Mainstream Economists Fear Depression Looming

by Charles Walker

Even before the end of the Second World War, radicals were expecting a return of the Great Depression, once the war was ended. The radicals were wrong, and so were many mainstream economists, financiers, and politicians. Oh sure, there were those in the land who proclaimed that the twentieth century would be the American Century, but in 1945–46 it wasn’t easy to distinguish self-serving boosterism from solid insight.

Since the end of WWII, this nation has suffered frequent mild to harsh recessions; that is, temporary contractions of sales and production. But sooner or later things would pick up, and joblessness would decrease, until the next downturn.

The American economy was said to be a boom and bust economy. That sort of implied that something automatic was at work, something beyond human control. But that implication was only partly right. For capitalism is above all a human enterprise. While there are “laws” governing all economies, capitalism included, and while those laws cannot be sidestepped, many mainstream economists argued that their effects could be limited.

But they cannot be limited under any and all conditions (as we may soon experience).

What are the conditions under which the routine strategies — raising and lowering interest rates, increasing and decreasing taxes and government spending—might not readily remedy a looming economic upheaval? According to two very mainstream economists today’s conditions!

It’s one thing to read the standard leftist forecast warning workers of economic perils that may be right around the corner, but it’s at least startling when mainstream economists say, as does the liberal economist and author James K. Galbraith, “The [economic] danger, at the moment, is collapse.” He further writes, “[W]e are in for a crisis; the sooner this is recognized and acted upon, the better.” [“The War Economy”]

James K. Galbraith is Professor at the Lyndon B. Johnson School of Public Affairs and at the Department of Government, University of Texas at Austin, where he teaches economics. He served on the staff of the U.S. Congress, first as economist for the House Banking Committee and then as Executive Director of the Joint Economic Committee in 1981–82.

It is not only Galbraith who believes that an “ensuing recession could be very deep and very long.” There are other establishment economists who are raising a similar, if somewhat muted, alarm. On September 30, the New York Times economics columnist, Paul Krugman, wrote that he feared the nation faced the possibility of  “a prolonged period of stagnation,” similar to the Great Depression. “It has become a cliché,” he wrote, “to say that everything is different now [from the pre-WWII years]. What worries me is the prospect that some things may be the same — the same as they were here in the 1930’s…”

Where Krugman is merely worried about the nation’s economic prospects due to the contracting of the “bubble economy,” Galbraith is convinced that the government must overhaul its basic policies, or face “disaster.” He writes, “Cautious men are in charge of the economy at the moment, but this attitude can only bring disaster…To avert this, an initial program could be up to three times what has been so far proposed.”

Clearly, Galbraith would find Bush’s “shot-in-the-arm” stimulus proposals far, far short of what is needed. As this is written, Bush is proposing a stimulus program of up to $75 billion. Galbraith says that even if federal authorities spend as much as $100 to $200 billion the nation would still face a severe recession. More than that, Galbraith says the situation is so bad that the government should forget altogether about a stimulus program. “In these circumstances, the concept of ‘stimulus’ should be discarded in favor of the larger objective of economic stabilization—a sustained effort commensurate with the crisis as it unfolds.”

On October 4, the Labor Department announced “new [joblessness] claims rose last week to the highest level in nine years.” No doubt those claims included tens of thousands of claims filed by workers who lost their jobs as a consequence of the skyjackers’ attacks. Still no one disputes that joblessness would have risen in any event. That’s because of the escalating slowdown in manufacturing and the electronics industries.

Bush proposes to lengthen unemployment benefits and spend $3 billion on heath care and job training for those unfortunates who lost their jobs directly or indirectly because of the World Trade Center and Pentagon attacks. That aid is sure to be welcomed. However, by itself, $3 billion is not enough to keep the estimated one million or more of those unfortunates from falling into poverty. After all, how far can an average of $3,000 or less for each worker go? More to the point, there’s no sign that anyone in Washington is even daydreaming about the huge amounts of cash that Galbraith estimates must be spent by the national government (the principal tax collector) to stem the unprecedented joblessness that may be in store.

If the history of the Great Depression is any guide, workers will have to find their own collective way through the turmoil that Galbraith’s analysis portends. In the 1930s, U.S. workers staged a militant upsurge in defense of their most basic rights as human beings. Millions of workers formed unions and fought back, and, very often, won out over the propertied interests, who had no vested stake in a democratic society or an abundant economy for all. It’s hard to say what form the next workers’ upsurge will take or how far it will go. But if Galbraith is right, this much can be confidently said about American workers’ future, “Hold on to your hats, it’s going to be a bumpy ride!”

October 4, 2001