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Don't Compare Economy to the Depression, Prof Says

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August 11, 2010 – The past financial crises in Latin America and Asia are better comparisons to the United States' current economic woes than the Great Depression, according to George Shambaugh, associate professor of international relations at the School of Foreign Service.

"A lot of people have said our current financial crisis was new and different.  As a consequence, they looked back to the Great Depression rather than to more recent crises to figure out what was going on," says Shambaugh, also chair of the government department. "Unfortunately, the Great Depression is not the most useful example to go back to."

Shambaugh, who is writing a book on the subject, says the roots of today's U.S. and European economic problems are in the late 1980s and early 1990s, when global political and economic environments fundamentally altered the management of international financial markets. 

"Understanding that, looking at the experiences of the Latin American and Asian financial crisis in the late 1990s and early 2000s really give us a much better way of interpreting and explaining what's going on today in the United States and Europe," he says.

Shambaugh is studying how the relative power of political and economic leaders in a particular country affects its ability to negotiate economic policy reforms and manage domestic and global markets. 

"Just as you often benefit from an economic check on political exuberance, you benefit from a political check on economic exuberance," he explains. "There are two dynamics -- markets and government -- and they need to work together."

He says the challenge faced by President-elect Kim Dae-jung of South Korea in 1997 echoes that of President-elect Obama in 2008. Both faced huge financial crises and political opposition from right-wing parties, but they eventually reformed their economics because they were charismatic politicians who joined forces with strong financial leaders.

"The book looks at the relationship between the strength of political leaders and economic leaders and what happens when they work together to mutually support economic policy, keep political or economic exuberance at bay or when one takes a dominant role," Shambaugh notes. "In the late Clinton Bush administrations before 9/11, lack of political oversight led to economic exuberance. Post-9/11, the relative lack of power among economic leaders enabled political exuberance with little economic constraint."

Shambaugh also is involved in a long-term, multidisciplinary study with researchers from University of California, Irvine that explores how individuals perceive and react to global threats such as terrorism, environmental disasters, and economic crises.   The findings help explain how democratic societies interpret and respond to different types of threats with important implications for democratic values, institutions and practices.

The first publication from the National Foundation of Science-funded project in a January issue of Studies in Conflict and Terrorism showed that people tend to rely on national-level information from the government and the media rather than personal experience when assessing national threats. Shambaugh says this explains why the Bush administration was successful with mobilizing the ‘War on Terror.'"

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