'A Chicken in Every Pot': The Economy Will Recover

 |  Includes: DIA, QQQ, SPY
by: Arnold Landy

It is time to smash the myth that the U.S. financial crisis will cause any recovery from the current recession to be slow and unimpressive. In fact, history tells us the opposite.

It may surprise readers to learn that during the Great Depression, after collapsing from 1929-1933, our economy actually expanded sharply from 1934-1937 (industrial production regained its prior peak), declined during 1937- early 1938, then began another robust recovery that lasted beyond the end of World War II.

As summarized by Christina Romer, Chairperson of the Obama administration's Council of Economic Advisers, the early 1930s saw the failure of nearly half the nation's financial institutions, yet the recovery years of 1934-1936 displayed increases in real GDP of 11%, 9% and 13%, respectively and the unemployment rate fell from 25% to about 15% during that period. Clearly, that financial crisis, which was far worse than that of today, did not prevent our economy from recovering rapidly.

During 1937- early 1938, our economy fell into another decline. Most monetary economists, like Milton Friedman, Anna J. Schwartz and Allan Meltzer, placed blame for this on the Federal Reserve Board, which tightened money by raising banks' reserve requirements in late 1936. Keynesian economists, like Paul Krugman, tend to blame the federal government's cutting back on fiscal stimulus, which also occurred. Christina Romer sides with the monetarists in crediting the subsequent expansion of the money supply with pulling us out of the Depression, while stating recently that the New Deal was too small a program to have been effective. She points out that the current stimulus package's fiscal effect is about twice the size of FDR's New Deal, as a percentage of GDP, and will last twice as long.

By 1938-1939, fiscal and monetary policy had turned expansionary, again, and the economy expanded rapidly through and beyond the Second World War. Examination of economic data from the Great Depression and its aftermath shows that a financial crisis can cause an economic calamity, but there is no evidence that recovery from such a debacle is necessarily sluggish, indeed the evidence is to the contrary.

Due to the cloud of pessimism overhanging our national outlook as expressed by most observers, I look for the nascent economic recovery to surprise on the upside. In other words, a chicken in every pot, as the economy moves from cold to hot.