It’s understandable. People don’t want to be accused of alarmism and making a bad situation worse. But this reticence is self-defeating and ahistoric. It minimizes the gravity of the crisis and ignores comparisons with the 1930s and the 19th century. That matters. If the hordes of party-goers had understood the pandemic’s true dangers, perhaps they would have been more responsible in practicing social distancing.
Even after the July jobs report, when the unemployment rate fell from June’s 11.1 percent to 10.2 percent, the labor market remains dismal. Here are comparisons with February, the last month before the pandemic was fully reflected in job statistics: The number of employed fell by 15.2 million; the unemployed rose by 10.6 million; and those not in the labor force increased by 5.5 million.
“The nineteenth and early twentieth centuries were filled with depressions,” write the husband-and-wife Reinharts. Among economists, they are heavy hitters. She is a Harvard professor, on leave and serving as the chief economist of the World Bank; he was a top official at the Federal Reserve and is now chief economist at BNY Mellon.
What’s clear is that the Pandemic Depression resembles the Great Depression of the 1930s more than it does the typical post-World War II recession. To simplify slightly: The typical postwar slump occurred when the Fed raised interest rates to reduce consumer price inflation. They lowered rates to stimulate growth.
By contrast, both the Great Recession and the Pandemic Depression had other causes. The Great Recession reflected runaway real estate and financial speculation and their adverse effects on the banking system. The Pandemic Depression occurred when infection fears and government mandates led to layoffs and an implosion of consumer spending.
The collateral damage has been huge. Small businesses accounted for 47 percent of private-sector jobs in 2016, estimates the Small Business Administration. Many have failed or will fail because they lacked the cash to survive a lengthy shut down. In a new study, economist Robert Fairlie of the University of California at Santa Cruz reports an 8 percent drop in the number of small businesses from February to June. Among African Americans, the decline was 19 percent; among Hispanics, 10 percent.
In one respect, the Reinharts have underestimated the parallels between the today’s depression and its 1930s predecessor. What was unnerving about the Great Depression is that its causes were not understood at the time. People feared what they could not explain. The consensus belief was that business downturns were self-correcting. Surplus inventories would be sold; inefficient firms would fail; wages would drop. The survivors of this brutal process would then be in a position to expand.
This view rationalized patience and passivity. Just wait; things will get better. When they didn’t, anxiety and discontent mounted. There was an intellectual void. Modern scholarship has filled the void. If — at the time — government had been more aggressive, preventing bank failures and embracing larger budget deficits to stimulate spending, the economy wouldn’t have collapsed. The Great Depression wouldn’t have been so great.
Something similar is occurring today. The interaction between medicine and economics often baffles. Is this a health-care crisis or an economic crisis? Before the New Deal in the 1930s, national leaders followed the conventional wisdom of the day — doing little. Similarly, leaders now are following today’s conventional wisdom, which is to spend lavishly. Will this work or will the explosion of government debt ultimately create a new sort of crisis?
The language of the past increasingly fits the conditions of the present. The many busts of the 19th century have long been referred to as “depressions” — for example, in the late 1830s, the 1870s and the 1890s. The accepted reality at the time was that mere mortals had little control over economic events. We thought we had moved on, but maybe we haven’t.
The implications for the economic outlook are daunting. In their essay, the Reinharts distinguish between an economic “rebound” and an economic “recovery.” A rebound implies positive economic growth, which they consider likely, but not enough to achieve full recovery. This would equal or surpass the economy’s performance before the pandemic. How long would that take? Five years is the Reinharts’ best guess — and maybe more.
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