ten major differences between the great depression and the today's great recession

8/8/2019 Ten Major Differences Between the Great Depression and the Today's Great Recession

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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 theGreat Depression. We feel the recession of today as being extraordinary, but how does it compare

to the singular economic event of the last century?

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. 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 globalmarket 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, todays 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 downturnsboth of them were the result of

historically unsustainable levels of debt prior to the economic collapse.


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Comparing the Great Depression vs. the Great Recession

1. Deficit Spending and Monetary Policy

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


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crisis, private spending evaporates. This is problematic because consumer spending represents

70% of the United States 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 1937when conservatives were

successful in having the federal government slash thebudget 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.

Total US Debt

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.


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The first overarching similarity of todays recession to 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 our Great Recession is thatthere 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 collapsethe 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 individualdevastation 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


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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

workerswere 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 Greenlawof 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 ishistorically 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 incomeor 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.

Greenlaws 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 todays global economic climate.

3. GDP Growth

Gross domestic product (GDP) growth is probably the greatest factor in determining whatconstitutes 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 1 st and 2nd quarters of 2009. The 4th quarter of 2008 and the


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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. Reagans response to President Carters 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.

Seven Biggest Downturn Since 1929

This chart is a good comparison of the economic crises of the 20th century


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GDP Decline 2008

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%


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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.

World Great depression Table

(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. Todays

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. ORourke elaborate on this in the think tankVOX 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.


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World industrial production is much more vibrant in todays Great Recession than it was during

the Great Depression.

6. Bank Foreclosures

Another interesting point of study is howmany banks foreclosed during the Great Depression ascompared 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.

Lehman Brothers: Was it Merely a Fake StoreFront?

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

byhttp://www.toonpool.com/cartoons/Lehman%20Brothers%20Bank%20bankrupt_22808

7. Unemployment

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.


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Great Depresssion vs. Great Depression Unemployment Experience

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

UCLAsays that African-Americans and high school dropouts are experiencing depression-level

unemployment. And as I have previouslynoted, 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 to

compare current unemployment with what occurred 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 ones experience of the severity of unemployment in America.


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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.


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Rescue Society Great Depression Photo

This picture depicts a typical unemployment line during the Great Depression. Picture provided

byhttp://www.adannews.com/16333/video-foreclosure-fraud-investigation-and-unemployment-

extension-99ers-could-be-affected/


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Cumulative GDP Loss vs Peak Unemployment Rate During Recessions

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 of35.2 weeks to find

employment.


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Average Length of Unemployment

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.

9. Protectionism

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 Actwas 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:


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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 structureshave 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 Roosevelts 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 withFortune

Magazine in its November 2010 edition:

I dont think well 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


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countrya lot of which reside in its businessesare still here. We work hard, we are innovative,

we adapt quickly. It will surprise people when America gets its mojo back.

Internet Resources on the Great Depression vs Great Recession

y Pew Study on Great Depressiony CNN Comparison: Great Depression vs. Great Recessiony Bruce Bartlett, Forbes: Great Depression vs. Great Recessiony The Atlantic Magazine: The Great Depression vs. the Great Recessiony Paul Krugman, New York Times: The Great Depression vs. the Great Recessiony The Freeman: Comparing the Great Depression vs. the Great Depressiony VOX: A Tale of Two Depressionsy Congressional Budget Office Compares Two Depy National Bureau of Economic Researchy The Tattler: The Great Depression vs the Great Recessiony Economics Journal Comparing the Great Depression vs. the Great Recessiony Atlantic Journaly New York Times: Unemployment Today vs. the Great Depressiony Bloomberg: US Data Shows Recession Worst Since Great Depressiony

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