From the Great Depression to the Great Recession

The following apeared in the Spring, 2010, edition of Phi Kappa Phi Forum, the quarterly magazne of the National Honor Society of Phi Kappa Phi


From the Great Depression to the Great Recession


By John T. Harding


   When President Franklin Delano Roosevelt began his economic recovery program for the nation soon after taking office in spring 1933, he used several methods to combat the Great Depression that President Barack Obama has been adapting to counteract the recent Great Recession.
   Did government stimulus efforts work then, and are they working now? The answer is a qualified “yes, but ...”
   Output of goods and services improved in the 1930s, but because a banking crisis accompanied the downturn, the jobless rate was slow to catch up.
   That scenario, experts say, applies today.

Similar causes, similar effects

   The Great Depression began with a collapse of the financial markets, from stocks to banks and beyond, just as the Great Recession started with “irrational exuberance” — as former United States Federal Reserve Board chairman Alan Greenspan notably put it — in credit markets, which led to bank failures and housing crises and more.
   After the financial well went dry in the 1930s, FDR primed the pump of the economy through expenditures, following the precepts of economist John Maynard Keynes, who argued that the government could spend the country out of its doldrums. Examples included the Works Progress Administration, Civilian Conservation Corps, road and bridge construction, and a program for artists and writers.
   In the wake of the recent downturn, President Obama based his economic stimulus program on similar principles. Again, road and bridge construction projects are playing a major role. Also, there are bonus payments to Social Security recipients and tax credits to homebuyers; plus, the “Cash for Clunkers” program benefited the auto industry.
   Production of goods and services did improve in the 1930s. After the 1929 stock market crash, output fell by more than 40 percent, but by 1935, it recovered somewhat, to an estimated $73.3 billion, after having tumbled to $56.4 billion in 1933. (Output had been at $103.6 billion in 1929.)
   The employment picture, however, remained bleak — FDR’s policies resulting in a “jobless recovery.” In 1933, unemployment was about 25 percent; in the immediate years following FDR’s stimulus initiatives, it was still high at 20 percent. (Economists differ on the acceptable unemployment rate. At one time, 5 to 7 percent was the norm; now, it’s about 4 percent.)

Will the same thing happen again? Experts say probably.

   In the current decline, output, as measured by gross domestic product (GDP, which calculates the dollar value of all goods and services produced over a certain period), has improved. As 2007 ended, output topped out at $14.4 trillion. It declined through 2008 and most of 2009, before gaining 3.5 percent in the third quarter.
   But unemployment has risen from the 5 percent range in 2006 to upwards of 10 percent three years later. Federal Reserve Chairman Ben S. Bernanke, an authority on the Great Depression, warned in November 2009 that high unemployment is likely to continue through 2010.
   The problem stems from changes in the labor market and the systemic banking crisis — echoing the Great Depression — contend economists Edward S. Knotek II and Stephen Terry of the Federal Reserve Bank of Kansas City (Economic Review, Third Quarter 2009, Vol. 94, No. 3).
   The jobless rate will stay at about 10 percent for the rest of this year before fading to 9.2 percent in 2011 and 8.3 percent in 2012 — still too high — according to 41 economists surveyed by the Federal Reserve Bank of Philadelphia late last year.
   The same survey forecasted a GDP recovery rate of only 2.3 percent for 2010, 2.9 percent for 2011 and 3.2 percent for 2012.
   This combination mirrors the 1930s: slow growth in output and a high jobless rate.

Shortsighted thinking then and now

   After an initial surge in the economy facilitated by government spending, FDR turned off the money pump, being persuaded that recovery was well enough along. Yet many economic historians claim that was a mistake and resulted in a second decline in 1937, with production falling again.
   Today, too, “there is a more modest view of how much fiscal stimulus can produce because public debt can crowd out private investment,” Phillip LeBel, Professor of Economics at Montclair State University, said in an interview.
   In other words, if government finances its projects with bonds at a higher interest rate than the private sector offers, investors will buy government securities — which are safer — and there is less money available for corporate use. To make matters worse, even local bankers say certificate of deposit rates are not likely to improve for another year. Thus, consumers are paying down credit card debt instead of saving or spending.
   Moreover, firms are slow to hire during a downturn until they see a sustained pattern of recovery, LeBel added.
   So while encouraging signs suggested the economy had bottomed out by fall 2009, this spring the nation may still travel a bumpy road.
   As Bernanke predicted in his 2000 book, Essays on the Great Depression:

Those who doubt that there is much connection between the economy of the 1930s and the supercharged, information-age economy of the twenty-first century are invited to look at the current economic headlines — about high unemployment, failing banks, volatile financial markets, currency crises, and even deflation. The issues raised by the Depression, and its lessons, are still relevant today.