How Bad is the Economy?

I keep seeing comparisons between the current economic state and the Great Depression. Sometimes someone will ask if the current economy resembles the 1930s or the 1970s.

All of this is ridiculous. By the standard measure of a recession, we are not even in one yet, just a slow-down. This probably will change and the economy has been hit by several blows but comparisons with he 1930s and 1970s are premature at the very least.

Currently unemployment is a bit over 5%. In the 1970s it got as high as 10% and 5% was considered full employment and nearly unreachable. During the Depression unemployment was above 30%. A third of the country was out of work (a lot more if you remember that women weren't supposed to work full-time, anyway).

Inflation is trickier. During the 1970s inflation was a constant factor. People were reluctant to bank their wages because inflation was running ahead of interest. Your money was actually worth less after keeping it in the bank for a few years. The cost of living went up so fast that union contracts specified multiple cost of living increases during a single year. Inflation for the last few months has spiked at a rate not seen since 1980 but we don't know if this year is an anomaly or a trend.

During the Depression, we actually had deflation instead of inflation. Money was so tight that the price of everything went down. If it is bad that housing is not holding its bubble price, think how much worse it would be if nothing held its value.

So, compared with the two earlier periods, things aren't so bad now. But that's not the real difference. The big difference is time. The Depression lasted from 1929 until World War II - more than a decade. The 1970s had recessions hitting so close that the economy hadn't really recovered from the previous one before the next hit. As I already mentioned, inflation and unemployment were both well above today's figures, even during the recoveries. And this went on from the late 1960s until 1983.

So, we haven't even started an official recession and it is already being compared to events that lasted more than a decade. Wait a year or two to see if the economy has recovered. If things are still bad in 2010 then it is time to start worrying. If we haven't seen a recovery in 2015 then you can start talking about the 1930s and 1970s.

In the meantime, 1992 and 2001 are better comparisons.

So why have this conversation at all? I suspect that it is Bush Derangement Syndrome. Liberals would love for Bush's legacy to be that he wrecked the economy. Even more, they would love to use this as a spring-board for even more government intervention. Barack Obama is on board with this. His response to every bit of ad economic news is that it shows the need for more government oversight.

Most economists now admit that the Depression was much longer than it should have been because of FDR's economic policies. Obama wants to repeat that mistake.