Marketplace Today Blog

By Robert Cloud
Waupaca County Post

“Don’t expect a quick recovery,” says Merton Finkler, an economics professor at Lawrence University in Appleton.

Finkler spoke to the Winchester Academy Feb. 8, comparing the current recession to the Great Depression of the 1930s.

He focused on how both economic downturns were marked by dwindling industrial output, burgeoning private and public debt, inadequate banking regulations and a rapid drop in international trade.

Many of the economic indicators have been as bad, if not worse, in this recession as they were in the 1930s.

For example, world industrial output — which measures all production from manufacturing and mines — dropped by nearly 40 percent in a three-year period after its peak in June 1929.

During the Great Depression, industrial output in the U.S. fell at an even greater rate, dropping to less than 50 percent of its peak over a three-year period. That means American factories and mines in June 1932 were producing half of what they had produced in June 1929.

Since the last peak in April 2008, world industrial output initially followed a nearly identical downward trajectory as that of the 1930s. Between April 2008 and February 2009, industrial output dropped by 16 percent. But it then began a slow climb last spring and over the past 10 months global industrial output has risen by 9 percent.

Currently, U.S. industrial output has been on the rebound for the past six months, according to estimates by the Federal Reserve. However, output plunged 12.5 percent in the first half of 2009 and is still 10.8 percent below its peak in April 2008.

Finkler attributed more than half of the economy’s growth to companies replenishing their dwindling inventories.

Finkler noted that international trade also dropped significantly in 2009, which it did during the Great Depression.

In 1930, in response to the economic downturn, Congress passed the Smoot–Hawley Tariff. “That led to huge tariffs, which reduced income and jobs in all participating countries,” Finkler said. “Tariffs do little to help the economy. They’re just political cover.”

He said Buy American provisions in the 2009 stimulus simply shifted imports from China to other countries without creating more jobs.

One of Finkler’s biggest concerns about the current economic recovery is that it is built on an unsustainable debt. He points to private, rather than public, debt as the source of the problem.

In the 1930s, total U.S. debt was at 300 percent of gross domestic product. Most of that debt, Finkler said, was corporate debt.

Between 1975 and 2009, the total U.S. debt-to-GDP ratio skyrocketed from 155 percent to 355 percent, with the most rapid growth occurring over the past decade. Household debt is now slightly above 100 percent of GDP, which means Americans are consuming more than they produce.

The high level of household debt is one reason that banks have tightened credit, which in turn limits consumer spending and business investment, which then hampers job growth.

Although the national unemployment rate dropped in January, Finkler said it did not give him much reason to be optimistic.

“When things pick up, the first thing employers say to their workers is that they can work overtime. They need to have more confidence in the economy and more access to credit before they start hiring,” Finkler said. “Even if economists say the recession has ended that doesn’t mean the unemployment rate will go down right away.”

Finkler said the U.S. has lost nearly 10 million jobs since the start of the current recession.

To repair the economy over the long term, Finkler recommended reforming financial regulations and controlling the level of both private and public debt.

“In a highly leveraged economy, fiscal and monetary policies are not enough. We have to make changes in lending behavior,” Finkler said. “Excessive debt accumulation, whether it be by the government, banks, corporations or consumers, poses greater systemic risks.”

On the other hand, Finkler said most economists agree that in the short term the government needs to step in and increase its spending when private sector spending and employment drops significantly.