The Great Depression began at a time when a child then would be 90 years old today. There is no shared experience experience of the depths and real human impact impact of the Great Depression. We feel the recession recession of today as being extraordinary, extraordinary, but how does it compare to the singular economic event of the last century? There are many relevant parallels and lessons between the Great Depression and Great Recession that give us historical perspective and po licy insight. The stock market crash of 1929 marks the beginning of the Great Depression whereas the collapse of Lehman brothers in September 2008 was the beginning of the Great Recession. Both periods were marked by increased unemployment, frugality and popular unrest. The scope of o f the economic crisis however is radically different. During the great depression the global market did d id not have the necessary institutionalized structures necessary to undermine the extent of the bust. Furthermore,the Great Depression was characterized by a severe double do uble dip whereas this current economic crisis has maintained a steady growth rate, growth g rowth has slowed but it has not stopped. There are also significant differences in the level of deficit spending, manufacturing capacity and bank foreclosures. Perhaps most importantly are the public po licy 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 total severities of o f these two economic downturns²both of these downturns were the result of historically unsustainable levels of de bt prior to the economic collapse.
1.) Deficit Spending and monetary policy
Prior to the Great Depression the country co untry was under the very frugal leadership of the Warren G. Harding and Calvin Coolidge administrations. Both men took great steps towards austerity and fiscal responsibility. The understanding of fiscal policy was simple: the federal government should run a balanced budget.The great role the federal government now plays; especially in regards to Medicare, Social Security, Medicaid and military spending relative to the insufficient tax rates we desire, are unsustainable.
However, during an economic econo mic crisis private spending evaporates. This is problematic because consumer spending represents 70% o f the United State¶s economy.
Bruce Bartlett of Forbes furthers,
³In the 1930s, there were a number of economists econo mists 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 gov ernment 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 unprecede nted deficits resulting from World War II that actually ended the Great Depression.´
Government spending must compensate for the private sector in order to compensate for private spenders newfound frugality. If nothing no thing fills the consumer gap, deflation is inevitable and once a country is in a deflationary period recovery reco very becomes all the more difficult. Unlike many of the European economies who were suffering from hyper-inflation during the Great Depression, the United States was experiencing substantial deflation. Prices had to be cut and subsequently wages and labor.
The United States is flirting with deflation today and e xperienced mild deflation in 2009, but many believe that governmental deficit spending can counter-balance these deflationary forces. The great unknown is the continued continued downward spiral of housing resale values. This is the catalyst for much much of our current deflationary pressure and home prices continue to decline. The first overarching similarity of today¶s recession versus the Great Depression is the amount of deficit spending as part of federal monetary policy.
2.) Neo-functionalism
The first significant difference between the Great Depression and t he 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 gro wth of technical economic institutions that have required the growth gro wth of political institutions as a result. This need to compensate co mpensate economic markets with governance is know as the³ spill-over´ effect. Bruce Bartlett of Forbes elaborates on the changes made since the Great Depression, ³Policymakers were united in their desire to make sure this didn't happen if humanly possible. Many postwar institutions such as the World Bank, Ge neral Agreement on Tariffs and Trade and International Monetary Fund were created to fix various problems thought to be responsible r esponsible 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 o ne of the more stable currencies in modern t imes, but the European Union and the creation of a common, standard currency for the EU haspositively increased the stability of the major currencies. This has pre vented the massive hyperinflation experienced in the German and Hungarian currencies that occurred during the global Great Depression. Increased political political coordination coo rdination through international institutions has also increased response time and readiness to international economic crises.
From an American perspective the Employment E mployment Act of 1946 has radically rad ically increased our ability to deal with crisis. The impetus for creating such an act was to put in plan mechanisms that could cou ld be used to immediately began to combat economic downfall. The Employment Act of 1946 has its purpose o utlined, utlined, ³Because of the planlessness of the twenties ² because of the lack of courageous action immediately following the collapse ² the nation n ation lost 105,000,000 manyears of production in the thirties.´ t hirties.´ Public policy conventions recognize that t hat the critical difference between deflation, and it¶s accompanying large unemployment une mployment rates and inflation, is that a nation and in fact individual workers, can never recover the t he lost days, weeks, months and years of o f idle factors and idle workers workers that are the result result of deflation. 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 bill b ill ultimately accomplished was a philosophical justification for putting 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 to day, but the Social Security Act was also responsible for creating an unemployment insurance program. The law is administrated an enforced by The Employment and Training Tra ining Administration in the U.S. Dept. 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 v ital asset during times of economic woe as it a llows llows the unemployed to remain part of o f the consumer economy. This is a fact that remains true to this t his day. Just like in the Great Depression the Great Recession saw the growth of o f unemployment insurance. In 2008, a special spec ial 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 both the Bush era tax cuts and a further extension of o f unemployment benefits.
David Greenlaw of Morgan Stanley elaborates elaborat es on the potential impacts of the failure to extend the EUC, ³As 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 impact would be associated with the loss of extended unemployment benefit payments? payments? According to the BEA's monthly personal income report, total unemployment benefit benefit payments pa yments in October amounted to $128 billion billion (SAAR). Based on the breakdown of recipients, recipients, we estimate that EUC payments payments accounted for $55 billion 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 two-thirds of the effect would be be concentrated in 1Q, and that the propensity p ropensity to spend of benefit recipients is relatively high, t he direct negative impact on 1Q GDP could be as much as one full percentage point.´
Greenlaw¶s estimates if accurate, are indeed troubling. Ho wever, the creation of the EUC and its functions are very much in par with what happened during the Social Security Act of 1935. Some programs like the EUC or National Recovery Administration Administration during the depression due fail, but the t he overarching principle is that during an economic eco nomic crisis there is a spillover between government institutions institutions and economic econo mic growth. That was true then and it is even truer in today¶s global economic climate.
3.) GDP Growth
GDP is probably the largest factor in determining a depression versus a recession. The most simplistic definition definition of o f a recession is when economic econo mic growth contracts for two quarters straight, however the severity is measured in actua l decline, not merely the distinction between positive and negative growth.The economy was slowing in 2007, and fell by -0.7 and +0.6 in 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 of growth gro wth below -5.0% since the Great Depression.
The National Bureau of Economic Research (NBER), which is the main watchdog institution for determining when recessions decline or end defines it as a, ³Significant decline in economic econo mic activity activity is spread across the economy, lasting more than a few months, normally nor mally 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 o f it is called a business cycle "trough." This is a much better definition definition because becau se it is all encompassing. A recession does not necessarily have to be a broad general decline; there could be only certain segments of the economy that are causing economic woes. The unofficial definition of a depression is much more c lear. A depression is broadly defined as a drop in 10 % of 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 econo mic crisis there has been a period of o f GDP loss, followed by a period of slow growth as opposed o pposed to the massive decline in economic output out put that occurred during the Great Depression. At the end of the day the GDP definitional debate does not matter to the American public. One of the most interesting interesting examples of o f this occurred during the 1980 election elect ion cycle. Jimmy Carter attacked Ronald Rona ld Regan for misusing the term depression to describe the economic situation of the country. co untry. Regan¶s response to President Carter¶s claim would become one of o f the most notable responses in American political history. Regan stated, "Let it show on the record reco rd that when the American people peo ple 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."
4.)
United States Manufacturing Decline
Both the Great Depression and the Great Recession were characterized by an immense decline in manufacturing production. produ ction. However the scale of the decline was radically different between the two. Karl Aigiger of the Austrian Institute of Economic Research and the Vienna University of o f Economics and Business writes, ³ The Speed of o f the breakdown of activity at the t he 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 dec lined by 12% in the first three quarters and did not recover before 1932. Only one half ha lf of the total decline therefore happened in the first three quarters in the Great Depression. This time manufacturing output resumed growth after three quart ers. The standard deviation of the decline in the first three quarters (across countries) is again much smaller in the recent crisis.´ crisis.´
(This chart shows the change in manufacturing 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 a n initial shock but since then global trade and global production have continued slower than previously but nonetheless remains unabated. Barry Eichengreen Eichengreen and Kevin H. O¶Rourke O¶Rourke elaborate in the think tank VOX, VOX, ³Global stock markets have mounted a sharp recovery since the beginning of o f the year. Nonetheless, the proportionate decline dec line in stock market wealth remains even greater than at the comparable co mparable stage of the Great Depression.The downward spiral in global trade volumes has abated, abat ed, and the most recent month for which we have
data (June) shows a modest uptick. Nonetheless, No netheless, the collapse of global trade, even now, remains dramatic by the standards of o f the Great Depression.´ World industrial production is much more vibrant in toda y¶s Great Recession Recession than it was during the Great Depression.
6.)
Bank Foreclosures
Another interesting point of study ishowmany ishowmany banks foreclosed in the Great Depression as compared to the Great Recession. Between the months of January 30th to March 1933 there were 9,096 bank failures, which represented 50% of banks. Between the months of December 2007 to May 2009 we 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 stagnated business, we are not nearly in as dire a position during the Great Depression.
This Cartoon depicts the Leman Brothers Bank. Lehman Brothers would file for bankruptcy on September September 15th 15 th 2008. The Bankruptcy filing was the largest in United States history; history; it also represented the beginning of the the current recession. Picture Picture provided byhttp://www.too byhttp://www.toonpool.com/cartoons/Le npool.com/cartoons/Lehman%20Brothers%20B hman%20Brothers%20Bank%20bankrupt_22808 ank%20bankrupt_22808
7.)
Unemployment
The unemployment rate at the height of the Great Depression was at a staggering 25%. Today the unemployment unemployment is around 9.80%. Having a quarter of the working working population hungry and unemployed was wa s 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 worse than white unemployment during the recession and thus t hus continues to be the case. Global Research elaborates, ³No wonder Chris Tilly - director d irector of the Institute for Research on Labor and Employment at UCLA says that African-Americans and high school dropouts are experiencing depression-level unemployment. And as I have previously noted noted,, unemployment for those who earn $150,000 or more is only 3%, while unemployment for the poor is 31%. The bottom line is that it is difficult difficult to compare current unemployment with what occurred o ccurred during the Great Depression. In some ways things seem better now. In other ways, they don't. Factors like where you live, race, income and age greatly affect one's experience of the severity of unemployment in America.´
This shows that while unemployment levels are far less severe than they were in the Great Depression, race and region play a huge role in who is unemployed.
This picture depicts a typical unemployment line during the Great Depression. Picture provided by http://www.adannews.com/16333/video http://www .adannews.com/16333/video-foreclosure-fraud-i -foreclosure-fraud-investigation-and-une nvestigation-and-unemploymentmploymentextension-99ers-could-be-affected/
8.)
Length of average unemployment
Very much like the Great Depression, Depression, people peop le 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 only been tracking track ing the duration of unemployment since 1948 1948.. So in terms of records this current recession represents the longest duration of unemployment.
9.) Protectionism
Both the Great Depression and the great recession are showing very long periods of unemployment. There was more protectionism in Europe than the United States, St ates, but both societies became considerably less open. From 1929 to 1935 customs inflow 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. e ither. In 1930 the Smoot- Hawley tariff was passed which raised tariffs on over 2,000 goods to record levels.
This move is widely considered by economists eco nomists today to be a signifi s ignificant cant factor in prolonging the great depression. World- Crisis.net Crisis.net an online o nline site dedicated to providing news and analysis of economic crisis states states,, ³The initial government response to the t he crisis exacerbated the situation; protectionist policies like the 1930 Smoot-Hawley S moot-Hawley Tariff Act, rather than helping the economy, merely strangled global trade. Industries that suffered suffered the most included agriculture, mining, and logging as well as durable goods such as cow and automobiles.´ Like the Great Depression this current recession is incredibly global. Ho wever, there are new structures put in place like the G20, E.U. Commission and the IMF that t hat curb protectionist po licies. licies. These organizations are by no means a full proof way of completely co mpletely eradicating mercantilist policies. In order to protect the American auto industry Barak O bama levied a 35% tax on all tires made in China in September 2009. The scale of the recession and inequalities in economic recovery could not doubt exacerbate protectionist policies. At this point in time it is unlikely that protectionism will reach Great Depression levels but it is still too early to rule out that possibility. possibility.
"World": Weighted by GDP. 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. 1)
10.) Double Dip During Depression and Possibility Now:
A major characteristic of the Great Depression that peo ple worry about occurring in this current recession is a ³ double d ip.´ The Great Depression consisted of two major economic dips. The first occurred between August, 1929 through March, 1933 the second economic decline also known as ³ Roosevelt¶s Recession´ occurred between May 1937 through June 1938.
This picture was found at http://www http://www.marketoracle.co.uk/A .marketoracle.co.uk/Article8778.html rticle8778.html
Whether or not the American economy eco nomy will experience a ³double dip´ d ip´ during this current crisis is is yet to be determined. In the summer of 2010 many economists certainly thought so. However, these concerns co ncerns were contingent on the possibili po ssibility ty of o f coming deflation which have not materialized. Jaime Dimon C.E.O of J.P. Morgan Chase stated in an interview with F ortune ortune Magazine in their November 2010 edition,
³I don¶t think we¶ll have one but no one knows. The American economy may be stronger than people think. At the t he root of my optimism is the sense that the embedded strengths of this country²a lot of which reside res ide in its businesses²are still here. We work hard, we are innovative, we adapt quickly. quickly. It will surprise surprise people when America gets its mojo back.´
