Another Depression?

Louis Galambos is scared about the economy and cautiously optimistic at the same time, which sounds about right.

"Am I nervous?" says the professor of economic history at the Johns Hopkins University. "Yes, I'm nervous. You are, too. We're all nervous. Anybody who looks at this and thinks about it should be nervous. This could be another big one. And it could have really major implications for the society."


But as one with a better perspective on U.S. business trends than almost anybody else, Galambos, 77, knows more than most of the people who speak blithely about another "depression."

Such as deep structural changes that make the U.S. economy less vulnerable to a 1930s-style downturn, when one person in four was unemployed. Such as a wide range of industrial, information, service and medical companies that are sound.


Such as the steady heartbeat of the "third industrial revolution," the one in solid-state electronics, which began in the 1960s and still promises the kind of technology improvements that have more than doubled the U.S. standard of living in four decades.

Galambos has been thinking for half a century about why economies thrive or fail. Besides his project of editing President Dwight D. Eisenhower's papers, he is one of the country's leading business chroniclers, having written or co-written numerous books on pharmaceuticals, telecommunications, business ethics and other subjects.

"I'm optimistic about the economy other than housing and finance," he said in an interview at his book- and newspaper-festooned house in Guilford.

"That does not seem to me to be running out of steam. I still think companies like Hewlett-Packard, companies like Intel - I see those kinds of companies grinding ahead. Wal-Mart and Target - I see them still on track. So the core of the economy seems to me to be still successful, still moving forward. The question is, can we pull up" out of the dive.

Chances may be better now than in the early 1930s. For one thing, policymakers in the earlier crisis initially froze. When they decided to do something, it was wrong. When they finally hit on the right medicine, the dose was too small.

"We reacted very slowly to the Great Depression because we really didn't understand it very well," Galambos said. "It's amazing how stupid it was." Policy response in recent weeks, by contrast, "has been very fast, and it's been very large," he said.

But even if Henry Paulson and Ben Bernanke & Co. mess up, the size and nature of today's economy protect against deep downturns in ways that the 1930s economy didn't.

Ballooning federal and state government since the 1940s gives crucial ballast. Government doesn't contribute as much to economic growth as, say, Silicon Valley or pharmaceuticals, Galambos said. But when the private sector is shrinking, the sheer size and inertia of modern government tend to keep the economy from entering depression every two decades, as it did for more than a century up to World War II.


Then there is technology. The "second industrial revolution" of electricity, chemicals and mass production had bloomed in the 1920s but lagged in the 1930s during the slump. Still, it furnished a base for recovery in the 1940s.

Continuing productivity gains from the computer revolution, Galambos believes, should help keep the economy from sinking too deeply now.

Still, he is amazed by the unfolding of events. There is no question this is the worst U.S. financial crisis since the 1930s, he said.

"I am stunned - you can use that word. I am stunned by the size of the failures and the lack of understanding of what their risk was by people whom I generally have a lot of respect for," Galambos said.

No fan of indiscriminate government rules, he blames a lack of appropriate regulation in part for the collapse.

"That's a periodic aspect of modern capitalism. It grows so fast and in such surges, it outgrows the regulatory system," he said. "Somebody should have been screaming, 'Risk! Subprime risk!' "


The trick now, he says, will be installing new regulation without smothering innovation.

"We want growth," he said. "We want new opportunities. The whole society is geared to growth, economic growth. Since the 1970s, we have recovered our position in the world economy until recent events, which bring it into question."

It'll take two or three years to work out the problems, says the man who looks at business across the centuries.

"But I basically am optimistic about the economy," he adds. "If I thought we had exhausted the potential for information-age innovation, then I would be more pessimistic. Then I would be more worried."