Commentary - February 2009

The Great Depression of ‘09?

Don’t buy into the hype

by Lyle E. Brennan

No one was surprised to hear the news in December that the U.S. is officially in a recession, as defined by the National Bureau of Economic Research (NBER). It’s no secret that the housing market and the stock market are at their lowest levels in years, credit is tight, unemployment is rising and consumers and businesses are hunkering down and trying to wait out the worst of the economic downturn.

While it makes sense to recognize the seriousness of the current recession, some so-called experts have been creating panic by predicting that the U.S. is headed for another 1930s-style Great Depression, complete with breadlines and tent cities. While this may sell newspapers (or their electronic equivalents), the truth is that the situation now is nothing like it was in the 1930s.

Let’s consider a few statistics comparing the 1930s Depression to today. From the peak of the “up” cycle in August 1929 to the trough of the “down” cycle in 1933, gross domestic product decreased 27 percent, U.S. exports went down 66 percent, the Consumer Price Index declined 27 percent, industrial production declined 52 percent and the Dow Jones Average lost 85 percent of its value.

The most recent figures from 2008 aren’t anywhere close to these numbers. Despite the troubles in the auto industry, industrial production declined less than 6 percent from November 2007 to November 2008, U.S. exports actually increased, and the Consumer Price Index remained relatively flat. The Dow Jones Average has lost less than half its value since the downturn began.

Unemployment reached 25 percent during the Great Depression. Unemployment compensation wasn’t established until 1935, so people who lost their jobs then had no safety net. December 2008 unemployment figures stood at 7.2 percent, and people today have unemployment compensation that lasts for weeks, or even months.

More than 10,000 banks closed their doors during the Great Depression, and in many cases, depositors lost everything they had in the bank. In 2008, fewer than 500 banks failed, and the FDIC (established in 1935) covered all losses up to $100,000. That amount was increased to $250,000 in October 2008.

The truth is, the U.S. learned valuable lessons from the Great Depression of the 1930s and put protections in place to ensure that future downturns are not as severe. In addition to unemployment compensation and FDIC insurance, we now have Social Security benefits, Medicaid and many other state and federal programs to help those in need. The Federal Reserve keeps a close watch on the money supply to avoid extremes in inflation or deflation.

Obviously, the current system isn’t perfect, and there is no way to prevent the inherent ups and downs of the economic cycle. According to the NBER, recessions have occurred about every five years since the end of World War II, with the average downturn lasting less than a year. Some were mild, but others were more severe. Dr. Keith Schwer, head of UNLV’s Center for Business and Economic Research, compares the current recession to the downturns in 1973-1975, when unemployment peaked at more than 8 percent, and 1981-1982, when unemployment reached nearly 11 percent. Each of these recessions lasted about 16 months.

Economic cycles are a fact of life, and recessions can act as a Darwinian agent of change, ensuring the “survival of the fittest” businesses and industries. Recessions force companies to be more competitive by lowering expenses, increasing efficiencies and improving customer service. While painful in the short run, being forced to streamline a company and re-think priorities and business plans pays off over the long haul.

Now may be the time to increase your market share by being more nimble than your competitors. Do the necessary research, increase your marketing efforts and search for bargains in real estate, durable goods and equipment. If your primary industry or profession is suffering, investigate ways to diversify into other areas.

Above all, don’t be fooled into thinking we’re all heading for economic disaster. The current cycle will eventually run its course. The real danger lies in giving in to the fear. That can lead to foolish knee-jerk reactions, or to a deer-in-the-headlights paralysis that keeps us from taking necessary action. Instead of dreading another Great Depression, let’s do the best we can in the current economy and look forward to success when the system cycles up again.

Lyle E. Brennan Publisher
COMMENTS? email: lyle@nbj.com