They say that those who don’t learn from history are doomed to repeat it. But, when it comes to the “Great Depression” comparisons now springing up amid this terrible economic climate, an equally fitting adage might be that those who dwell too much on history are doomed to repeat it — that’s essentially what Robert Shiller, the Yale University economist who predicted the housing bust and much of the current financial crisis, says.
“The attention paid to the Depression story may seem a logical consequence of our economic situation,” Shiller writes in an op-ed piece for The New York Times, saying that the recent bursting of the housing and stock market bubbles, huge failures of financial institutions, and low confidence have indeed created a picture not seen since the 1930s. “But,” he adds, “the retelling, in fact, is a cause of the current situation — because the Great Depression serves as a model for our expectations, damping what John Maynard Keynes called our ‘animal spirits,’ reducing consumers’ willingness to spend and businesses’ willingness to hire and expand. The Depression narrative could easily end up as a self-fulfilling prophecy.”
Similar comparisons sprung up in 1981-82 and following the crash of 1987, Shiller says, but in both those cases the woes were explained away (the former as a result of Federal Reserve policy and the latter as the result of “program trading”). “This time is different: the Great Depression appears truly relevant, and many people have been spooked by the story,” Shiller writes.
The Depression itself was fueled by fear of a depression, Shiller says. “In the 1930s, there was incessant talk about the depressions of the 1870s and 1890s,” he said. “Each of those downturns lasted for the better part of a decade.” Sentiment emerged that those depressions would have lasted much longer “except for accidents of history”, like a European famine and bumper domestic farming crop, or the onset of World War I.
Shiller raises the question of whether President Obama should have evoked the Depression in saying that failure to pass a stimulus plan could lead to another such period. “Perhaps he had to take that risk to promote the economic stimulus plan, and not just hope for some accident to save us,” Shiller says. “The story was already entrenched in our consciousness, and will be with us until we see a real, solid boost from the stimulus package and its likely successors.”