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Spectre of 1937 'double dip' hangs over divided policy makers

Men line up at City Hall in New York to apply for snow-clearing jobs during the Depression.


A synchronized global slump, a housing meltdown, failed banks and stubbornly high unemployment.

The parallels between the Great Depression and the Great Recession of 2007-09 are powerful and well documented.

Now, as the voices of austerity square off against those pushing for more stimulus, economists are warning of another scary congruence – the threat of a 1937-like plunge back into recession.

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Like then, too much deficit cutting could choke off fuel to the sputtering recovery, sending the global economy into another tailspin.

"We could be making some of the same mistakes. Certainly, there are echoes of 1937," agreed Douglas Porter, deputy chief economist at the Bank of Montreal.

Last week, Prime Minister Stephen Harper and his British counterpart, David Cameron, formed an unusual alliance of debt hawks, coming down firmly on the side of stricter austerity as the way out of the crisis – at least in Europe.

In the United States, U.S. President Barack Obama is locked in a bitter struggle with the Republican-led Congress over his desire for a major new stimulus package to get Americans working again.

Mr. Porter said Mr. Harper's call for global austerity is "precisely the wrong medicine at this time."

Government bond yields in Canada, and in most other countries, have sunk to multi-year lows in recent days. That's a sign that financial markets are stressed about economic growth prospects, not government deficits or inflation, according to Mr. Porter.

"Governments shouldn't be aggressively cutting spending when the economy is gasping for air," he said. "That's certainly the wrong prescription."

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A few missteps, and policymakers could be staring at a repeat of the dark days of 1937 and 1938, when it seemed the recession would never end.

"The majority of the economics profession would say the U.S. should err on the side of loosening public spending to make sure the country doesn't fall into a double dip," said economist Gordon Betcherman, a professor at the University of Ottawa's School of International Development and Global Studies.

"The politicians are much more split."

In 1937, a politically weakened U.S. President Franklin D. Roosevelt ended six straight years of growing government spending and swollen deficits with a return to austerity. Combined with tighter monetary policy, it put the U.S. back into recession. The economy shrank, and unemployment, which had fallen from nearly 25 per cent in 1933 to less than 15 per cent crept back up to near 20 per cent in 1938.

The dynamics would soon change as the U.S. economy ramped up for war in 1939. Government spending would nearly double from 1937 levels, and the double dip was soon over.

Mr. Obama is facing similar challenges in 2011. He's up for re-election next year and the Republicans, hardened by the Tea Party movement, are intent on a showdown between Big Government and deficit slashing.

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But that may be where the parallels end. U.S. monetary policy remains decidedly expansionary. Federal Reserve chairman Ben Bernanke, who as an academic specialized in the study of the Great Depression, knows the lessons of the Thirties. Last Thursday, he announced a $400-billion (U.S.) bond-buying program to help push down longer-term interest rates.

In Europe, the dynamics are quite different. It's not an ideological debate about the size of government, but a fight over who should ultimately pay for keeping the euro zone intact.

Europe's rich countries, led by Germany, are balking at pumping more cash to bail out their more heavily indebted neighbours in Greece, Portugal, and perhaps eventually, Spain and Italy.

What policy makers fail to recognize is that this recession, like the Great Depression, is different from the slumps of recent memory, according to Prof. Betcherman. What the two downturns share is a common cause: a financial system meltdown and a burst asset bubble.

Ground-breaking research by economists Carmen Reinhart of the University of Maryland and Harvard University's Kenneth Rogoff suggest the effects of recessions like these are stubbornly tough to shake.

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About the Author
National Business Correspondent

Barrie McKenna is correspondent and columnist in The Globe and Mail's Ottawa bureau. From 1997 until 2010, he covered Washington from The Globe's bureau in the U.S. capital. During his U.S. posting, he traveled widely, filing stories from more than 30 states. Mr. McKenna has also been a frequent visitor to Japan and South Korea on reporting assignments. More

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