OPINION:
Compared to the Great Depression’s recovery, today’s weak economy is more befuddling. Considered the worst downturn since the Depression, the recent severe recession is commonly perceived today as the reason for the slow current recovery. However, examination of the economy’s performance during these two periods does not just refute today’s prevailing perception — it proves the opposite is more accurate. Instead of the recession’s severity causing today’s slow recovery, it is the slow recovery that has made the last recession seem all the greater.
The prevailing narrative of today’s economy is that the last downturn was a “Great Recession” — the most severe since the Great Depression eight decades ago. As a result, the recovery of today’s economy has been retarded. The supposition is clear: The more severe the downturn, the slower the recovery.
The theory’s flaw is that a comparison of real gross domestic product (GDP) growth following the Great Recession and the Great Depression produces a very different picture.
First, today’s narrative linking the last recession and the Great Depression implicitly likens them. In reality, they differed dramatically in severity.
From 1929 to 1936, the Great Depression saw real GDP fall 26.3 percent over four consecutive years, 1930 through 1933. The economy did not regain its 1929 level until 1936 — seven years later.
The last recession saw real GDP fall just 3.1 percent over two years, 2008 and 2009. The economy regained its real GDP level 15 quarters later, in 2011’s third quarter.
Second, even more contradicted by comparison is the idea the last recession’s severity has retarded recovery.
Since 2009, real GDP annual growth has averaged just 1.4 percent. Over the similar seven-year period of 1933-39, real GDP annual growth averaged 5.9 percent. Even if we drop 2009’s 2.8 percent contraction — so that only the period when the economy grew is examined — the 2010-15 growth average rises to just 2.1 percent. The Depression’s similar six-year period, 1934-39, recorded 7.1 percent average annual growth — despite enduring 1938’s 3.3 percent contraction, a drop greater than the Great Recession’s total fall.
The unfavorable comparison does not end there. The last recession’s recovery has benefited from advantages that the Depression’s did not. Most notable among these is the Federal Reserve’s management of the money supply. During the Depression, as Milton Friedman showed, money supply actually shrank. In contrast, today’s economy has benefited from a prolonged period of historically low interest rates and lax monetary policy.
For those inclined to see government spending as stimulative, the Depression’s New Deal has nothing on today’s. From 1933 to 1939, federal spending averaged 9.2 percent of GDP, and the deficit averaged 3.6 percent. While far above 1932’s federal spending at 6.8 percent and deficit at 4 percent of GDP, New Deal spending and deficits pale in comparison to today’s. From 2009 to 2015, annual federal spending averaged 22.2 percent of GDP and deficits averaged 6.2 percent.
Although the Depression brought extreme levels of government stimulus, two areas of government activity were mild by today’s standards: taxes and regulations.
During 1933-39, federal revenues averaged 5.5 percent of GDP. Even after several annual increases, they were still just 7 percent in 1939. Over the 2009-15 period, federal revenues averaged 16 percent of GDP and hit 18.2 percent last year.
The other government activity area that assuredly favored the 1930s recovery was a lower economic impact from federal regulations.
The big picture encompassing both the Great Depression and the last recession shows that in the race to recovery, the economy with the smaller government footprint ran faster — even when hobbled by government failing to do its basic job of maintaining a stable money supply.
Apologists for today’s slow recovery have not solved the riddle of why it is so lethargic. The theory that the last recession’s severity has impeded the economy does not withstand comparison to the Great Depression’s aftermath, when a far greater downturn had a far more robust economic rebound.
The real story is that the current period’s prolonged economic weakness has served to retrospectively raise our opinion of the last recession’s severity. It is the slow recovery that has made the last recession “great.”
If the economy at its nadir (2009’s real GDP of $14.4 trillion) had grown by the 1933-39 annual average of nearly 5.9 percent, it would not only have surpassed in 2010 its prerecession 2007 peak of $14.9 trillion, but it would have reached $15.3 trillion — a level it did not equal until 2012’s first quarter.
What today’s slow growth apologists have accomplished is to unwittingly provide a guide as to how today’s recovery can be accelerated. We find America years into a period in which economic mediocrity has become acceptable: The last recession was so bad that so-so is now OK.
To paraphrase Shakespeare’s “Julius Caesar”: “The fault lies not in our scars, but in ourselves.” During this unnecessarily prolonged recovery, we have lost sight of the fact that economic growth needs to be a priority.
• J.T. Young served in the Treasury Department and the Office of Management and Budget, and as a congressional staff member.
Please read our comment policy before commenting.