Are You Prepared for an American Recession Turned Great Depression? Skip to main content

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Are You Prepared for an American Recession Turned Great Depression?

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Are You Prepared for an American Recession Turned Great Depression?

Just as many Americans had begun to believe the worst of the economic downturn had passed, some experts are saying that the nation’s reemerging job woes are signs of something more sinister afoot: a potential Great Depression.

So what could cause America’s Recession to turn into a Great Depression?

One commentator for The New Republic, Dean Baker, also co-director of the Center for Economic and Policy Research, says our biggest problem is now ideological: more focus around the Beltway on cutting deficits rather than spurring the labor market and housing markets. As Baker writes, “Unfortunately, the country seems destined to follow the same course in the current slump as it did in the 30s. The May jobs report should have provided the sort of stiff kick that is needed to revive discussion of additional stimulus. Instead, it seems to have barely shaken Washington’s ongoing obsession with deficits.”

Instead of attempting to save the country’s economy by shoring up deficit spending, Baker argues that Congress should target the true source of America’s financial success: consumption. Currently, there are major barriers to traditional consumerism, including sustained high unemployment. When employers aren’t hiring due to market insecurity,  workers have little leverage to negotiate for higher wages, leaving millions of men and women just like you and me, experiencing underemployment, fewer benefits and more income insecurity. And it’s not hard to see that job insecurity means less consumption—from home buying to clothing purchases—an equation that does nothing to help spur broader economic growth.

A second major obstacle in our national recovery is the lingering real estate reckoning. As Baker writes, “To date, the decline in house prices has destroyed nearly $7 trillion in housing equity. And prices are still falling. Homeowners are likely to see another $1 trillion in equity disappear over the next year. The loss of this wealth will lead homeowners to cut back their consumption further in order to rebuild their savings.”

 

But instead of the federal government “spending money to make money,” additional stimulus is not in the forecast even as more job losses are on the horizon with the coming of a new fiscal year of slashed budgets on the state level. “All of this suggests a bleak picture for the unemployed,” says Baker. “The economy must create 90,000 jobs a month just to keep even with the growth of the labor force. To be sure, the dismal 54,000 job performance for May was partly an issue of timing, with jobs showing up in April instead of May. But even taking the last three months together yields an average growth rate of just 160,000. At this pace, it would take more than a decade to get back to normal levels of unemployment….At some point, the pain of high unemployment across the country may lead to some new thinking in Washington, but until that time, welcome to the second Great Depression. ”

Financial markets seem to understand this lesson the best—even when policy makers do not—that while long-term fiscal responsibility is important, slashing spending in the midst of a continuing economic malaise can deepen that crisis into another depression and paves the way for self-defeating deflation in what was the world’s strongest economy.

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