What If They Threw a Recession and Nobody Came?
Rich Danker in the Weekly Standard writes in the guise of a book review about a favorite conservative theme: How a distressed economy in recession, left to its own devices without government interference, will heal itself. The book, The Forgotten Depression by James Grant, is about a financial crash in 1920-1921 (see here and here) during the administrations of President Warren Harding and President Calvin Coolidge. Amity Shlaes has written another excellent history of the period in the biography Coolidge.
Grant’s book describes something that every good Keynesian considers to be heretical, blasphemous anathema, namely how an economy in the grasp of a particularly vicious depression can recover in a relatively short time with absolutely no government stimulus. If you recall from the post The Keynesian-Neoclassical Ideological Conflict (2) at the very end, I said that a neoclassical, laissez-faire solution to a sick economy works only with free markets with minimal government intrusion. That is precisely what the economy had in the Harding and Coolidge administrations. Only with free markets can the balance between supply and demand in the form of an equilibrium price for each good be found (See the posts on supply and demand, and on marginal utility). Without this balance the economy cannot be stable from collapse, and without such stability the economy cannot grow.
That the 1920-21 Depression was particularly sharp can be seen in consumer price deflation, estimates of which range from -13% to -18%. Wholesale price deflation was even sharper at about -37%. Estimates of unemployment at the height of the depression range from about 9% to 12%. Yet the government did nothing and the economy recovered to vigorous growth after 18 months of recession. This is a significantly shorter duration than that of the Great Depression of 108 months.
The history of the 1920-21 Depression therefore points to a better way to produce a healthy, vigorous economy without the need to vastly increase the national debt. At the present time the national debt is approximately $18.2 trillion which is about 102% of GDP.
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