Paul Krugman highlights an incredibly important point from yesterday's daily report by Goldman economist Jan Hatzius:
The private sector financial balance—defined as the difference between private saving and private investment, or equivalently between private income and private spending—has risen from -3.6% of GDP in the 2006Q3 to +5.6% in 2009Q1. This 8.2% of GDP adjustment is already by far the biggest in postwar history and is in fact bigger than the increase seen in the early 1930s.
Which is to say, we've swung from spending to saving even more sharply than we did during the Depression. Had we done nothing, the macroeconomic effects would have been similar. As Krugman puts it, "government deficits, mainly the result of automatic stabilizers rather than discretionary policy, are the only thing that has saved us from a second Great Depression."
It's also worth pointing out that government is at best only partially offsetting the private-sector adjustments going on here. As Hatzius writes further down:
Consistent with the private spending retrenchment, debt among households and nonfinancial businesses is actually declining for the first time on record (the data go back to 1952). Debt growth has fallen from +10.6% (annualized) in 2006Q1 to -0.7% in 2009Q1. Moreover, total nonfinancial debt growth has also slowed from a peak of 9.9% (annualized) in 2005Q4 to 4.3% in 2009Q1, as the increase in Treasury borrowing has only partially offset the collapse in the private sector. Finally, total debt—nonfinancial and financial—is shrinking rapidly, even if we include the federal government.
Again, depressions are what you get when you don't ease these adjustments, even if you think they're ultimately necessary. (And clearly our level of borrowing was unsustainable.) We've done some of that, but it seems to me (and Hatzius--and Krugman) that we could do a lot more.
P.S. John Judis made some of these same points in a great piece last week.