The 1930's, the 1970's, and Our Current Economy

We are currently experiencing the worst economy since the 1970's or perhaps since the 1930's and early 1940's.  There are similarities and differences between our current mess and the mess during the Great Depression and the mess of the stagflation of the 1970's.

I find the biggest similarity between now and the era of the Great Depression is in the presidencies.  Herbert Hoover is disliked by historians and they blame his laissez-faire policies for the Great Depression.  Of course, Hoover was in favor of big government and his policies reflected this.  Roosevelt simply continued the policies of Hoover and exacerbated the situation by instituting even more big government.

In much the same way, the media and the establishment refer to Bush as a conservative.  Even many Republicans go along with this.  It is assumed that Bush was pro-free market, as some of his rhetoric may have indicated.  Unfortunately, Bush was and is in favor of big government in almost every arena.  He started two major wars and occupations, he centralized education more, he destroyed civil liberties, he instituted more socialized medicine with his prescription drug plan and he oversaw numerous new regulations on business.  These things are just a few of his big government policies from a long list.  The only positive thing a libertarian could say about Bush is that he reduced the marginal income tax rates.

Despite Bush's abysmal record, the media makes him out to be some kind of free market guy.  This is ridiculous, just the same as the claim for Hoover is ridiculous.  After Bush's massive bailouts of banks and car companies right before he left office, Obama stepped in and upped the ante.  He passed a massive "stimulus" and instituted Obamacare.  He has also presided over more regulations on businesses, some of which haven't even taken effect yet.  Basically, Obama has done the same thing as Roosevelt in that he inherited a mess and he has made things even worse.

One of the biggest differences between now and the Great Depression is that we now have the FDIC.  At the start of the Depression, there was no FDIC and there were a lot of bank runs.  This meant a lot of banks went under and this had a deflationary effect as it reversed the fractional reserve process.  One of the major mistakes that people make in economics today is that they think lower prices were a cause of the Great Depression.  Unfortunately, these people are confusing cause and effect.  The lower prices was probably the only blessing of the Depression as it allowed people to at least afford essential goods.

Bernanke claims to be a student of the Great Depression.  He thinks the Fed is to blame because they did not print enough money (seriously).  He is possibly half right.  The Fed is partly to blame, but only because there was too much money printing in the late 1920's, which caused the artificial boom.  Not many people look at this, except of course for the Austrian economists.

One other thing to note about the Depression is that most people think it ended with the beginning of World War II.  While the war "solved" the unemployment problem, the economy was horrible until after the war ended.  There was major rationing and times were not fun.  It wasn't until the war ended and government actually shrank (one of the few times in history) that the economy recovered and prospered.

As for the 1970's, I think the biggest similarity (and one we will see more of) is that the Keynesians are being proven wrong.  In the world of a Keynesian, there is supposed to be a trade-off of inflation and unemployment.  The Fed can print more and this will reduce unemployment.  If the Fed pulls back, this will cure price inflation but may cause higher unemployment.  The Keynesian theory was proven wrong in the 1970's as there was high unemployment, a stagnant economy, and high price inflation.

The Keynesians are being proven wrong again as all of the monetary inflation and government stimulus has not helped unemployment and the economy continues to struggle.  The only thing we are missing right now in comparison to the 70's is the high price inflation and high interest rates.  Although the monetary inflation has been huge, interest rates and prices have not spiked due to fear.  This fear is with the bankers and with the general public.

As this economic crisis continues, I expect we will see a combination of both periods.  If anything, I think things will look a little more like the 1970's, particularly if and when price inflation turns up.

It is hard to compare all of these eras beyond this because times change so much.  There aren't soup lines like there were during the 30's because now people get food stamps and government checks.  Today's technology also complicates things (in a good way) as communication and the internet allow people to prosper more.  Some things are much cheaper now due to technology (and maybe Walmart), but some essential needs like healthcare are more expensive.

If the government and the Fed continue to be reckless, then things will be worse than the 1970's.  If all of the monetary inflation and reckless spending get under control quickly, then things could get better a lot faster, particularly with today's technology.  There is going to be pain no matter what.  It is just a question of when the American people demand that their government get out of the way.  The quicker that this happens, the less pain there will be.