Will 2013 put the 'Great' in Great Recession?

The year 2013 will be a critical one for the fledgling U.S. economy, according to Central Michigan University professor of economics Jason Taylor. The Great Recession was so named because of several similarities to the Great Depression of the 1930s.  Taylor says that the history of the Great Depression may provide insight into what might happen in 2013.

 

Current issues like the tax increases and spending cuts associated with the fiscal cliff deal and debt ceiling debate, as well as and long-term structural reforms like Obamacare are reminiscent of some of the issues that made the Great Depression extend through more than a decade.

 

Taylor says that after three and half years of economic free-fall in the early 1930s, the U.S. experienced significant recovery between 1933 and 1937.  Then, the economy experienced what was called a “recession within the Depression,” which Taylor says “put the ‘Great’ in the Great Depression.”

 

Now, nearly four years from the official end of the Great Recession, Taylor believes the year 2013 will be as critical to the current economy as the year 1937 was critical to the Great Depression.

 

“Like 1937, 2013 will see both fiscal and structural challenges,” Taylor said. “How we face these challenges may determine whether historians will date the Great Recession as lasting from 2007 until 2009, or if it will be dated from 2007 until 2017 or later. The U.S. went significantly south in 1937 and we need to avoid a repeat double-dip in 2013.  The unexpected fall in gross domestic product during the 4th quarter of 2012 makes the next few months all the more critical.”

 

Taylor says that some of the major factors that caused the 1937 recession will play a major role in the challenges the U.S. economy will face in 2013. For example, 1937 saw significant fiscal contraction, similar to the tax increases and spending cuts that are resulting from the fiscal cliff deal as well as those that will certainly come from whatever deal is reached to avert the debt ceiling this May. Another notable comparison between the two very crucial periods for the U.S. economy is the push for long-term structural reforms with bad timing.

 

“Like President Roosevelt, President Obama has pushed for some dramatic long-term structural reforms at an inopportune time,” Taylor said. “A debate on reforming health care would certainly have been a healthy one for the country to have had during a time of economic calmness, but pushing for it during the depths of the crisis in 2009 most definitely harmed the fragile recovery.

 

“The upcoming implementation of Obamacare, a law that many still do not fully understand, will certainly have some unexpected, and unintended, economic consequences.  We are already seeing firms cutting hours for some workers to below 30 per week so that they can avoid paying the penalty for not providing health care to those workers. I suspect this also will further accelerate the shift from labor to capital in entry-level jobs since firms do not need to provide health care for machines.”

 

In maintaining positive recovery from the recent recession, Taylor says policy makers need to show a commitment toward needed budget reforms to keep from falling into another recession.

 

“We absolutely need to remove the uncertainty facing the economy,” Taylor said. “Politicians need to show the American people that they are serious about solving our long term budget problems, including those of entitlements like Social Security and Medicare.  The recent fiscal cliff deal kicked this can further down the road—which is par for the course in Washington.”