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This Is Not Another Great Depression

Few people in the world know more about the Great Depression than economic historian Price Fishback, which is why whenever he offers an opinion on the subject, I always listen carefully. Back in the fall, Fishback wrote two outstanding posts here at the Freakonomics blog, one on what the New Deal tells us about the likely success of the stimulus package, and another on the Home Owners Loan Corporation.
Fishback is back, with a three-part series explaining why our current economic situation is very, very different from the Great Depression. In the first of these three posts, Fishback reviews the basic macroeconomic statistics then and now. My description might make it sound dry, but it absolutely is not; this is must-read stuff. I suspect you will be stunned at how bad the Great Depression really was.
How Does the Current Crisis Compare to the Great Depression?
By Price Fishback
A Guest Post

Over the past couple of decades, every time we have experienced a slowdown in the American economy, the media mentioned the possibility that this is the next Great Depression. Maybe this is a natural response to the relative lack of downturns over the past 20 years. After experiencing a downturn once every three to seven years for nearly two centuries, the U.S. economy has been averaging a downturn about once every nine or ten years since the early 1980’s. As declines in the economy have become rarer, perhaps people have become more sensitive to them.
In the 1920’s, Soviet economist Nikolai Kondratiev argued for the existence of 40- to 60-year economic super-cycles. Since the Great Depression ended nearly 70 years ago, maybe we are overdue for the next one.
The events of the last year naturally have stimulated comparisons to the Great Depression. Two years ago, few would have ever guessed that there would be no pure major investment banks left on Wall Street. The banking industry is struggling, as many financial institutions face uncertainty about the values of their assets, particularly financial instruments related to mortgages. The U.S. and most of the rest of the world are in recession. Meanwhile, the stock market has lost roughly 40 percent of its value from the all-time peak it reached in late 2007.
How does this compare to the Great Depression? We won’t know the final outcome of this recession for a while, but I can safely say that the current situation is nowhere near as bad as the situation during the 1930’s. There may be surface similarities on some dimensions, but there are far more differences than there are similarities.
Since the start of the recession in late 2007, the monthly unemployment rate has risen from 4.9 percent to 7.6 percent in January 2009. Before thinking about the Great Depression, realize that unemployment rates have exceeded 7 percent in 139 months since World War II. This includes 32 months between 1974 and 1977, 76 months between 1980 and 1986, and 21 more between 1991 and 1993. The Great Depression was far more disastrous. One year after the stock market crash of 1929, the unemployment rate had risen from 2 percent to 10.8 percent. The next year it was 16.8 percent. Then unemployment rates rose above 20 percent for four straight years!
It does not end there. The unemployment rate exceeded 14 percent for five more years until finally dropping below 10 percent again in 1941. These rates include emergency workers, but these were people who were working for their relief payments at hourly wages that were roughly half the norm on other government projects. We treat people receiving unemployment benefits today as unemployed, and all they are required to do is seek work.
Do I sound like your grandparent talking about walking barefoot and backward several miles through the snow to go to school? There’s more. Real G.D.P. fell during the last two quarters, but real G.D.P. in the fourth quarter of 2008 was almost identical to real G.D.P. in the fourth quarter of 2007. Since World War II, there have been 28 quarters where real G.D.P. was below the same quarter in the prior year. How does this compare with the Great Depression? In 1930, Americans produced 8.6 percent fewer final goods and services than in 1929, in 1931 15 percent less, and in 1932 and 1933 roughly 26 percent less than in 1929. It is hard to conceptualize such a drop in G.D.P.
Consider this: the 1932 and 1933 figures would have been the equivalent of shutting down all production of goods and services west of the Mississippi River. Annual real G.D.P. did not reach its 1929 level again until 1936. We are experiencing pain now, but the problems of the Great Depression were several magnitudes greater.