression's tail end. Nonetheless, government has been about twice as big a part of the economy as it was in 1940, the Federal government three times as big, a factor that should not be underestimated in any attempt to draw a parallel between the two situations. Some observers argue that the only reason things have not been worse is because of these large public shares, and particularly the stabilizing effects of the transfer payments they facilitate (an idea Paul Bairoch mentions in his book Economics and World History). And both the public and private investment of recent decades have entailed a massive, Depression-scale accumulation of debt.

One might also point to the employment picture. The figures provided by the Bureau of Labor Statistics show that 24.9 percent of the labor force was out of work in 1933, and still 14.6 percent in 1940-figures with no recent parallel. Official postwar unemployment only ran in the double digits between September 1982 and June 1983, peaking at 10.8 percent in November and December 1982. In October this year, it was a mere 6.5 percent.

However, "unofficial" estimates of American unemployment since the 1970s commonly produce much higher figures than that. Simply including BLS statistics on marginally attached workers (who recently had a job and want another one but are not looking), discouraged workers (who are not seeking work because of the state of the market), and part-timers ("who want and are available for full-time work but have had to settle for a part-time schedule") raises the October 2008 figure to 11.8 percent. Much more expansive definitions are possible, and these commonly result in Depression-level numbers.

In short, the idea that we are in a quasi-Depression is not totally groundless-or unprecedented. Such a view is a commonplace among long wave theorists, whose work frequently recognizes an analogy between the post-1973 period and the 1920s and '30s.

It also suggests strongly that we have been on the wrong track economically these past several decades, in the U.S., and around the world (where the picture has not been much better, and similarly evocative of the '30s in many commentaries). One theory, espoused by many (though by no means all) of the aforementioned long wave economists, is that the revival of growth commonly requires active state intervention, perhaps of a Keynesian type-exactly the opposite direction to the "courtesan state" practices pioneered by Augusto Pinochet's Chile, Margaret Thatcher's Britain and plain old Reaganomics.2

Given the changed rhetoric of recent weeks, it may be possible that the sorts of policies which, in this reading of economic history, get growth going again, will be enacted by governments. However, it would be a real mistake to jump the gun on that score. Following the fad for neo-mercantilism in the late 1980s and early 1990s, the Asian financial crisis of 1997-1998, the bursting of the tech bubble and associated corporate scandals, the end would be declared-and yet, the TINA ("There Is No Alternative") mentality soldiered on.

So it might again after the sense of crisis has passed.

1 It is worth noting that measures other than GDP, such as the Genuine Progress Indicator (GPI), report poorer performance than that. According to the 2006 report by Redefining Progress, U.S. GPI stagnated in the area of $15,000 per capita in 1978, the U.S. economy as a whole making no meaningful progress in three decades. It is also worth noting that according to Alan Freeman's analysis in 2003's "Globalisation: economic stagnation and divergence," even going by GDP the world economy was static between 1980 and 2002, and actually shrank between 1988 and 2002.
2 I explore that idea in a somewhat more academic manner here, in my article, "A Long-Term Trend Toward the Depletion of Fiscal-Macroeconomic Slack in the World Economy?", where I argue for the wage-productivity gaps, financialization, short-termism and resource misuse fostered by neoliberal policies as the causes of the stagnant growth and mounting debt seen since the 1970s.