Leonhardt on Why the Great Depression Was Good

In Sunday's New York Times, the estimable David Leonhardt offers up one of those classic believe-it-or-not leads beloved of anyone who writes about economics. You might think the Great Depression was really a very bad time, he says, but think again. "Underneath the misery of the Great Depression, the United States economy was quietly making enormous strides during the 1930s. Television and nylon stockings were invented. Refrigerators and washing machines turned into mass-market products. Railroads became faster and roads smoother and wider. As the economic historian Alexander J. Field has said, the 1930s constituted 'the most technologically progressive decade of the last century.' "

Leonhardt uses this sweeping statement to draw a more contemporary conclusion. The Great Depression looked bad cyclically, but it was really good -- "progressive" -- secularly. This is just the opposite of our own dog days. Writes Leonhardt, switching smoothly from cyclical and secular to short and long term: "The most worrisome aspect about our current slump is that it combines obvious short-term problems -- from the financial crisis -- with less obvious long-term problems. These long-term problems include a decade-long slowdown in new-business formation, the stagnation of educational gains and the rapid growth of industries with mixed blessings, including finance and healthcare."

Leonhardt's eventual conclusion -- maybe we should focus on some of our long-term weaknesses -- is impossible to argue with. But to get there by taking a tour of the Great Depression is a kind of deception, which begins with the difficulties of comparing the two historical periods.

Leonhardt's argument is so sketchy that he gets to pick and choose his evidence at will. The historical reality is a lot more problematic than he suggests. First, folks in the Great Depression had no better idea what they were going through than we do today. Roosevelt and the New Dealers were trying everything and hoping something would work. There were, famously, two depressions, the latter in 1937 triggered by Roosevelt's reaction to political pressures to balance the budget. Despite Keynes' "General Theory," the Great Depression ended only after the enormous buildup and spending for World War II. The war was not a policy; it was a cataclysmic event -- arguably the transformative event of that period. Even after the war, American economists generally assumed the U.S. would re-enter depression. Even American converts to the Keynesian gospel like Harvard's Alvin Hansen (who had argued in the late '30s the case for "secular stagnation," that is that technology had been played out and that the U.S. economy would never grow again without government help) assumed that would be the case. Leonhardt's implicit assumption is that good policy in the '30s led to the boom years of the '50s and '60s. In fact, it was mostly serendipity mixed with vast toil and blood. The primary factor may have been that the U.S. emerged from the war as the only intact industrial power in the world. We're unlikely to have that advantage again.

Second, Leonhardt underplays how deep and scarring the Great Depression was, which makes it difficult to compare to our own political and economic situation. Unemployment hit 25%, and there was no safety net. The country was flattened; the banking system nearly collapsed. Fascism and communism were ascendant throughout the world; capitalism truly did look like an anachronism. The desperation of the times drove New Deal reforms, some of which had beneficial effects, some of which didn't. But while some infrastructure like bridges, dams and highways was built, the government did almost nothing for smaller businesses (there was no real venture capital) or for funding science and technology; R&D was dominated by a handful of giant corporations in a way unimaginable today. True, the sheer depth of the crisis, followed by the displacement and dislocation of war, did effectively reshuffle the economy, in a way that the financial crisis in 2008 did not. For all the unemployment and pain today, we so far have seen nothing comparable to the '30s, which makes the headline on Leonhardt's piece -- "The Depression: If Only Things Were That Good" -- an exercise in both nostalgia and bad taste.

Third, Leonhardt is arguing a variant of the contemporary stagnation thesis, which I've discussed here and here and which is a reprise of Hansen's late '30s thesis. Look at those fabulous technologies that arose in the '30s! Well, just as we can't really predict economic matters effectively, we're even worse with technologies; the recent past is no indication of the future when it comes to technology. So even if you believe, in hindsight, that the '30s was a marvelous age, what good would that do us? Were folks standing on bread lines in the '30s saying, "Hey, don't worry, nylon stockings are coming soon"? No, they were hungry, angry and depressed; night seemed to be closing in on them and the American dream. Leonhardt's list of technological wonders is also odd. Washing machines and fridges -- swell. Nylon made a nifty business for its inventor, DuPont, but it really was part of a larger boom in chemicals and synthetic materials that began in the '20s and lasted through the '60s. Television also had its roots in the '20s. Television could have been launched in the '30s, but it was held up a combination of patent maneuvering, led by RCA, and regulatory obstacles. It would finally be commercialized after the war. As for smoother roads and faster trains, well that sounds like Leonhardt's preference for greater infrastructure spending; it doesn't have a lot to do with transformational "wonder" technologies.

The truth is the great transformative technologies of postwar America were nascent in the '30s, but were fueled by wartime R&D spending: nuclear power in the Manhattan Project, jet and rocket propulsion, and most importantly, the semiconductors that emerged after the war from research in wartime radar and microwave radiation, which spawned the astonishingly fertile and dynamic evolution of digital electronics (you might include codebreaking and early cybernetic theory too). How much longer would those technologies have taken to develop without the hothouse pressure of the war and government funding? How competitive would the world have been in the '50s if Hitler, say, had been assassinated in 1937? How long would the depression have lasted if the Japanese decided not to bomb Pearl Harbor?

We have no answers except: a lot longer. Leonhardt is really asking here: How can we get back to that marvelous age of the '50s with its amazing economic growth, low unemployment, great equality of incomes and world supremacy? The answer is: suffer through a slump that lasts a decade and that scars every American, then enter upon a desperate war that destroys everyone but ourselves. That'll do it. Yup, those were good times.

Robert Teitelman is editor in chief of The Deal.