A person who was a child during the Great Depression of the 1930s would be in his or her nineties today. There is no shared national experience of the depths and devastating human impact of the Great Depression. We feel the recession of today as being extraordinary, but how does it compare to the singular economic event of the last century? The questions Americans are asking are “how does the USA economic crisis today compare to the Great Depression?” We have authored this blog to both answer questions on similarities between the Great Depression and support this with Great Recession Graphs. Key questions are also similarities and differences between unemployment today and during the Great Depression, as well as similarities and differences between today’s market and the market of the 1920′s.
My personal opinion is that public policy–both in timing and significance–the similarities between Great Depression and the Great Recession is what has made this a Great Recession rather than a Great Depression. It was these public policy differences and similarities from the Great Depression to modern day that likely saved our economy.
In essence, the world’s most valuable asset in a time of crisis is sound public policy–ideas not influenced by dogma, but by the need to solve American economic problems before the situation becomes calamitous.
There are many relevant parallels between and lessons to be learned from the Great Depression and Great Recession that can provide a historical perspective and policy insight. Both the depression of the 1920′s and today’s recession were marketed by a substantial stock market sell-off. The stock market crash of 1929 marked the beginning of the Great Depression, whereas the collapse of Lehman Brothers in September 2008 was the beginning of the Great Recession we are currently experiencing.
Both periods were marked by increased unemployment, frugality, and popular unrest. The scope of the economic crisis, however, is radically different. During the Great Depression the global market did not have the institutionalized structures necessary to undermine the extent of the bust. Furthermore, the Great Depression was characterized by a severe double dip, whereas the current economic crisis has maintained a steady growth rate; growth has slowed, but it has not stopped. There are also significant differences in the levels of deficit spending, manufacturing capacity, and bank foreclosures.
Perhaps of greatest importance were the public policy actions of President George Bush, President Barack Obama, and Ben Bernanke, today’s Chairman of the Federal Reserve. The quick and significant actions taken by a Republican President, a Democratic President, and a Republican-nominated Chairman of the Federal Reserve Board have been the difference between the extent of the severity of these two economic downturns—both of them were the result of historically unsustainable levels of debt prior to the economic collapse.
Prior to the Great Depression, the United States was under the very frugal leadership of the Warren G. Harding and Calvin Coolidge administrations. Both men took strong steps toward austerity and maintaining fiscal responsibility. The understanding of fiscal policy was simple: the federal government should be run on a balanced budget. The great role the federal government now plays, especially in regard to Medicare, Social Security, Medicaid, and military spending relative to the insufficient tax rates we desire, is unsustainable. However, during an economic crisis, private spending evaporates. This is problematic because consumer spending represents 70% of the United State’s economy.
Bruce Bartlett of Forbes states further:
In the 1930s, there were a number of economists who argued strenuously for a do-nothing policy. But as the Great Depression dragged on and collapsed in 1937—when conservatives were successful in having the federal government slash the budget deficit (it fell from 5.5% of GDP in 1936 to 0% in 1938)they lost credibility. Economists today generally believe that it was the unprecedented deficits resulting from World War II that actually ended the Great Depression.
As America spends to get out of recession the deficit increases exponentially
Government spending must compensate for the private sector in order to compensate for private spenders’ newfound frugality. If nothing fills the consumer gap, deflation is inevitable, and once a country enters a deflationary period, recovery becomes all the more difficult. Unlike many of the European economies who were suffering from hyperinflation during the Great Depression, the United States was experiencing substantial deflation. Prices had to be cut and subsequently so did wages and labor.
The United States is flirting with deflation today, and it experienced mild deflation in 2009, but many believe that governmental deficit spending can counter-balance these deflationary forces. The great unknown is the continued downward spiral of housing resale values. This is the catalyst for much of our current deflationary pressure as home prices continue to decline.
The first overarching similarity of today’s recession to the Great Depression is the amount of deficit spending as part of federal monetary policy.
The first significant difference between the Great Depression and our Great Recession is that there is a significantly larger amount of neo-functionalism today than there was during the Great Depression. Simply put, there has been a growth of technical economic institutions that have required the growth of political institutions as a result. This need to compensate economic markets with governance is known as the “spill-over” effect.
Brue Bartlett of Forbes elaborated on October 2009,
Policymakers were united in their desire to make sure this didn’t happen if humanly possible. Many postwar institutions such as the World Bank, General Agreement on Tariffs and Trade and International Monetary Fund were created to fix various problems thought to be responsible for the Great Depression. Congress even passed a law, the Employment Act of 1946, which requires the president to do everything in his power to prevent another depression.
These institutions have played a vital role in alleviating the severity of bust cycles. The dollar has always been one of the more stable currencies in modern times, but the European Union and the creation of a common, standard currency for the EU has positively increased the stability of the major currencies. This has prevented the massive hyperinflation experienced in the German and Hungarian currencies that occurred during the global Great Depression. Increased political coordination through international institutions has also increased response time and readiness to handle international economic crises.
From an American perspective, the Employment Act of 1946 has radically increased our ability to deal with crisis. The impetus for creating such an act was to create mechanisms that could be used to immediately begin to combat an economic downfall. The purpose of the Employment Act of 1946 has been outlined by [SOURCE?] as follows: “Because of the planlessness of the twenties—because of the lack of courageous action immediately following the collapse—the nation lost 105,000,000 man-years of production in the thirties.”
Public policy conventions recognize that the critical difference between deflation and its accompanying large unemployment rates and inflation is that a nation, and in fact individual workers, can never recover the lost days, weeks, months, and years of idle factories and idle workers that are the result of deflation. The economic drag on a nation and the individual devastation is defining for an age and for the individual lives of the unemployed. What the 1946 Employment Act ultimately accomplished was a philosophical justification for putting new economic systems in place before times of economic crisis.
Even before this bill was passed there was a significant growth of circuit breakers. The Social Security Act of 1935 established the retirement vehicle that we know today, but the Social Security Act was also responsible for creating an unemployment insurance program. The law is administered and enforced by The Employment and Training Administration in the U.S. Department of Labor. The program has grown substantially; by 1994 more than 96% of workers were covered by unemployment insurance. Unemployment insurance has been a vital asset during times of economic woe as it allows the unemployed to remain part of the consumer economy.
This fact remains true to this day. Just like during the Great Depression the Great Recession has also seen the growth of unemployment insurance. In 2008, a special extended benefits program known as the EUC program was created. In mid-November the program was up for an extension, but it failed to pass in the House. The President and Republican leaders of Congress have now reached a compromise extending the Bush-era tax cuts and creating a further extension of unemployment benefits.
David Greenlaw of Morgan Stanley elaborates on the potential impacts of the failure to extend the EUC program:
As seen in the accompanying figure, the unemployment benefits share of personal income is historically high at present but is about on par with that seen in the deepest recessions of the post-war period (namely, the 1973-75 and 1981-82 recessions). So, how much of an economic impact would be associated with the loss of extended unemployment benefit payments? According to the BEA’s monthly personal income report, total unemployment benefit payments in October amounted to $128 billion (SAAR). Based on the breakdown of recipients, we estimate that EUC payments accounted for $55 billion (SAAR) of the total. The loss of these payments would be worth about -0.4% of personal income—or roughly -0.1pp of income growth spread out over the next several months.Assuming that about two-thirds of the effect would be concentrated in 1Q, and that the propensity to spend of benefit recipients is relatively high, the direct negative impact on 1Q GDP could be as much as one full percentage point.
Greenlaw’s estimates, if accurate, are indeed troubling. However, the creation of the EUC and its functions are very much on a par with what happened during the creation of the Social Security Act of 1935. Some programs, like the EUC or National Recovery Administration during the depression, do fail, but the overarching principle is that during an economic crisis there is a spillover between government institutions and economic growth. That was true then, and it is even truer in today’s global economic climate.
3. GDP Growth
Gross domestic product (GDP) growth is probably the greatest factor in determining what constitutes a depression versus a recession. The most simplistic definition of a recession is when economic growth contracts for two quarters straight; however, the severity is measured in actual decline, not merely by the distinction between positive and negative growth. The economy was slowing in 2007, and fell by -0.7 and +0.6 in the 1st and 2nd quarters of 2008, respectively, but then fell off a cliff. The 3rd and 4th quarters of 2008 were -4.0% and -6.8%, respectively, followed by -6.40% and 0.70% in the 1st and 2nd quarters of 2009. The 4th quarter of 2008 and the 1st quarter of 2009 were the first successive quarters since the Great Depression that sustained growth below -5.0%.
The National Bureau of Economic Research (NBER), which is the main watchdog institution for determining when recessions decline or end, defines recession as follows:
Significant decline in economic activity is spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. The beginning of a recession is commonly referred to as a business cycle “peak,” and the end of it is called a business cycle “trough.”
This is a much better definition because it is all encompassing. A recession does not necessarily have to be a broad general decline; it can be that only certain segments of the economy are causing the economic woes.
The unofficial definition of a depression is much more clear. A depression is broadly defined as a drop in 10% of the GDP. Between 1929 and 1933, the United States’ GDP dropped more than 30%.
The difference between the Great Depression and the Great Recession is very clear. In the current economic crisis there has been a period of GDP loss, followed by a period of slow growth as opposed to the massive decline in economic output that occurred during the Great Depression. The GDP loss during the Great Depression was obviously significantly greater and more prolonged.
At the end of the day, the GDP definitional debate does not matter to the American public. One of the most interesting examples of this occurred during the 1980 election cycle. President Jimmy Carter attacked Ronald Reagan for misusing the term depression to describe the economic situation of the country. Reagan’s response to President Carter’s claim would become one of the most notable responses in American political history. Reagan stated:
Let it show on the record that when the American people cried out for economic help, Jimmy Carter took refuge behind a dictionary. Well, if it’s a definition he wants, I’ll give him one. A recession is when your neighbor loses his job. A depression is when you lose yours. And recovery is when Jimmy Carter loses his.
This chart is a good comparison of the economic crises of the 20th century
This graph shows the GDP in its monetary value.
4. United States Manufacturing Decline
Both the Great Depression and the Great Recession were characterized by an immense decline in manufacturing production. However, there was a radical difference between the two in the scale of the decline. Karl Aiginger, of the Austrian Institute of Economic Research and the Vienna University of Economics and Business, writes this:
The speed of the breakdown of activity at the start of the recent crisis is highlighted if we analyze quarterly or monthly data on manufacturing and exports. Industrial production declined by 19% between 3Q2008 and 1Q2009, and then leveled off. During the Great Depression it declined by 12% in the first three quarters and did not recover before 1932. Only one half of the total decline therefore happened in the first three quarters in the Great Depression. This time manufacturing output resumed growth after three quarters. The standard deviation of the decline in the first three quarters (across countries) is again much smaller in the recent crisis.
(This chart shows the change in manufacturing production, on a country-by-country basis)
*) 01 – 05/2009 compared to 01 – 05/2008. – **) 1929/1923. – 1) Peak/2008. – 2) Peak/2007. – 3) 1Q2009/peak. -4) Weighted by GDP. –”World”: Countries in table weighted by GDP.
Source: WIFO calculations using Mitchell, IFS, ST.AT.
5. Global Industrial Production
During the Great Depression industrial production had a massive three-year decline. Today’s global markets experienced an initial shock, but since then global trade and global production have continued more slow than previously but nonetheless remains unabated. Barry Eichengreen and Kevin H. O’Rourke elaborate on this in the think tank VOX in March 2010:
Global stock markets have mounted a sharp recovery since the beginning of the year. Nonetheless, the proportionate decline in stock market wealth remains even greater than at the comparable stage of the Great Depression. The downward spiral in global trade volumes has abated, and the most recent month for which we have data (June) shows a modest uptick. Nonetheless, the collapse of global trade, even now, remains dramatic by the standards of the Great Depression.
World industrial production is much more vibrant in today’s Great Recession than it was during the Great Depression.
6. Bank Foreclosures
Another interesting point of study is how many banks foreclosed during the Great Depression as compared to the Great Recession. Between the months of January 30, 1933 to March 1933, there were 9,096 bank failures, which represented 50% of the banks. Between the months of December 2007 to May 2009, the U.S. lost 57 banks, which equates to 0.6 % of our total banks. As you can see, the difference is staggering. While banks are still not in a great position to lend, which has caused a stagnation of business, we are not in nearly as dire a position as during the Great Depression.
This cartoon depicts the Lehman Brothers Bank. Lehman Brothers would file for bankruptcy on September 15, 2008. This bankruptcy filing was the largest in United States history; it also represented the beginning of the current recession. Picture provided by http://www.toonpool.com/cartoons/Lehman%20Brothers%20Bank%20bankrupt_22808
The unemployment rate at the height of the Great Depression was at a staggering 25%. Today unemployment is around 9.80%. Having a quarter of the working population hungry and unemployed during the Great Depression was a massive impetus for strikes and civil unrest; today we are not nearly at the same levels. However, there are common trends in demographical and regional unemployment.
For instance, African-American male unemployment was higher than white unemployment during the recession and this continues to be the case. Global Research elaborates on this:
No wonder Chris Tilly— director of the Institute for Research on Labor and Employment at UCLA—
This shows that while unemployment levels are far less severe than they were during the Great Depression, race and region play a huge role in determining who is unemployed.
This picture depicts a typical unemployment line during the Great Depression. Picture provided by http://www.adannews.com/16333/video-foreclosure-fraud-investigation-and-unemployment-extension-99ers-could-be-affected/
8. Length of Average Unemployment
Very much as in the Great Depression, people are currently experiencing a long duration of unemployment. By January of 2010, Americans were waiting an average of 35.2 weeks to find employment.
That number has since declined. During the Great Depression the duration of unemployment was no doubt longer, but interestingly enough, the United States federal government has been tracking the duration of unemployment only since 1948. So in terms of records, this current recession represents the longest duration of unemployment.
Both the Great Depression and the Great Recession are showing very long periods of unemployment. There was more protectionism in Europe than in the United States, but both societies became considerably less open. From 1929 to 1935, customs inflow in the United Kingdom went from 0.8 % of their GDP to 4.7 % of their GDP. In France the rate went from 1.4 % to 3.0%.
These measures were responsible for deepening the European depression. The
United States was not a beacon of free trade during the depression either. In 1930, the Smoot- Hawley Tariff Act was passed, which raised tariffs on over 2,000 goods to record levels. This move is widely considered by economists today to be a significant factor in prolonging the Great Depression.
World-Crisis.net, an online site dedicated to providing news and analysis of economic crisis, states this:
The initial government response to the crisis exacerbated the situation; protectionist policies like the 1930 Smoot-Hawley Tariff Act, rather than helping the economy, merely strangled global trade. Industries that suffered the most included agriculture, mining, and logging as well as durable goods such as cows and automobiles.
Like the Great Depression, this current recession is incredibly global. However, new structures have been put in place, like the G20, the E.U. Commission, and the IMF, which help to curb protectionist policies.
These organizations are by no means a foolproof way of completely eradicating mercantilist policies. In order to protect the American auto industry, President Barack Obama levied a 35% tax on all tires made in China in September 2009.
The scale of the recession and inequalities in economic recovery could no doubt exacerbate protectionist policies. At this point in time, however, it is unlikely that protectionism will reach Great Depression levels, but it is still too early to rule out that possibility.
“World”: Weighted by GDP.
1) 1Q2009/2Q2008. – 2) 1Q2009/3Q2008. – 3) 2Q2009/1Q2008. – 4) 2Q2009/3q2007. – 5) – 1Q2009/1Q2008. – 6)
2Q2009/4Q2006. – 7) 2Q2009/1Q2008.
Source: WIFO calculations using Mitchell, IFS, WTO.
10. Double Dip During Depression and Possibility for It Now
A major characteristic of the Great Depression that people worry about a recurrence of in the present recession is a “double dip.” The Great Depression consisted of two major economic dips. The first occurred from August 1929 through March 1933. The second economic decline, also known as “ Roosevelt’s Recession,” occurred from May 1937 through June 1938.
This graph was found at http://www.marketoracle.co.uk/Article8778.html
Whether or not the American economy will experience a “double dip” during this current crisis is yet to be determined. During the summer of 2010, many economists certainly thought so. However, these concerns were contingent on the possibility of coming deflation, which have not materialized.
Jamie Dimon, CEO of J.P. Morgan Chase, stated the following in an interview with Fortune Magazine in its November 2010 edition:
I don’t think we’ll have one but no one knows. The American economy may be stronger than people think. At the root of my optimism is the sense that the embedded strengths of this country—a lot of which reside in its businesses—are still here. We work hard, we are innovative, we adapt quickly. It will surprise people when America gets its mojo back.
I have covered only a superficial level of the analysis between the current recession and the Great Depression, however, as our economy continues to improve and we begin to give credit to why today’s recession was not substantially worse, more research will occur. The question about why the great depression was more severe than today’s recession will be an academic debate for the generations.
Internet Resources on the Great Depression vs Great Recession
- Pew Study on Great Depression
- CNN Comparison: Great Depression vs. Great Recession
- Bruce Bartlett, Forbes: Great Depression vs. Great Recession
- The Atlantic Magazine: The Great Depression vs. the Great Recession
- Paul Krugman, New York Times: The Great Depression vs. the Great Recession
- The Freeman: Comparing the Great Depression vs. the Great Depression
- VOX: A Tale of Two Depressions
- Congressional Budget Office Compares Two Depressions
- National Bureau of Economic Research
- The Tattler: The Great Depression vs the Great Recession Economics Journal Comparing the Great Depression vs. the Great Recession
- Atlantic Journal
- New York Times: Unemployment Today vs. the Great Depression
- Bloomberg: US Data Shows Recession Worst Since Great Depression
- The Next Great Depression
- Tell Us Your New Great Depression Stories [Request For Information] (gawker.com)
- Paul Ingrassia: The Great Auto Restructuring Shows Signs of Success (online.wsj.com)
- Great Recession not that great after all, apparently (ftalphaville.ft.com)
- The Ten Most Prosperous Thanksgivings Since The Great Depression (247wallst.com)
- Hyperinflation Armageddon (lewrockwell.com)
- Christina Romer’s Comparison of the Great Depression vs. Today’s Great Recession (wealthvest.com)
- Ten Key Differences between the Current Recession and the Great Depression (wealthvest.com)
- Have we made the changes to avoid Great Recession 2 (wealthvest.com)
- Great Depression vs Great Recession: Bruce Bartlett (wealthvest.com)
- Great Depression vs Great Recession: American Perspectives (wealthvest.com)
- Great Depression (1929-1933) vs. Great Recession (2007-2009) (wealthvest.com)
- Great Depression vs. ‘Great Recession’ (wealthvest.com)
- Great Depression, Great Recession: What 1929 can teach us about 2009 (wealthvest.com)
- The Great Depression and the Great Recession – Thinking Back to Franklin D Roosevelt (wealthvest.com)