The Very Real Chance of Another Great Depression

An article in the New Republic has an unsettling analysis of why the USA could be heading towards another Great Depression - what's truly upsetting is that the main underlying cause should the worse case play out is that we NEVER learn from history. The article parallels the mistakes made in the 1930's with political/economic actions today and indicates we are making the same mistakes all over again. Leading the way in the march toward the potential fiasco, of course, is the GOP which never seems to want to avoid repeats of past disasters. A sure mark of insanity is doing the same thing and expecting a different result. Not that there is much doubt that the GOP is increasing controlled by the insane. Democrats, however, have no excuse for lacking the political will to speak out against such stupidity. Here are some article highlights:
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When the financial system was on the edge of melting down back in the fall of 2008, there was much talk in the punditocracy of a second Great Depression. The story was that we risked repeating the mistake at the onset of the first Great Depression . . . Instead, however, we acted, and these days the accepted wisdom is that the TARP and other special lending facilities created by the Federal Reserve Board prevented a similar collapse that saved us from a second Great Depression.
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But this view badly misunderstands the nature of the first Great Depression—and may, in fact, result in the country suffering the second Great Depression that the pundits claim we have averted.
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Allowing the cascade of financial collapses at the start of the first Great Depression was a mistake. However, there was nothing about this initial collapse that necessitated the decade of double-digit unemployment that was the central tragedy of the Great Depression. This was the result of the failure of the federal government to respond with sufficient vigor to mass unemployment. Indeed, the economy only broke out of the Depression when the federal government undertook massive deficit spending to fight World War II.
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Then, as now, politicians in Washington were obsessed with the budget deficit. They never would have countenanced such spending, apart from the threat to the nation posed by Hitler and the Axis powers.
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Unfortunately, the country seems destined to follow the same course in the current slump as it did in the 30s. The May jobs report should have provided the sort of stiff kick that is needed to revive discussion of additional stimulus. Instead, it seems to have barely shaken Washington’s ongoing obsession with deficits.
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In policy circles, there seems to be an absurd faith that demand in the economy will arise out of nowhere if we are just virtuous enough in reducing the deficit. That is not the way the economy works. Demand must come from some discrete source and it is very difficult to see where that might be if the country continues on a path of deficit reduction.
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To see why this is the case, first note that nearly 70 percent of demand in our economy is from consumption, but consumption has been growing slowly for two reasons. The first is that the economy has been creating few jobs. Furthermore, in a weak labor market workers do not have the bargaining power to push up their wages. The slow growth in jobs and stagnant wages mean that most families, who get nearly all their income from working, are seeing little growth in income. Slow growth in income means slow growth in consumption.
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The second factor depressing consumption has been the continuing deflation of the housing bubble. To date, the decline in house prices has destroyed nearly $7 trillion in housing equity. And prices are still falling. . . . The loss of this wealth will lead homeowners to cut back their consumption further in order to rebuild their savings.
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With these other sectors accounted for, this leaves the government as the only remaining candidate for boosting the economy. But additional stimulus is not even on the agenda in Washington. Instead, we are seeing cutbacks at all levels of government. These cutbacks led to a loss of 29,000 jobs in May. The pace of job loss is only likely to increase when states impose another round of cuts on July 1, the beginning of a new fiscal year for most of them.
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Moreover, there are more factors pointing to slower growth than faster growth going forward. In addition to the state and local cuts kicking in next month, the new fiscal year for the federal government begins October 1. This is also likely to involve further cuts in spending. And the payroll tax cut is scheduled to end 3 months later, as is the extension of unemployment benefits. At some point, the pain of high unemployment across the country may lead to some new thinking in Washington, but until that time, welcome to the second Great Depression.