Social Europe

  • EU Forward Project
  • YouTube
  • Podcast
  • Books
  • Newsletter
  • Membership

Crisis, Rinse, Repeat

J Bradford DeLong 9th April 2018

J. Bradford DeLong

J. Bradford DeLong

Later this century, when economic historians compare the “Great Recession” that started in 2007 with the Great Depression that started in 1929, they will arrive at two basic conclusions.

First, they will say the immediate response of the US Federal Reserve and the Department of the Treasury to the crisis in 2007 was first-rate, whereas the response immediately after the stock-market crash of 1929 was fifth-rate, at best. The aftermath of the 2007-2008 financial crash was painful, to be sure; but it did not become a repeat of the Great Depression, in terms of falling output and employment.

On the other hand, future historians will also say that the longer-term US response after 2007-2008 was third-rate or worse, whereas the response from President Franklin Roosevelt, Congress, and the Fed in the years following the Depression was second- or even first-rate. The forceful policies of the New Deal-era laid the foundations for the rapid and equitable growth of the long postwar boom.

Now, consider some key economic data points. US per capita national income peaked in 2006, just before the Great Recession, and was still 5% below that point in 2009. Within three years, however, it had returned to its 2007 peak; and, if we are lucky, it will end up being 8% above its 2007 peak this year.

By contrast, four years after US per capita national income peaked in 1929, it was still down 28%, and would not return to its 1929 peak for a full decade. In other words, there can be no comparison to the Great Depression, at least in terms of decreased per capita national income.

But nor can there be any comparison to the Great Recession in terms of weak productivity growth. Within 11 years of the peak of the pre-Depression business cycle in 1929, output per worker was up 11% and still growing rapidly. By contrast, output per worker this year is only 8% higher than its pre-Great Recession peak, and that figure continues to rise slowly.

So, within 11 years of the start of the Depression, Roosevelt and his team had gotten US per capita national income back to its previous peak while pushing output per worker 11% higher. Moreover, they did that having started from a position in 1933 that was incomparably worse than what US policymakers faced in late 2009. When historians look back at the two periods, they will have to conclude that the relative performance after the Great Recession was nothing short of appalling.

In assigning blame for this dismal track record, Democrats point to the fact that Republicans turned off the spigot of fiscal stimulus in 2010, and then refused to turn it back on. Republicans, for their part, have offered a range of incomprehensible and incoherent explanations for the anemic growth recorded since the financial crisis.

Some Republicans, naturally, blame Obama and his signature legislative accomplishments like the 2010 Affordable Care Act (Obamacare) and the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. Others blame the unemployed, those who have dropped out of the labor market altogether, or those who want to work but supposedly have nothing of value to contribute – the so-called “zero marginal product workers.”

There is much more truth to the argument offered by the Democrats, even if Obama and his team also deserve a fair share of the blame for pursuing inappropriate fiscal austerity in the early stages of the recovery. At any rate, austerity is not the whole story. And when thinking about what comes next, the most worrisome aspect of the post-2007 response is that those who implemented it, and those who succeeded them, still do not recognize it as a failure.

For example, Fed policymakers, with a few honorable exceptions, still insist that they did the best they could, considering the fiscal headwinds at the time. Likewise, Obama administration policymakers still pat themselves on the back for preventing a second Great Depression, and say they did the best they could, given recalcitrant Republican congressional majorities after the 2010 midterm elections.

At the same time, right-leaning economists still busy themselves arguing that the Obama administration’s fiscal policies and then-Fed Chair Ben Bernanke’s monetary policies were dangerously inflationary. If we are to believe them, we should consider ourselves lucky to have escaped the fate of Greece or Zimbabwe.

But as Christina D. Romer and David H. Romer of the University of California, Berkeley, have shown, countries throughout the post-war period that lacked the monetary or fiscal space to deal with a financial crisis often suffered from output shortfalls of 10% or more even a decade after the fact.

It has now been 11 years since the start of the last crisis, and it is only a matter of time before we experience another one – as has been the rule for modern capitalist economies since at least 1825. When that happens, will we have the monetary- and fiscal-policy space to address it in such a way as to prevent long-term output shortfalls? The current political environment does not inspire much hope.

Republication forbidden. Copyright: Project Syndicate 2018 Crisis, Rinse, Repeat

wealth tax
J Bradford DeLong

J Bradford DeLong, a former US Assistant Secretary of the Treasury, is Professor of Economics at the University of California at Berkeley and a Research Associate at the National Bureau for Economic Research.

Harvard University Press Advertisement

Social Europe Ad - Promoting European social policies

We need your help.

Support Social Europe for less than €5 per month and help keep our content freely accessible to everyone. Your support empowers independent publishing and drives the conversations that matter. Thank you very much!

Social Europe Membership

Click here to become a member

Most Recent Articles

u421983467298feb62884 0 The Weak Strongman: How Trump’s Presidency Emboldens America’s EnemiesTimothy Snyder
u4201 af20 c4807b0e1724 3 Ballots or Bans: How Should Democracies Respond to Extremists?Katharina Pistor
u421983c824 240f 477c bc69 697bf625cb93 1 Mind the Gap: Can Europe Afford Its Green and Digital Future?Viktor Skyrman
u421983467b5 5df0 44d2 96fc ba344a10b546 0 Finland’s Austerity Gamble: Tax Cuts for the Rich, Pain for the PoorJussi Systä
u421983467 3f8a 4cbb 9da1 1db7f099aad7 0 The Enduring Appeal of the Hybrid WorkplaceJorge Cabrita

Most Popular Articles

startupsgovernment e1744799195663 Governments Are Not StartupsMariana Mazzucato
u421986cbef 2549 4e0c b6c4 b5bb01362b52 0 American SuicideJoschka Fischer
u42198346769d6584 1580 41fe 8c7d 3b9398aa5ec5 1 Why Trump Keeps Winning: The Truth No One AdmitsBo Rothstein
u421983467 a350a084 b098 4970 9834 739dc11b73a5 1 America Is About to Become the Next BrexitJ Bradford DeLong
u4219834676ba1b3a2 b4e1 4c79 960b 6770c60533fa 1 The End of the ‘West’ and Europe’s FutureGuillaume Duval
u421983462e c2ec 4dd2 90a4 b9cfb6856465 1 The Transatlantic Alliance Is Dying—What Comes Next for Europe?Frank Hoffer
u421983467 2a24 4c75 9482 03c99ea44770 3 Trump’s Trade War Tears North America Apart – Could Canada and Mexico Turn to Europe?Malcolm Fairbrother
u4219834676e2a479 85e9 435a bf3f 59c90bfe6225 3 Why Good Business Leaders Tune Out the Trump Noise and Stay FocusedStefan Stern
u42198346 4ba7 b898 27a9d72779f7 1 Confronting the Pandemic’s Toxic Political LegacyJan-Werner Müller
u4219834676574c9 df78 4d38 939b 929d7aea0c20 2 The End of Progess? The Dire Consequences of Trump’s ReturnJoseph Stiglitz

Hans Böckler Stiftung Advertisement

WSI Report

WSI Minimum Wage Report 2025

The trend towards significant nominal minimum wage increases is continuing this year. In view of falling inflation rates, this translates into a sizeable increase in purchasing power for minimum wage earners in most European countries. The background to this is the implementation of the European Minimum Wage Directive, which has led to a reorientation of minimum wage policy in many countries and is thus boosting the dynamics of minimum wages. Most EU countries are now following the reference values for adequate minimum wages enshrined in the directive, which are 60% of the median wage or 50 % of the average wage. However, for Germany, a structural increase is still necessary to make progress towards an adequate minimum wage.

DOWNLOAD HERE

S&D Group in the European Parliament advertisement

Cohesion Policy

S&D Position Paper on Cohesion Policy post-2027: a resilient future for European territorial equity”,

Cohesion Policy aims to promote harmonious development and reduce economic, social and territorial disparities between the regions of the Union, and the backwardness of the least favoured regions with a particular focus on rural areas, areas affected by industrial transition and regions suffering from severe and permanent natural or demographic handicaps, such as outermost regions, regions with very low population density, islands, cross-border and mountain regions.

READ THE FULL POSITION PAPER HERE

ETUI advertisement

HESA Magazine Cover

What kind of impact is artificial intelligence (AI) having, or likely to have, on the way we work and the conditions we work under? Discover the latest issue of HesaMag, the ETUI’s health and safety magazine, which considers this question from many angles.

DOWNLOAD HERE

Eurofound advertisement

Ageing workforce
How are minimum wage levels changing in Europe?

In a new Eurofound Talks podcast episode, host Mary McCaughey speaks with Eurofound expert Carlos Vacas Soriano about recent changes to minimum wages in Europe and their implications.

Listeners can delve into the intricacies of Europe's minimum wage dynamics and the driving factors behind these shifts. The conversation also highlights the broader effects of minimum wage changes on income inequality and gender equality.

Listen to the episode for free. Also make sure to subscribe to Eurofound Talks so you don’t miss an episode!

LISTEN NOW

Foundation for European Progressive Studies Advertisement

Spring Issues

The Spring issue of The Progressive Post is out!


Since President Trump’s inauguration, the US – hitherto the cornerstone of Western security – is destabilising the world order it helped to build. The US security umbrella is apparently closing on Europe, Ukraine finds itself less and less protected, and the traditional defender of free trade is now shutting the door to foreign goods, sending stock markets on a rollercoaster. How will the European Union respond to this dramatic landscape change? .


Among this issue’s highlights, we discuss European defence strategies, assess how the US president's recent announcements will impact international trade and explore the risks  and opportunities that algorithms pose for workers.


READ THE MAGAZINE

Social Europe

Our Mission

Team

Article Submission

Advertisements

Membership

Social Europe Archives

Themes Archive

Politics Archive

Economy Archive

Society Archive

Ecology Archive

Miscellaneous

RSS Feed

Legal Disclosure

Privacy Policy

Copyright

Social Europe ISSN 2628-7641