The Great Recession vs. the Great Depression

David Wheelock: Now, Scott asked me to talk about the Great Depression in the context of our recent experience in the recent financial crisis and to do all of that in one hour. So I'll summarize the recent financial crisis in one slide — there'll be a quiz on this later [audience laughter]. And I'm not even going to talk about it. Suffice it to say, the financial crisis was a little complicated and had a lot of aspects to it.

We had a severe financial crisis in the 1930s as well, but it was different. It was... let me just say it's different. Now historically, in the U.S. as well as in other countries, recessions that follow financial crises tend to be much more severe than ordinary recessions. Financial crises therefore are bad. The '30s, we had a financial crisis, the 2000s we had a financial crisis. We ended up with severe recessions afterward, it's not a coincidence.

Instead of going through the nuts and bolts of the financial crises in both periods, however, let me compare instead the recent recession with the Great Depression, just in terms of the concepts of economics that we've been using up to this point. GDP, inflation, unemployment.

So for example, in the 1930s, '29 was the peak of the economy. 1933, beginning early 1933 was the bottom and the beginnings of the recovery period. Over that period, real GDP fell by about a third, 36.2%. The unemployment rate touched over 25%, peaked out at 25%. And the price level fell by about a third, 27%.

By comparison, the worst recession in the U.S. history since then, the recession of 2007 to 2009, lasted 18 months peak to trough before the recovery. Real GDP, that is the balloon again, shrank by 5%. The maximum height of the unemployment rate reached 10% briefly for one month. It's been trending down, albeit slowly, since then and the price level has been pretty stable, just a slight rate of inflation: 1.6% on average during the period of the recession.

What I've done here is drawn some charts where I've taken whatever I'm interested in, in this case real GDP, set that value equal to 100 — whatever the value of GDP was at 100 at the beginning of the recession — and then plotted it out over time. So the Great Depression here is shown by blue line. It lasted, lasted, lasted. So even 20 quarters after the 1929 peak, GDP in the U.S. was still 27% below where it had been in the third quarter of 1929, which was just the peak of the economy before it started into the recession. By comparison, we go out a similar length of time today after the beginning of the current — I don't want to say current recession — but the recession that officially lasted from December of 2007 to mid-2009. We had the recession, we lost about 5% of GDP. Since then, we've gained it all back and then some.

So as of the... what are we, I think this is through the first quarter of this year, 2013. Output of goods and services are now 3% above what they were in the fourth quarter of 2007, which was the peak of the last business cycle before the recession.

So again, the Great Depression lasts, lasts, lasts and even four or five years after the peak, still huge... hugely smaller if that makes any sense, but a much smaller economy in terms of what's being produced than we have now.

The unemployment rate again, I've harped on this already. Here we are in this case five years after the peak... we have employment in the U.S. economy today is 1.4% below what it was in December of 2007. We have not fully recovered the level of employment. We've surpassed it in GDP, but we're still not there yet in terms of employment in the U.S. economy. So this is the path for employment setting the peak at 19 — sorry, 2007 — at equal to 100 and then setting the 1929 peak also at 100, you can see we lost the unemployment rate in 1932-33 about 25% of the labor force. Even four years after the peak, 17.5% rate of unemployment.

Price level, again, a significant difference between the Depression and the recent recession was the great deflation we had during the 1930s as compared to the slight inflation we've had. Price level today is about 10% higher than it was in December of 2007 whereas in the 1930s, five years after the peak in 1929, prices were 22% below what they had been in 1929.

And then the stock market. The stock market’s fully recovered what it lost during the recession including that big drop in 2009. It is now 5% above the peak of the stock market in fall of 2007. Stock market performance has been much different in the last couple of years than it was after the 1929 peak when it came down hard and just stayed flat for many, many years.

So again, hopefully by having lived through the recent experience and now seeing the views of how our economy — it functions, has functioned since 2007 — you can get some perspective thinking back about what our grandparents lived through and our great-grandparents in the 1920s and 1930s when it was much much more severe than the recession we've just come through. Severe as it was, it doesn't compare on scale with the Great Depression.

Originally recorded July 11, 2013