Echoes of the Great Depression: America, Europe, and Japan

Although we are technically no longer in a recession, the rate of economic growth is so low that the economy for many people seems like it is in recession. Below is a chart I created using data from the St. Louis Federal Reserve Bank that compares GDP growth rates under Obama with those under Ronald Reagan. The time axis shows months from the beginning of their respective administrations. The dotted curves shows the trends of the GDP growth in the two presidencies obtained by bezier spline smoothing.

Both Presidents inherited severe recessions, so we should not judge them very harshly for a beginning period of negative GDP growth. We would not expect any changes of law or policy to have any effects for a period of six months to a year in any case. Obama’s record shows that after approximately three-quarters of a year GDP growth stabilized to around 2% per year. In the past four months GDP growth has undergone a steep decline. It is conceivable that if the next quarter’s GDP growth is sufficiently large, the trend may return to around 2%. On the other hand it could get worse as well. Looking at Reagan’s record, we can see that after the initial two years there was a huge spurt of growth varying from seven to eight percent that lasted for around a year. After that growth bounced around between three and four percent with a few dips to around 2%. Looking at these data, anyone should agree that the Reagan era growth was much superior to the growth under the Obama administration. Also, another point of concern is that growth under Obama has been both low and flat (after averaging out fluctuations from trend) for his entire tenure.

The long, slow growth under Obama should remind us of the long, very slow growth during the Great Depression.  And the comparison of the Obama era growth with the Reagan era growth should remind us of the comparison between the long duration of the Great Depression and the relatively short duration of the 1920-21 depression. Perhaps the cause of the poor performance of the Obama economy is the same as the cause of the long duration of the Great Depression: very bad government economic policies. There are several candidates for policies that have had the worst impact on the economy. Here are several; there may be more.

1. The Affordable Care Act, AKA Obamacare.
2. The $831 billion American Recovery and Reinvestment Act of 2009, AKA the Obama Stimulus.
3. The continuation of our old, broken tax structure that encourages corporations to keep their foreign profits overseas, and discourages investment in general.
4. The Dodd-Frank Act economic regulations.
5. The federal attempt to displace fossil fuels with the use of “green energy”.
6. The “quantitative easing” (QE) policy and “zero interest rate policy” (ZIRP) of the Federal Reserve.

There is absolutely no way I could cover all of this material in a single post. To some degree, I have already discussed at least some effects of the Fed’s QE policy, and I have made some mention of the Dodd-Frank Act. For this one post I will content myself with examining the effects of the Obama Stimulus. I will discuss at least some of the others in future posts.

For four straight years after the Obama Stimulus was passed, the most commonly used index for unemployment, the Department of Labor’s U3 index, averaged more than 8%. Currently U3 is 5.5%. This unemployment rate would have been much larger if discouraged workers had not left the work force altogether. The U6 index, which includes most of these discouraged workers, remained around 12% through May 2014. It is currently 10.8%. Therefore on its own terms of limiting unemployment, the stimulus failed. It is not hard to find the reasons why it did fail. In a February 17, 2014 opinion piece in the Wall Street Journal, James Freeman noted the following facts. The stimulus was spent mostly in government and education sectors, where unemployment was low, and only about 10% was spent on promised public infrastructure. Freeman notes that this was despite the fact that the unemployment rate in construction was in the double digits. Federal spending was increased as a result of the “stimulus” from $3 trillion in 2008 to $3.5 trillion in 2009.

All of this had very little effect on the nation’s economic growth. If you consult the chart of GDP growth above, you can see that most of the recovery on Obama’s watch occurred before the tenth month of his administration. This corresponds to October, 2009. The bill which authorized the stimulus was signed into law on February 17, 2009, and could hardly have had much effect for a number of months after its passing. In fact there is almost no change in the slope of the bezier curve fitting the GDP growth data, as one would expect if the stimulus spending were having much effect. After Obama’s tenth month, growth flattened to at or below 2% for the next four years. This Keynesian stimulus was then also a failure in jolting the economy into higher growth. Instead, by directing scarce resources to what the private sector needed least (the maintenance of state and local government employment), the so-called “stimulus” probably helped stunt growth so that it could not reach the long term trend of 3.3%. Echoes of the Great Depression’s WPA indeed.

The U.S. in the era of Obama is not the only place where we can find echoes of the Great Depression. One can find parallels in Western Europe, but the best example of what Keynesian ideas can do to a nation is probably Japan. The case that Japan has been hurt by Keynesian ideas is somewhat muddled however by a controversy over whether or not Japan had any of its infamous “lost decades” at all. (see here and here and here and here.) I will defer a discussion of Europe and Japan as also being echoes of the Great Depression to future posts.

GO TO HOME

Sharing is caring!