Business

In their BusinessWeek column, Mr and Ms Welch respond to a reader’s question:

How does today’s financial crisis compare with the beginning of the Great Depression and the 1930s?

In response, the Welches say that while “real global pain” lies ahead, the situation is unlikely to wind up in a catastrophe on the Great Depression level. Their reasoning is interesting–basically, they offer 4 factors that differentiate the Depression era from our own:

1)”In 1930 the protectionist Smoot-Hawley Tariff Act ushered in years of international retaliation and discord. Today’s crisis is marked by a high degree of free trade and global cooperation.”

2)”In 1933 the National Industrial Recovery Act encouraged labor and industry cartels. The result was a decline in U.S. competitiveness—again, hardly the current case: American companies have never been in better fighting form.”

(The NIRA was passed in 1933 and was in force until it was found unconstitutional in 1935. It involved cartelization and extreme micromanagement of the economy, and is generally considered to have been one of FDR’s more unwise innovations, delaying rather than assisting the recovery from the Depression. Interestingly, NIRA was strongly backed by Gerard Swope, one of Jack Welch’s illustrious predecessors as head of GE.)

3)”Finally, a second Great Depression is unlikely because of the institutions created to prevent one, foremost being the Federal Deposit Insurance Corp., with its authority to insure deposits, critical to stabilizing the banking system.”

4)”Others say we’re marching into French-style socialism. Au contraire. The U.S. government has a century-long history of handling interventions with a fast-in, fast-out approach. In 1984, to take a recent example, it bought 80% of Continental Illinois National Bank but sold it just 10 years later to Bank of America. In 1989 it created the Resolution Trust Corp., which cleaned up the savings and loan crisis, then quickly packed up. TARP, the federal bailout plan, looks to be no exception, as its loan terms give banks flexibility and strong incentives to pay off the government within five years.”

I agree with Jack and Suzy Welch that we should not be panicking about the economy and that comparisons with 1929 are overdrawn. However, I also think that the economic future will be tremendously influenced by the election results–and that an Obama administration, combined with a strong Democratic congressional majority, would, very likely, dilute or negate three of the four factors that they list as separating us from the Depression era. While the result would probably not look as grim as 1929, it would still be pretty bad.

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