Historical Precedents Reason for Hope

A look back in time will provide not only context but hope for a better economy. Comparisons of the Great Recession with the Great Depression often lead to a concern that it took World War II to end that depression. As Christina D. Romer writes in “The Hope That Flows From History,” (New York Times August 11, 2011), “what is going to save us today?”

Romer answers that while the war speeded the recovery, the economy was “improving long before military spending increased. More fundamentally, the wrenching wartime experience provides a message of hope for our troubled economy today: we have the tools to deal with our problems, if only policy makers will use them.”

“Monetary expansion was very effective in the mid-1930s, even though nominal interest rates were near zero, as they are today,” say Romer. She takes heart that the Federal Reserve may be using its available tools more aggressively in the coming months as a lesson learned. Another lesson “is to beware of withdrawing policy support too soon. A switch to contractionary policy before the economy is fully recovered can cause the economy to decline again.” Romer points out that reducing the deficit more sharply in the near term could be a crucial mistake. She says, “The lesson here is that fiscal stimulus can help a depressed economy recover” as demonstrated in depression.

Looking at mismatch of skills and jobs then and now, Romer notes that “because nearly 10 million men of prime working age were drafted into the military, there was a huge skills gap between the jobs that needed to be done on the home front and the remaining workforce. Yet businesses and workers found a way to get the job done. Here the lesson is that demand is crucial – and that jobs don’t go unfilled for long.”

Romer’s last point is about the national debt. She says, “At the end of WWII, the ratio of debt to GDP hit 109% — one and half times as high as it is now. Yet this had no obvious adverse consequences for growth or our ability to borrow.” She calls for a bolder approach more like that taken in WWII to solve our economic malaise today. Romer says, “Unemployment of roughly 9% for 28 months and counting is a national emergency. We must fight it with the same passion and commitment we have brought to military emergencies in our past.”