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January  27, 2009

Economist discusses 2009 vs. the 1930s

Students in U.S. Economic History talked with someone from an agency helping to make history right now Tuesday. William A. Strauss, a senior economist and economic advisor from the Federal Reserve Bank of Chicago, spoke to the class about the current economic climate and how it compares to the Great Depression.

Joanna Short, Augustana associate professor of economics, and Federal Reserve economist William Strauss talk with students before class Jan. 27, 2009. (Photo by Jeff Chin)

For starters, Strauss told the class that pundits and reporters who are comparing today's economy with that of the 1930s are looking to provoke an "extreme reaction." The comparison is wrong, he said, because the statistics of the 1930s are so dramatic compared to those of 2009 that there is no real comparison.

During the Great Depression, Gross Domestic Product fell by 27%. Today's forecasters see a drop of -1.6%.

In the 1930s, unemployment reached 25%. Last December, unemployment was at just over 7%.

"What is the definition of a recession?" Strauss asked the class.

A student responded that it is two consecutive quarters of negative growth. Strauss replied that although that's the textbook answer, it isn't always correct. In 2001 the U.S. experienced a mild recession that did not have two consecutive negative quarters, for example.

He referred students to the National Bureau of Economic Research Business Cycle Dating Committee, which tracks statistics and decides when economic activity peaks. The NBER defines a recession as "a significant decline in economic activity spread across the economy, lasting more than a few months... A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough. "

The NBER pegged the current recession's beginning as the first quarter of 2008. Strauss said the 2008 fourth-quarter GDP numbers will be coming out this week and will be closely watched.

Meanwhile, the Blue Chip Economic Indicators forecasting group calls for GDP growth to be "quite weak" this year and says that weakness will continue well into 2010.

Strauss then took the class through a brief analysis to put this recession in perspective:

The average recession lasts 11 months and the range has been 6-16 months. The Blue Chip forecast for this one is 18-21 months.
The average change in GDP in a recession is -1.4%. The range is 0.3 to -3.1%. The forecast this time: -1.6%
The maximum jobless rate in a recession averages 7.8%. The range is 6.1-10.8%. The forecast: 8.4%.

Strauss conceded that the Federal Reserve is exercising authority is hasn't had to use since the Great Depression, but he was optimistic that a crisis like the 1930s will be avoided.

"Economist are slow to catch on but we do try to learn from our mistakes," he said.

That means avoiding some of the mistakes made in the 1930s, such as allowing so many banks to fail that the supply of money in the lending system crashed. Other mistakes included cutting federal spending when economic activity slowed and tax revenue decreased, and putting high tariffs on foreign goods, causing retaliatory tariffs to cripple U.S. exports. "Economists agree that free trade ultimately benefits all," Strauss said. A current debate over more protection for domestic steelmakers "will be an early test for the Obama administration," he added.

Some parts of the U.S. will not suffer as much as others. States like Illinois and Iowa where housing prices did not rise as sharply will be spared some of the upheaval taking place in overheated real estate markets like California, Arizona and Florida. "The impact here will be in labor markets," he said.

Strauss spoke to the Quad City Chamber of Commerce Federation earlier in the day.

(The Dispatch/The Rock Island Argus story)
(Quad City Times story)