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Wary USDA Economists Downplay Chances of Another Great Depression

December 15, 1990

WASHINGTON (AP) _ For some Agriculture Department analysts with good memories, old textbooks or both, there are some disturbing similarities between what’s been going on since about 1981 and the boom-that-busted era of the 1920s and ’30s.

Current speculation about whether the United States is already in an economic recession hasn’t boosted holiday spirits, either.

But John Kitchen and Gregory Gajewski of the department’s Economic Research Service think a recession will be mild by historical standards. Unless a few things go completely haywire.

Kitchen and Gajewski, writing in the current issue of Agricultural Outlook magazine, say their prediction is based on things staying relatively stable - no war in the Mideast and no big hammering by other problems.

″While there is the potential for a mild recession, and a slim chance for a severe downturn, the outlook is for continued mediocre growth in the economy over the next year,″ the report said.

The nation’s economy was said to be ″especially weak″ in the final quarter of 1990 and probably will be ″fairly weak″ through the first half of 1991 before reviving.

A number of worrisome items confront agricultural economists, not the least of which is the stalled Uruguay Round of trade talks that was recently recessed in Geneva because of disputes over limiting commodity price supports and export subsidies.

Whether the talks will resume in the weeks or months ahead on any kind of harmonious note remains to be seen.

The Persian Gulf crisis also has had an effect on domestic energy prices and federal spending on maintaining the large U.S. military presence in that region.

Kitchen and Gajewski said the uncertainties over GATT and the Persian Gulf, along with ″a relatively tight monetary policy″ by the Federal Reserve the past several months are big factors.

Putting it all together has led some analysts to draw parallels with the late 1920s and early 1930s.

The U.S. economy grew strongly in the late ’20s, but then faltered, leading to financial failures and, in retrospect, policy mistakes that led to the Great Depression of the 1930s.

According to the report, some of the policies undertaken during the crisis period of 1930-32 included higher income tax rates, heightened protectionism through increased tariffs and a restrictive monetary policy by the Fed.

″Lower-income earners saw their tax rates rise sixfold to eightfold, and higher income earners saw their rates double or triple,″ the report said. ″Similarly, tariff rates were raised sharply. The average rate jumped from 38 percent in 1925 to 59 percent in 1932.″

Further, the Federal Reserve’s tight money policy of the early 1930s and the contraction of the money supply by one-third during 1929-33 are well- documented. In 1929, there were more than 25,000 banks. By 1933, fewer than 15,000 were left.

The report said that in 1921 - and again in 1981 - there was a crumbling of expectations that farm income would continue growing. Farmland values fell 26 percent in 1921-28, and 48 percent during 1981-88.

Prices received by farmers in the 1920s and the 1980s declined relative to prices paid for goods needed to produce crops and livestock.

″Income was essentially the same in 1929 as in 1919,″ the report said. Likewise for income in 1989 compared with 1979. It plunged early in each period and then recovered by the end of each decade.″

But agriculture moved down with the rest of the U.S. economy during the 1929-33 plunge, the report said. All key indicators slipped sharply, including farmland values, prices of commodities, prices paid by farmers and exports.

Despite some of the parallels, the report said that upon closer examination today’s policy shifts and instabilities are ″not nearly as severe″ as those of 60 years ago.

″While the recent federal budget package reduces the expansionary nature of fiscal policy, the package certainly is not excessively restrictive,″ the report said. ″Most individuals’ income tax rates will not change.″

The budget package agreed to by Congress and the Bush administration calls cuts of nearly $500 billion, including $13.5 billion from USDA programs over the next five years.

″Also, the spending cuts are largely either cuts from planned growth in expenditures, or planned cuts from a year earlier that depend on future economic growth,″ the report said. ″Specifically, the planned spending cuts could be eased significantly if the economy performs worse than some fairly optimistic assumptions spelled out in the package.″

The analysis also said consumer confidence in banks, although down recently, is higher than in the late 1920s and early 1930s, in part because of federal deposit insurance, which didn’t exist then.

″Back then, banks held off from making loans to keep cash on hand, thus reassuring depositors,″ the report said. ″But with fewer loans, many companies contracted or went out of business.″

Finally, it said, downward spiral in trade protectionism on a scale of the 1930s does not appear likely.

″Even if protectionist policies increase, the world’s economies probably would evolve into competing ‘free-trade areas.’ So trade would not contract as much as it did in the 1930s.″

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