“Disagrees with Robert Reich on Recession’s cause” is a good summary of the near term events that triggered the Great Depression and the Great Recession. But attributing both the depression and the recession respectively to the failure of the Bank of United States, a local New York City bank that was allowed to fail at a time when other banks were being propped up, and the failure of Lehman Brothers, again at a time when other private investment banks were saved, is to substitute effect for cause.
Reich describes a three decade trend from the late ‘70s to the recently past decade in which household incomes for the middle class did not increase (despite greater female participation in the job market) while the top 1% share of income soared from the 10% during the prosperous post war decades to a high of around 29% in 2007. He points to a similar phenomenon prior to the Great Depression.
If there are multiple days of snow accumulating to five feet, a roof some place will cave in. But this is less a matter of its inadequate engineering than the extraordinary load it had to carry. Similarly, we can point to the faulty engineering of the World Trade Buildings, but airlines crashing into them were the main reason for their collapse.
Reich’s point is when the middle class (about 80% of the population as he defines it) is deprived of growing purchasing power, the wildly disproportionate share of wealth held by the top 1% cannot find solid investment opportunities in the USA. This results in huge amounts of savings by the top 1% being either channeled into investments abroad, in effect exporting jobs, or used for speculative purposes, thus creating economic “bubbles”, such as surrounded the Internet in the 1990s and housing more recently. Or, as the letter writer points out, “1928 and 1929 witnessed a spectacular run up in the value of utility stocks, especially electric stocks which, in modern parlance, were perceived as having a lot of ‘blue sky’ as more and more labor saving household electrical devices were invented.”
Thus, what the writer attributes to the causes of the Great Depression and the Great Recession may have been just the last straws that broke the camel’s back.
Incidentally, it is true that China continued to experience positive growth throughout the recession, but the rate of the expansion of their Gross National Product dropped by three percent and it would have been far worse had they not ‘exported’ their recession through maintaining an artificially low currency exchange rate, providing fiscal stimulus through heavy governmental spending, and by expansionary monetary policies, including very low interest rates.
My previous letter was not intended to be a comprehensive review of the causes of the Great Depression of 1929-1940. The stock market collapse of October 29th, 1929 triggered a recession. The recession of 1929 became a depression in the second half of 1930 as the direct result of passage of the Smoot-Hawley Tariff in June of that year despite hundreds of leading US businessmen pointing out that the United States had for more to lose than their foreign counterparts in the tariff war that would inevitably ensue. As predicted, retaliatory tariffs caused the demand for US goods to plummet within a few months of the passage of Smoot-Hawley.
Signing Smoot-Hawley into law was one of number of harmful things the Hoover administration did that turned the recession into a depression, spelled with a small “d”. By pressuring companies not to lay off workers, Hoover deprived them of the ability to streamline their operations in response to the new economic reality, further undermining stock values. (US companies did not repeat this mistake in 2007).
The collapse in 1931 of the Bank of United States (whose sixty branch offices held the deposits of some 400,000 depositors, including a large number of small and medium size businesses) triggered the run on banks that wiped out whatever was left of middle class savings, putting an additional damper on domestic demand for goods and services.
Economic historian Amity Shlaes argues in “The Forgotten Man” that we have Roosevelt to thank for turning the depression of 1929-2 into the Great Depression–that it was the erratic economic and overtly anti-big business policies of the Roosevelt administration which caused the depression to drag on for over a decade by discouraging the private sector from investing in new plant and equipment and creating jobs.
While Reich may be right that the years leading up to both the Great Depression and the economic recession of 2007-2009 witnessed a high level of concentration of wealth in the hands of a few speculators, it does not necessarily follow that this was the cause (or even a cause) of either downturn.
The Watchdog, who studied economic history at the University of California, Berkeley, should know better.