Is This a New Depression? The Lessons of the 1930s

We often hear the question “isn’t this economic crisis becoming as bad as the Great Depression?” Economists can offer a variety of reassurances, but each of them is quite circumscribed:

1. First reassurance: So far, the downturn is at worst competing with 1981-82 for the title of worst post-war recession. True, it is too late for the large monetary and fiscal stimulus applied from Washington to prevent a major recession. In April the current episode is all but certain to surpass the 1981-82 recession in length. It is still quite possible, however, that with the help of the stimulus package the current recession could fall short of the 1981-82 in depth. Unemployment peaked at 11.4% in January 1983, whereas so far we are “only” up to 8.5% (in January 2008).

But the situation is clearly going to get worse before it gets better.

2. Second reassurance: The standard forecasts currently call for the US and other economies to begin to recover by 2010. Even if the situation continues its recent rapid deterioration and the current recession in a year or so attains the prize for most severe of the post-war recessions, it still has a long way to go before it rivals the Great Depression in either length or severity. In the Depression unemployment peaked at 25% in 1933; as late as 1941 it was still as high as 9.9%, far above normal levels (e.g., the levels before the 1929 stock market crash).

But how do we really know for sure that this recession won’t reach the league of the economic disaster that was the 1930s? After all, Japan in the 1990s endured a period of essentially zero growth that lasted as long as the Great Depression. Over the last year, forecasters have already marked down their growth forecasts over and over again, both in the U.S. and globally. When the sub-prime mortgage crisis first hit, in the summer of 2007, the Fed and White House said it was “contained.” When instead it spread, freezing up liquidity throughout the financial system, they said that Wall Street was not Main Street. When it became increasingly evident that the entire U.S. economy was in recession, most emphatically including Main Street, many talked of “decoupling:” under which other major economies would remain centers of global growth. Yet this optimistic hope, like the others, soon crumbled away to nothing.

3. Third reassurance: Even if the worst were to happen, and we turned out to be at the beginning of a decade of high unemployment and stagnation analogous to the Great Depression, standards of living in absolute terms would remain far higher than in the 1930s. This fact is worth noting.

But it does not offer much solace. There is a reason why the focus is always on the growth rate of income, rather than the level. People tend to form expectations based on their parents’ lifestyle and a trend expectation of continued economic improvement, and to grow accustomed to their recent standard of living. At least after human beings get past subsistence, their happiness is related more strongly to the rate of change of their standard of living than to the absolute level. A five per cent loss of income from current levels probably leaves people more miserable than a five per cent increase from 1930s levels of income. And loss of a job or house is, needless to say, enormously disruptive to a family, often traumatic.

4. So the important question, then, is: how do we know that the recession that began in December 2007 will not turn out to be analogous to the downturn that began in 1929: the beginning of what could turn out to be a very severe loss of income and a decade of high unemployment? There are plenty of analogies between now and then:

(i) a crisis in the US financial sector that had its roots in long excessive booms in real estate and the stock market;

(ii) the spreading of the crisis from the financial sector to the real economy and throughout the world; and even

(iii) popular American disillusionment with a Republican president perceived as too passive and too beholden to the rich, which then helps elect a charismatic and activist new Democrat.

The usual reason that is given not to fear a repeat of the Great Depression is that we have learned from the mistakes of that era, and won’t repeat them this time. What exactly is it that we learned? How can we be sure of doing it right this time? There are four big lessons for economic policy from the 1930s:

(Lesson I) Monetary policy — The Fed should respond to a severe loss of demand by aggressive monetary expansion, not by allowing the money supply to contract as happened in the 1930s (most famously pointed out by Milton Friedman and Anna Schwartz, in the Great Contraction chapter of a Monetary History of the United States). It happens that the Chairman of the Federal Reserve, Ben Bernanke, and the Chair of the President’s Council of Economic Advisers, Christie Romer, are two of the very top experts in the monetary history of the 1930s. The lessons of this period have been well absorbed, and the Fed has already given us an appropriately aggressive response. But that can only take us so far.

(Lesson II) Regulation of the financial sector — In times of financial crisis, many banks and especially their depositors will have to be bailed out; this recognition in turn requires a corresponding degree of regulation in normal times. The 1930s left us with institutions such as deposit insurance and minimum requirements for banks’ reserves and capital. The existence of these safeguards is another reason why it is indeed unlikely that we will experience anything as bad as the Great Depression. The origins of the financial crisis of 2007 was not that de-regulation fervor had led to a dismantling of the important safeguards from the 1930s. (It’s true that Glass Steagall and prohibitions on inter-state banking were dismantled in the 1990s. But that did not cause the crisis.) The problem was rather that regulation did not keep up with new innovations in non-bank financial institutions. Reform in this area is more easily said than done, and more easily done wrong than done right; but will nevertheless have to be attempted as soon as we get past the current crisis.

(Lesson III) Fiscal policy — When a deficiency of aggregate demand leads to a serious and prolonged recession, the government should respond with intelligently designed fiscal easing, in the form of both spending increases and tax cuts. There are several critical qualifiers: First the budget process must not be so encumbered by political machinations or corruption as to delay disbursements until it is too late, on the one hand, or to divert them to projects with miserable cost/benefit ratios, on the other hand. Second, the budget plans must also pay due attention to the constraints of long-run fiscal sustainability. Absent these conditions, a fiscal expansion could well make things worse rather than better.

The good news is that the fiscal stimulus package that President Obama signed into law last Tuesday was better designed than those enacted in many past recessions, let alone those enacted in other countries. The efforts to block it, by those in the Congress who do not understand the lessons of the past, were unsuccessful (though they did succeed in slightly reducing bang for the buck). The bad news is that Obama has taken office with a handicap that Franklin Roosevelt did not have: a trillion-dollar deficit and a $11 trillion national debt, both of which are already guaranteed to reach alarming levels as a share of GDP in the coming year. This negative inheritance constrains the extent of fiscal expansion that is feasible.

(Lesson IV) Trade policy — The lesson that economists have long thought had been most clearly demonstrated by the 1930s is the lesson to which today’s Congress has paid the least heed. Senator Smoot (R) and Congressman Hawley (R) in 1929 proposed legislation to raise US tariffs sharply. Warnings of the damage that such protectionism would cause were ignored, including a petition organized by the leading economists of the day and signed by 1,028 of the profession. President Hoover (R) signed the infamous Smoot-Hawley bill in 1930. The consequences are well-known. Other countries instantly retaliated, and emulated this aggressive act of protectionism. Over the subsequent years world trade collapsed (down 60% by 1932), helping to put the “Great” into the Great Depression and facilitating the rise of rabid nationalism in Germany and Japan.

The Buy America provisions in the original House version of the current stimulus bill risked a repetition of the mistake of Smoot-Hawley. These provisions have received far more attention in the media in every foreign country than inside the United States. President Obama insisted that the legislation abide by our international treaty commitments. It would have been better if this statement had come earlier, but it was music to the ears of us free traders. The final stimulus bill that the President signed this week was somewhat better from a trade perspective than the original. In his short time in office, Obama is already doing a better job of respecting international commitments than did his predecessor, who imposed WTO-illegal steel tariffs in 2002.

We are assured that:

(i) the government will apply the remaining Buy America provisions in a judicious manner (we are only talking about government procurement here, not interference with private-sector imports); that
(ii) in particular, the legal commitments to open markets vis-à-vis Canada and Mexico will continue, and that
(iii) the import content to the stimulus package would have been low in any case (just some iron and steel in bridges).

I still worry. The part of the Smoot-Hawley lesson that even a mercantilist can appreciate is foreign retaliation: the initial reduction in imports is more than offset by a reduction in exports. If the Buy America provision was heard internationally as the firing of a starting gun in a new race toward protectionism, then the preceding three reassurances are not very reassuring.

To say that the 1930s hold important lessons for policy makers today is not to underestimate the other important lessons from subsequent history, especially the excessive fiscal and monetary expansions of 1964-2005. President Obama will turn to the issue of long-run fiscal sustainability tomorrow.

Comments

[jimmy46:]

Senator Smoot (R) and Congressman Hawley (R) in 1929 proposed legislation to raise US tariffs sharply. Warnings of the damage that such protectionism would cause were ignored, including a petition organized by the leading economists of the day and signed by 1,028 of the profession.
President Hoover signed the infamous Smoot-Hawley bill in 1930. The consequences are well-known. """"""""

Like most people you totally do not understand the history of this and merely repeat what so many others have said.

Hoover's #1 belief was that WAGES SHOULD NOT BE CUT.
He jawboned corporations and coerced them into promising not to cut wages,
AND, he set up a government agency to snoop around the country to see that wages were not being cut.

Then to support this policy, Hoover supported HIGH PRICES for both industrial and farm goods.
High prices were needed to pay HIGH WAGES.

No other country in the world did this, so cheap foreign imports started decimating American production.

So, to support the first two wrong policies, Hoover and Congress increased tariffs.
One mistake required another, which required another.

When Roosevelt became prez, he supported all 3 of those policies so there was no change.

And indeed, TO THIS DAY, THE GOVERNMENT SUPPORTS HIGH WAGES.

Before 1930 wages always went down during a panic <recession>,
since then they never have.

This policy needs to be changed.

Cut the cost of production and you set the stage for a quick recovery.

Keep costs high and you prolong the misery.

Feb 23 02:38 PM

[Acolin:]

What is missing from this learned and accurate analysis of the current financial crisis is the absolutely ridiculous size of the unseen and unregulated Credit Default Swap market, its dramatic impact on our much smaller economy and the huge number of players CDS attracts, not just from logically related markets, such as banking and housing, but also from many other national corporations.

Activity in this derivatives market is dominated by a small group of large financial institutions. Five large commercial banks represent 97% of the total industry notional amount and 89% of industry net current credit exposure.

We apparently have learned nothing from the manic tulip bulb boom of 1637, where a leverage ratio of 28-to-1 on contracts for future deliveries inflated prices ten times higher than before and after the boom – in less than six months! That is like Crude Oil suddenly trading to $200 or 400 a barrel.

Feb 23 02:50 PM

[kcr357:]

On Feb 23 02:50 PM Acolin wrote:

> What is missing from this learned and accurate analysis of the current
> financial crisis is the absolutely ridiculous size of the unseen
> and unregulated Credit Default Swap market, its dramatic impact on
> our much smaller economy and the huge number of players CDS attracts,
> not just from logically related markets, such as banking and housing,
> but also from many other national corporations.
>
> Activity in this derivatives market is dominated by a small group
> of large financial institutions. Five large commercial banks represent
> 97% of the total industry notional amount and 89% of industry net
> current credit exposure.
>
> We apparently have learned nothing from the manic tulip bulb boom
> of 1637, where a leverage ratio of 28-to-1 on contracts for future
> deliveries inflated prices ten times higher than before and after
> the boom – in less than six months! That is like Crude Oil suddenly
> trading to $200 or 400 a barrel.
Come on, we all know speculation doesnt affect market value ; )

Feb 23 03:53 PM

[geo511:]

I've been wondering about that - is there someone that's written about how unemployment was calculated then


On Feb 23 08:48 AM Bones wrote:

> unemployment was calculated much differently back then. If done on
> an apple to apple basis the picture is FAR grimmer on unemployment
> comparison.

Feb 23 04:23 PM

[Chris B:]

Even if we have the knowledge/technology to prevent another great depression, will we? Politics has often contradicted the advice of economists, and public knowledge about economics is abysmal (as many articles and comments on this site demonstrate). The recent "Buy American" provisions to the stimulus bill are one example of how populist foolishness and empty slogans always beat the opinions of experts who have studied the subject all their lives.


On Feb 23 02:07 PM James H. Wang wrote:

> I work with macroeconomists quite a bit in what I do.
>
> All of them have mentioned that there would have been no way that
> we would fall into the Great Depression again. No guarantees, certainly,
> but we understand now.
>
> I think it's become very compelling to say that maybe we didn't actually
> understand.
>
> You're right, I think. We'll have to wait and see to see if our current
> downturn is just another 1981-1982, or is closer to the Depression,
> or the Panic of 1873 that readers are bringing up.
>
> I'm rather doubtful of the 1873 proposition, considering that our
> knowledge of economics was poor and we did everything wrong—since
> we were acting without respect to economics at all.
>
> But it still remains to be seen if we come to another Depression.
>
>
> So far, the indicators are not very reassuring.

Feb 23 04:37 PM

[Yohei:]

www.shadowstats.com/al...

Pretty close to the 1930's calculation of unemployment has been calculated and posted at John William's site, above. Current unemployment as calculated during the Great Depression is 18% and steeply rising. During the Great Depression unemployment peaked at 25%. U-6 unemployment is published by the Bureau of Labor Statistics.

"The SGS Alternate Unemployment Rate reflects current unemployment reporting methodology adjusted for SGS-estimated "discouraged workers" defined away during the Clinton Administration added to the existing BLS estimates of level U-6 unemployment."


On Feb 23 04:23 PM geo511 wrote:

> I've been wondering about that - is there someone that's written
> about how unemployment was calculated then

Feb 23 05:27 PM

[CJJ:]

The depression started in 2000-you're an idiot. That's like saying eating salt will kill you because its essentially just chlorine.

Markets are a joke they can be bamboozled for 7 years and you can just say it was intervention...At least accept reality. Let the morons like you hundreds of years in the future make such after the fact claims. They can write that the US in 2007 was on a disaster course since 1913 and that the depression started in 1930. You see how dumb this claim is? No?

On Feb 23 01:16 PM CLH wrote:

> Capitalism is self correcting. There is nothing the govt. can do
> except to extend the correction. Roosevelt failed and Bush --Obama
> will fail. (yes Bush started the stimulus by lowering taxes and interest
> rates and Obama is following him).
>
> The depression started in 2000 with the greatest market crash of
> all time (over 80%). We dont know how long it will last with govt.
> intervention. The Japanese crisis is now nearly 20 years old.
>
> The crisis is needed to stop people (and the govt.) from borrowing
> and pay off debt. When its over NO one will want to borrow. Similar
> to the late 1940s and 50s.

Feb 23 05:50 PM

[CJJ:]

How about Mr. Williams enters the 21st century and accepts a few facts about his ShadowStats unemployment numbers:

-Underemployment is not Unemployment.
-Who takes surveys like this? I don't know anyone, ever, who has been a part of one of these surveys. That includes 18 years at a home with a telephone with 2 working parents. I am now almost 30 been in the working world for about 9 years.
-Why would we believe surveys that survey no one you know and take them as fact.
-Why would anyone believe someone who says they are "underemployed". Wouldn't it be expected that anyone unemployed or underemployed exaggerates grossly?
-I most definitely am aware of more unemployed people now than 2 years ago. However many of them are lazy people who have not tried to get a job although they are getting unemployment benefits.
-I would subject that perhaps 25% or less people under the age of 35 live in a house with a landline phone. Until that little issue is resolved these employment surveys are highly subject.

That being said, I think the US6 employment number is probably the best estimate out there give or take +/-2%.

Mr. Williams is quite famous for across the board Governmental adjustments always adding or subtracting 5-10%. It'd be easier for people to use a flat Williams adjustment than subscribing to his site for insight into one person's opinion where he basically just adds or subtracts 5/10% to the negative side of the measure.


On Feb 23 05:27 PM Yohei wrote:

> www.shadowstats.com/al...
>
> Pretty close to the 1930's calculation of unemployment has been calculated
> and posted at John William's site, above. Current unemployment as
> calculated during the Great Depression is 18% and steeply rising.
> During the Great Depression unemployment peaked at 25%. U-6 unemployment
> is published by the Bureau of Labor Statistics.
>
> "The SGS Alternate Unemployment Rate reflects current unemployment
> reporting methodology adjusted for SGS-estimated "discouraged workers"
> defined away during the Clinton Administration added to the existing
> BLS estimates of level U-6 unemployment."

Feb 23 06:02 PM

[Jason Rines...:]

Thats a nice wishlist, I voted up. Execution from this transition from Efficient Market back to Save and Invest in an entirely different matter.


On Feb 23 10:30 AM hemibarracuda wrote:

> Things are different now from the last big one. The IMF and World
> Bank have bailed out poor countrys with DOLLARS-converting foreign
> currencys to DOLLARS before the bad loans were given not for economy
> building but for policy change with no regard for human consequences.
> We should resort to selective tariffs because there will be retaliation
> with what? The World bank, our politicians and fed. reserve are devaluing
> the dollar and ruining the power of the dollar and every effort shoud
> be made to earn our way out of debt. Resign from the UN, attempt
> to marginally back debt with our gold and silver reserves, let bad
> banks fail, abolish the FDIC and privatise it, term limits for the
> ALL politicians, resign from the World bank and the IMF.(they love
> socialism and hate GOLD as a sore of value. Banks should be allowed
> to make money on deposits and services only and the fed. should be
> stripped of its monopoly to print fake money. A lot to do but Tim
> and the Fed. are doing nothing and if some of the above were announced
> the world would see we were serious about maintaining the dollar
> on the productive capacity of american work ethic and as such retaliation
> would be less likely.

Feb 23 06:34 PM

[Jason Rines...:]

I am in the data space on Healthcare. The survey result may not have a lot to do with hedonic adjustment but probably is not representative of the entire population. If I email out to say, the people whom have an ailment like obesity and ask them economic questions the resultant sample obtained would be a lot different then if I sent it out to people that have Prostate problems. Just my hunch. In any event, it's becoming obvious to all that government reporting of statistics is suspect at best and blatantly manipulated at worst. The truth often lays in the middle.


On Feb 23 06:02 PM CJJ wrote:

> How about Mr. Williams enters the 21st century and accepts a few
> facts about his ShadowStats unemployment numbers:
>
> -Underemployment is not Unemployment.
> -Who takes surveys like this? I don't know anyone, ever, who has
> been a part of one of these surveys. That includes 18 years at a
> home with a telephone with 2 working parents. I am now almost 30
> been in the working world for about 9 years.
> -Why would we believe surveys that survey no one you know and take
> them as fact.
> -Why would anyone believe someone who says they are "underemployed".
> Wouldn't it be expected that anyone unemployed or underemployed exaggerates
> grossly?
> -I most definitely am aware of more unemployed people now than 2
> years ago. However many of them are lazy people who have not tried
> to get a job although they are getting unemployment benefits.
> -I would subject that perhaps 25% or less people under the age of
> 35 live in a house with a landline phone. Until that little issue
> is resolved these employment surveys are highly subject.
>
> That being said, I think the US6 employment number is probably the
> best estimate out there give or take +/-2%.
>
> Mr. Williams is quite famous for across the board Governmental adjustments
> always adding or subtracting 5-10%. It'd be easier for people to
> use a flat Williams adjustment than subscribing to his site for insight
> into one person's opinion where he basically just adds or subtracts
> 5/10% to the negative side of the measure.

Feb 23 06:37 PM

[Danny Newton:]

I am not so sure that federal tax cuts are curative when local governments are going to raise their taxes to chase more federal money. According to BEA records, disposable income increased after the post 911 tax cuts but the effect was neutralized by actions at the local governmental level in about four years. Some states like Georgia have prevented federal tax cuts from impacting state income because they piggyback their state income on top of the federal return and adjust the rate to keep from losing money. We will have to wait two years to find out the first reliable data on this last tax cut. I think it will show that the history of 2001 will repeat itself. If there is a benefit to federal tax cuts, it will be neutralized.

The infrastructure spending is also doomed to failure because it is nothing but the same old mistakes that were already in the pipeline. The feds require a three year plan of spending and all states have excess plans that could not be funded because of the failure of he Senate and the House to agree on a transportation bill. It was also fortunate that they could not get together because it extended the life of the Highway Trust Fund. The continuing resolutions at the old spending levels simply backed up a lot of projects.

These old plans are like toxic assets/loans sitting in the vaults of banks. Many transportation projects can not pay for themselves with the revenue that they create. This is especially true if analysis is limited to direct costs and benefits. Massachusetts is considering a 19 cent gas tax increase to get past some unwise infrastructure spending right now. Their toll roads were grabbed to help pay for the Big Dig. The drowning victim has simply kept its head above water by standing on the head of the unwise rescuer.

In spite of $15 billion spent on that project there is no BEA record of State Domestic Product that would suggest that their economy was suddenly put on steroids by this monster infrastructure party.

Feb 23 07:01 PM

[jeerio:]

so if we only hit 22% unemployment, we'll be good?? my sense is this is going to be worse overall, but not as lengthy, and perhaps not the winner in every possible category of badness.

the difference will be that we will (are) throwing tons of money at it, and that the inflation issues down the road, combined with higher taxes, will actually help us get the deficit fixed. this will be the ultimate 're-set' the economy needs before anything really good or reliable will occur. i'm guessing about 5 years for this cycle to move through. (i'm hardly an economist, and i just made that up, so don't be too harsh if that's an impossible result, ha)

i just can't wait until we have a bunch of clean technology and green stocks to pump up really far.

Feb 23 09:02 PM

[WMBANZAI7:]

BAILOUT SURFIN U.S.A.
(Surfin U.S.A., the Beachboys)
WilliamBanzai7 and the Bailout Boys

Singalong link: www.youtube.com/watch?...

Listen everyone there's a Bailout ocean
Across the U.S.A.
Greedy bankers n CEOs are surfin'
Like its gold rush Californ-i-a
You'd seem 'em wearing their Hermes ties
Bespoke brogues too
A big flashy French jet will do
BAILOUT U.S.A.

You'd catch 'em bailout surfin' at CITI
(Inside outside U.S.A.)
AIG's bottomless line
(Inside outside U.S.A.)
Detroit City and Charlotte
(Inside outside U.S.A.)
Why won't someone draw a line
(Inside outside U.S.A.)
All over East Side Manhattan
(Inside outside U.S.A.)
Goin down the faux capitalist way
(Inside outside)
Everybody's gone bailout surfin'
BAILOUT U.S.A.

We'll all be planning out a TARP get away
We're gonna take real soon
We're waxing down our slippery surfboards
We can't wait for Dr Doom
We'll all be gone for the summer
We're on a Ponzi safari to stay
Tell the shareholders and taxpayers we're bailout surfin'
BAILOUT U.S.A.

Everybody's gone bailout surfin'
BAILOUT U.S.A.

Everybody's gone bailout surfin'
BAILOUT U.S.A

Feb 23 11:11 PM

[Hmm?!:]

I think it is hilarious that the author does not talk about the major factors in this recession\ depression.

>> Massive household debt for mortgages (home not farm land) and credit cards that did not exist in 1930!
>> Trillions of foreign held US treasuries. Every interest dollar leaves the country and has to be repatriated somehow? How?
>> And the one key similarity. About 300 hundred economists put out a full page ad in the wall street journal and the media behaves like it never happened the next day. Including the author of this article.

Feb 23 11:16 PM

[Roman_Fiddler:]

I think it is comparing chalk and cheese, to be honest.

What concerns me most, is that people now will not deal with a depression in the way they did in the 1930s. Back then, many still had a modicum of self-sufficiency.

Feb 24 03:50 AM

[HiSpeed:]

Human emotions never change so another of history's reruns should come as no surprise.

Feb 24 10:23 AM

[drone:]

I don't want any lessons from the thirties any more than I want to follow my father's child rearing tactic of spare the rod and spoil the child.

Feb 24 07:48 PM

[PDT:]

Well said!


On Feb 23 10:42 AM Chris B wrote:

> "The origins of the financial crisis of 2007 was not that de-regulation
> fervor had led to a dismantling of the important safeguards from
> the 1930s. (It’s true that Glass Steagall and prohibitions on inter-state
> banking were dismantled in the 1990s. But that did not cause the
> crisis.)"
> ----------------------...
> Wrong. The repeal of Glass Steagall in 1999 allowed for the same
> combination of commercial banks and investment banks that caused
> the great depression. When these functions are combined, investment
> losses will always result in unavailability of commercial lending,
> which will always result in a credit crunch / depression. That's
> how financially responsible small businesses and homeowners end up
> suffering from Bank of America's derivitives and MBS trading. <br/>
>
> It's no coincidence that the great depression started with the loss
> of depositor funds in the stock / real estate markets and only started
> to improve after the Glass Steagal Act of 1933. It's also no coincidence
> that a mere 8 years after its lobbyist-inspired repeal, banks such
> as the freshly conglomerated Citigroup and Bank of America had plunged
> the US into a credit crunch. Now these mega-institutions are costing
> the American taxpayer HUNDREDS OF BILLIONS OF DOLLARS in direct bailouts
> and TRILLIONS in GDP destruction.
>
> That is the price we pay when we fail to learn the lessons of our
> grandparents.

Feb 26 02:06 PM

[tjhorton:]

Smoot-Hawley lessons are not as clear as Frankel claims.

en.wikipedia.org/wiki/...

Quote:There is no universal agreement about the effect of the tariff. According to the U.S. Statistical Abstract, the effective tariff rate was 13.5% in 1929 and 19.8% in 1933 with 63% of all imports being duty-free. From 1821 through 1900 the United States averaged 29.7% effective tariff rates and peaked in 1830 at 57.3% with only 8% of all imports being duty-free, dwarfing the Smoot-Hawley rate. In addition, imports in 1929 were only 4.2% of the United States' GNP and exports were only 5.0%. Smoot-Hawley's effect on the entire U.S. economy may have been small, compared to the monetary policy of the Federal Reserve System. By 1937 the effective tariff rate was reduced to 15.6% when the reaction of 1937-1938 occurred, demonstrating no statistical correlation between this economic downturn and tariff levels. Senator Robert L. Owen testified at the hearings on HR 7230, the bill to make the Federal Reserve banks a national property, that; "In 1937, when the Federal Reserve Board called upon the banks to raise their reserves to twice what they had been before, there was a contraction of credit of two billion dollars.[12]

Using panel data estimates of export and import equations for 17 countries, Jakob B. Madsen (2002) estimated the effects of increasing tariff and non-tariff trade barriers on worldwide trade during the period 1929–1932. He concluded that real international trade contracted somewhere around 33% overall. His estimates of the impact of various factors included about 14% because of declining GNP in each country, 8% because of increases in tariff rates, 5% because of deflation-induced tariff increases, and 6% because of the imposition of nontariff barriers.

Feb 27 12:29 PM

[MGA_1:]

Couple notes:
* The 81 downturn was completely voluntary and caused by volker raising interest rates to stop inflation. He could have lowered rates to re stimulate the economy - we can't do that now.
* Why 2010 for a recovery - because we want that? What about all the alt-A and option arms that still have to work their way through the system?
* We have close to a 10% unemployment NOW, but what about in a couple years. Is there really any good economic news out there?

2010 is not the time of recovery... it will be later. The debt has to clear out of the system.

Mar 08 05:36 AM