Great Recession or Little Depression

July 26, 2011

It was understandable at the time.  With financial markets in a panic and confidence shattered, everyone from media, politicians, and financial analysts characterized the period from late 2008 through early 2009 as the Great Recession.  But has that characterization, which underrepresented the extent of the economic crisis, hampered our nation’s recovery?  In addition, has it prevented politicians from enacting the policies necessary to combat devastating economic conditions not seen in this country since the 1930’s?

Subsequent economic analysis from 2008-09 demonstrates that the period was unlike any recession we have seen since World War II.

U.S. post-WWII Job Losses

The graph above – compliments of Calculated Risk – highlights the percentage of job losses compared to peak employment prior to economic contraction.  Clearly, the period from late 2008 to now is far worse than anything seen since the Great Depression.

U.S. Long Term Unemployed

The second graph illustrates people unemployed for more than 26 weeks.  Renowned economist Paul Krugman argues that we are still in the midst of a depression.  He notes that historically depressions do not normally comprise periods of nonstop contraction.  Instead, depressions usually have a period of economic growth, but the growth is too small to undue damage from the initial slump.  Krugman, along with other economists, are arguing for more expansionary fiscal and monetary policy.

But since many pundits characterized the period from 2008-09 as a recession, many Americans believe the worst is behind us.  Thus, they are more agreeable with political sentiment that argues for contractionary fiscal policy, such as near-term reductions in government spending.  Barring a complete collapse in our economy, which is certainly possible if the government defaults, a stimulus would be impossible to navigate through Congress.

Politicians most harmed by this are the ones who were in power in 2009, particularly the Democratic Party and President Barack Obama.  The public is more apt to compare the Great Recession with more recent recessions, such as 2001, 1991, or the early 1980’s, as opposed to the 1930’s.  As such, the public is less inclined to give elected officials the benefit of the doubt for slow progress in the job market.  America bounced back quickly in the 1990’s, why isn’t it happening this time?  President Obama’s fleeting words during his Election Day victory speech, when he said “the road ahead will be long, our climb will be steep, we may not get there in one year, or even one term,” are but a distant memory.

In many ways, President Obama is a victim of his own words. By downplaying the seriousness of the crisis in early 2009 to restore confidence in the markets, the American public never truly comprehended the seriousness of the economic slump.  And when a recovery was not immediately realized, frustrations mounted, leading to a Republican rout in the 2010 elections.

If anything, this illustrates the consequences of words in the long term.  It was certainly important for elected officials to restore confidence in 2009.  But in 2011, as our economy still teeters on the balance of recovery or collapse, officials lack the capabilities to instill the policies necessary to ensure this Little Depression doesn’t become great.