Depression lessons: Keep on spending
WASHINGTON -- First, critics said the government's massive $800 billion economic jump-start was too much. Now, with unemployment spiking, some say maybe it's not enough. And yet, as Christina Romer, head of the president's Council of Economic Advisers, said Monday, the measure has barely taken effect.
In a speech to the left-of-center Brookings Institution, Romer brushed aside talk that the ailing economy will require a second shot of fiscal adrenaline next year. "We need to let the medicine work for a while," she said.
But citing lessons from the Great Depression, she said the government must keep spending to sustain the economy until a recovery is well established.
After the 1929 crash, the economy plummeted for more than three years. But as the New Deal's deficit spending took hold, the U.S. posted the fastest peacetime growth in its history. The economy expanded by 11% in 1934, 9% in 1935 and 13% in 1936.
Then, though the unemployment rate remained stuck in double digits, President Franklin Roosevelt tightened spending and levied the first Social Security payroll taxes, which drained more purchasing power from private hands. The Federal Reserve, at the same time, doubled reserve requirements for banks. That one-two punch dealt the economy a blow that added two years to the Depression, Romer said.
Once seen as hyperbole, Depression references have increasingly become a staple of economic commentary. And with reason: The U.S. today has suffered the worst 12-month job loss since the Great Depression, the highest home foreclosure total and the most crippling financial crisis. Romer, an economic historian who specialized in the Depression while teaching at the University of California-Berkeley, said policymakers have learned the era's lessons.
There are parallels between the Depression and the current crisis. Both began with collapsing asset prices, saw leading financial institutions wrecked and were of global dimensions. But even though today's economy is badly wounded, it's still nowhere near Depression depths. From the 1929 peak to its trough in 1932, the economy contracted by more than 25% vs. the 2% decline suffered from the most recent peak, Romer said.
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