The Great Depression began at a time when a child then would be 90 years old

today. There is no shared experience of the depths and real 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?

There are many relevant parallels and lessons between the Great Depression and

Great Recession that give us historical perspective and policy 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 the economic crisis however is radically different. During the great

depression the global market did not have the necessary institutionalized structures

necessary to undermine the extent of the bust. Furthermore, the Great Depression was

characterized by a severe double dip whereas this current economic crisis has maintained

a steady growth rate, growth 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 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 total severities of these two economic downturns—both of

these downturns were the result of historically unsustainable levels of debt prior to the

economic collapse.

1.) Deficit Spending and monetary policy

Prior to the Great Depression the country 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 crisis private spending evaporates. This is problematic

because consumer spending represents 70% of the United State’s economy.

Bruce Bartlett of Forbes furthers,

“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.”

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 is in a deflationary period recovery 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 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 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 the 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 know as the“ spill-over”

effect.

Bruce Bartlett of Forbes elaborates on the changes made since the Great

Depression,

“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 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 put in plan mechanisms that could be

used to immediately began to combat economic downfall. The Employment Act of 1946

has its purpose outlined,

“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 it’s 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

factors 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 bill 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 today,

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

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 asset during times of economic woe as it allows the

unemployed to remain part of the consumer economy.

This is a fact that remains true to this day. Just like in the Great Depression the

Great Recession saw 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 both the Bush era tax

cuts and a further extension of unemployment benefits.

David Greenlaw of Morgan Stanley elaborates on the potential impacts of the

failure to extend the EUC,

“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 in par with what happened during the Social

Security Act of 1935. Some programs like the EUC or National Recovery Administration

during the depression due 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

GDP is probably the largest factor in determining 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 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 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,

“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; there could be only certain segments

of the economy that are causing economic woes.

The unofficial definition of a depression is much more clear. 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 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.

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. Jimmy Carter attacked Ronald Regan for misusing the term depression to describe

the economic situation of the country. Regan’s response to President Carter’s claim

would become one of the most notable responses in American political history. Regan

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."

4.) United States Manufacturing Decline

Both the Great Depression and the Great Recession were characterized by an

immense decline in manufacturing production. 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 Economics and Business writes,

“ 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 slower than previously but nonetheless remains

unabated. Barry Eichengreen and Kevin H. O’Rourke elaborate in the think tank VOX,

“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 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 15th 2008. The 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

7.) Unemployment

The unemployment rate at the height of the Great Depression was at a staggering

25%. Today the unemployment is around 9.80%. Having a quarter of the working

population hungry and unemployed 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 worse than white

unemployment during the recession and thus continues to be the case. Global Research

elaborates,

“No wonder Chris Tilly - director 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,

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 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-foreclosure-fraud-investigation-and-unemployment-

extension-99ers-could-be-affected/

8.) Length of average unemployment

Very much like 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 only been tracking the duration of unemployment 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 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 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,

“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 cow

and automobiles.”

Like the Great Depression this current recession is incredibly global. However,

there are new structures put in place like the G20, E.U. Commission and the IMF that

curb protectionist policies.

These organizations are by no means a full proof way of completely eradicating

mercantilist policies. In order to protect the American auto industry Barak 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 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.

"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 Now:

A major characteristic of the Great Depression that people worry about occurring

in this current recession is a “ double dip.” 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 “ Roosevelt’s Recession” occurred between May 1937

through June 1938.

This picture 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. In the summer of 2010 many economists certainly

thought so. However, these concerns were contingent on the possibility of coming

deflation which have not materialized.

Jaime Dimon C.E.O of J.P. Morgan Chase stated in an interview with Fortune

Magazine in their 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.”