great depression vs coronavirus pandemic essay

Economic Synopses

Comparing the covid-19 recession with the great depression.

The COVID-19-induced U.S. recession has been frequently compared with past recessions, including the Great Depression of the 1930s. Many commentators note that the economic contraction of 2020 is the deepest since 1947, when the Commerce Department's quarterly estimates of GDP begin, and possibly since the Great Depression. The Great Depression was likely the largest and longest slump in economic activity in U.S. history, though records for the eighteenth and nineteenth centuries are sketchy. Comparing the 2020 recession with the Great Depression is also fraught with measurement difficulties, but some rough comparisons based on various measures of economic activity are possible.

The Business Cycle Dating Committee of the National Bureau of Economic Research determined that on a quarterly basis economic activity peaked in the fourth quarter of 2019; though on a monthly basis, the peak occurred in February 2020 (https://www.nber.org/cycles/main.html). The Commerce Department estimates that inflation-­adjusted (i.e., "real") gross domestic product (GDP) fell at annual rates of 5.0 percent in the first quarter of 2020 and 32.9 percent in the second quarter. Though severe, the contraction apparently was relatively brief; economic activity began to increase in May or June, and most forecasters currently expect that output will increase in the second half of 2020 unless the pandemic resurges to the point of necessitating widespread business closures. 

Although official estimates of GDP begin in 1947, quarterly estimates of GNP (i.e., gross national product) are available for the Depression and earlier years. 1 Figure 1 plots the real GNP series for the Depression alongside the path of real GDP from the fourth quarter of 2019 through the first two quarters of 2020. The data are set equal to 100 in the cycle peak quarters (the third quarter of 1929 and fourth quarter of 2019). The figure also plots forecasts for real GDP over the remainder of 2020 and 2021. 2 As the figure shows, the cumulative decline in economic activity during the first two quarters of the 2020 recession was somewhat larger than the GNP decline during the first two quarters of the Great Depression. Moreover, the fall in real GDP during the second quarter of 2020 exceeded the largest one-quarter real GNP contraction during the Depression. The Depression-era contraction continued for more than three years, however. At its low point in the first quarter of 1933, real GNP was just 68 percent of its 1929 peak. By contrast, consensus forecasts predict that the U.S. economy will expand in the second half of 2020 and into 2021 but that output will remain below the 2019 peak for at least several quarters. 

A more consistently measured, but narrower, indicator of economic activity is the Index of Industrial Production (IP). 3 The index fell sharply during the first two months of the 2020 recession, as shown in Figure 2, but then began to rise. In April the index was just 83 percent of its February level, but by June it was 89 percent of its February level. The February-to-April decline in IP was the largest two-month decline in the history of the index, which begins in 1919. The cumulative declines in IP during the first four months of the Depression and the 2020 recession were similar. Although IP continued to fall for several quarters during the Depression, forecasters currently expect that IP will rise in coming months. (The orange dots on Figure 2 indicate Blue Chip consensus forecasts. 4 )

The unemployment rate increased sharply in the 2020 recession, from 3.5 percent in February to nearly 15 percent in April before falling back to 11.1 percent in June. Figure 3 compares the unemployment rate in the 2020 recession and Great Depression. 5 In contrast with the sharp rise at the beginning of the 2020 recession, the unemployment rate rose gradually during the initial months of the Great Depression, from about 2 percent in late 1929 to a bit less than 4 percent in June 1930. 6 The unemployment rate continued to rise, however, reaching 25 percent in 1933, and remained above 10 percent throughout the 1930s. 7 The Blue Chip consensus forecasts project a decline in the unemployment rate to below 10 percent by the end of 2020 and continued declines in 2021.

In addition to large declines in economic activity and employment, the price level also fell considerably during the Great Depression, as shown in Figure 4. At the business cycle trough in March 1933, the consumer price index (CPI) was 27 percent below its August 1929 level. Although the CPI fell during the first two months of the 2020 recession, it has since recovered to near its pre-recession level and is forecast to gradually rise.

Finally, Figure 5 plots the S&P 500 (Standard and Poor's stock price index). Stock prices peaked in early October 1929 then famously crashed, plunging some 30 percent over the first three months of the Great Depression. By 1932, stock prices were down nearly 85 percent from their August 1929 level. Stock prices also fell sharply in the early days of the 2020 recession. From February to March, the S&P 500 fell some 20 percent. However, by June, it had rebounded to 94 percent of its February level. 

By almost any measure, the 2020 recession began with sharp declines in economic activity, employment, and equity prices that rivaled or exceeded the initial declines of the Great Depression. The Great Depression persisted, however, and when it finally reached a trough nearly four years later, economic activity, employment, and consumer and equity prices were all far below their initial levels. The 2020 contraction might turn out to be the sharpest, but also the shortest, in modern times and perhaps of all time in the United States. The debate among forecasters has recently focused on the likely pace of the recovery and whether the increase in economic activity since May will be sustained or turn out to be merely an uptick before a second dip. The virus and the public's response to it will likely make that determination.

1 GNP is a measure of the total finished goods and services produced by U.S. producers, regardless where production takes place, whereas GDP captures total production within the United States and its territories, regardless of the nationality of the producers. The GNP estimates used here are from Balke and Gordon (1986).

2 Figure 1 plots the Blue Chip consensus forecasts for 2020:Q2-2021:Q4 (as of July 10) and the Survey of Professional Forecasters forecast for 2020:Q2-202:Q2 (as of May 15, 2020). 

3 Data are from FRED ® , Federal Reserve Bank of St. Louis ( https://fred.stlouisfed.org/series/INDPRO ).

4 Figure 2 assigns quarterly forecasts to the third month of each quarter.

5 The unemployment rate for the 2020 recession is the Bureau of Labor Statistics U-3 measure ( https://fred.stlouisfed.org/series/UNRATE ). The rate for the Great Depression was produced by G. H. Moore for the National Industrial Conference Board ( https://fred.stlouisfed.org/series/M0892AUSM156SNBR ).

6 The monthly unemployment rate series for the Depression begins in April 1929 and is quite volatile during 1929. Consequently, we use the value in December 1929 (set equal to 100) as the starting point, rather than the value at the business cycle peak in August 1929. 

7 However, if persons employed in government relief jobs are included, the rate fell below 10 percent in 1936. See Margo (1993) for a discussion of unemployment rate measures and other labor market indicators for the Depression.

Balke, Nathan and Gordon, Robert J. "Data Appendix," in Robert J. Gordon, ed., The American Business Cycle, Continuity and Change . Chicago: University of Chicago Press, 1986, pp. 781-850. 

Margo, Robert A. "Employment and Unemployment in the 1930s." Journal of Economic Perspectives , Spring 1993, 7 (2), pp. 41-59.

© 2020, Federal Reserve Bank of St. Louis. The views expressed are those of the author(s) and do not necessarily reflect official positions of the Federal Reserve Bank of St. Louis or the Federal Reserve System.

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ECONLOG POST

The COVID Crisis in Comparison with the Great Depression

Price fishback .pp-multiple-authors-boxes-wrapper.box-post-id-69046.pp-multiple-authors-layout-inline.multiple-authors-target-shortcode.box-instance-id-1 .pp-author-boxes-avatar img { width: 80px important; height: 80px important; } .pp-multiple-authors-boxes-wrapper.box-post-id-69046.pp-multiple-authors-layout-inline.multiple-authors-target-shortcode.box-instance-id-1 .pp-author-boxes-avatar img { border-radius: 50% important; } .pp-multiple-authors-boxes-wrapper.box-post-id-69046.pp-multiple-authors-layout-inline.multiple-authors-target-shortcode.box-instance-id-1 .pp-author-boxes-meta a { background-color: #655997 important; } .pp-multiple-authors-boxes-wrapper.box-post-id-69046.pp-multiple-authors-layout-inline.multiple-authors-target-shortcode.box-instance-id-1 .pp-author-boxes-meta a { color: #ffffff important; } .pp-multiple-authors-boxes-wrapper.box-post-id-69046.pp-multiple-authors-layout-inline.multiple-authors-target-shortcode.box-instance-id-1 .pp-author-boxes-meta a:hover { color: #ffffff important; } .pp-multiple-authors-boxes-wrapper.box-post-id-69046.pp-multiple-authors-layout-inline.multiple-authors-target-shortcode.box-instance-id-1 .pp-author-boxes-recent-posts-title { border-bottom-style: dotted important; } .pp-multiple-authors-boxes-wrapper.box-post-id-69046.pp-multiple-authors-layout-inline.multiple-authors-target-shortcode.box-instance-id-1 .pp-author-boxes-recent-posts-item { text-align: left important; } .pp-multiple-authors-boxes-wrapper.box-post-id-69046.pp-multiple-authors-layout-inline.multiple-authors-target-shortcode.box-instance-id-1 .pp-multiple-authors-boxes-li { border-style: none important; } .pp-multiple-authors-boxes-wrapper.box-post-id-69046.pp-multiple-authors-layout-inline.multiple-authors-target-shortcode.box-instance-id-1 .pp-multiple-authors-boxes-li { color: #3c434a important; } .pp-multiple-authors-boxes-wrapper.box-post-id-69046.pp-multiple-authors-layout-inline.multiple-authors-target-shortcode.box-instance-id-1 .pp-multiple-authors-boxes-li { border-radius: px important; } .pp-multiple-authors-layout-inline ul.pp-multiple-authors-boxes-ul { display: flex; } .pp-multiple-authors-layout-inline ul.pp-multiple-authors-boxes-ul li { margin-right: 10px }.pp-multiple-authors-boxes-wrapper.pp-multiple-authors-wrapper.pp-multiple-authors-layout-inline.multiple-authors-target-shortcode.box-post-id-69046.box-instance-id-1.ppma_boxes_69046 ul li > div:nth-child(1) {flex: 1 important;}.

By Price Fishback, May 6 2020

People have been asking how the Great Depression and the New Deal compare with the current COVID-19 crisis.  The economic situations are nothing alike, and the current response by U.S. governments is several orders of magnitude larger than the New Deal response to the Great Depression.

Currently, we know exactly why the economy has fallen off a cliff.   To stop the expansion of a nasty disease that can lead to horrifying deaths, officials from all levels of government have required all but “essential workers” to stay at home and practice social distancing when going to grocery and drug stores.   The move has “flattened the curve” and reduced transmission of the disease.   As a result, economic sectors that involve face-to-face activity have mostly gone dormant, causing workers to lose work opportunities and businesses to struggle to survive.

By contrast, even now we still do not fully understand the causes of the Great Depression of the 1930s.  Real output in both 1932 and 1933 was 30 percent lower than in 1929.  It did not reach the 1929 level again until 1937.  Unemployment rates rose from around 2 percent in 1929 to nearly 10 percent in 1930 and then stayed above 10 percent through 1940, including four years above 20 percent.  We know we made policy mistakes:  the Hawley-Smoot tariff, monetary policy that offered too little too late, and the 1932 tax increase that raised income taxes for the top 10 percent and added new excise taxes that hit all members of the economy.  Yet, there were other factors that are not as easy to identify that contributed to such a huge drop in economic activity.

Before 1929 the populace did not ask much of the federal government.  State and local governments had responsibility for labor and poverty policies.   Federal government outlays were 3 percent of GDP in 1929.  Few realize that Herbert Hoover’s government by 1932 had raised federal outlays to 6 percent of 1929 GDP (8 percent of a shrunken 1932 GDP) because Herbert Hoover did it within existing programs, loudly called for balanced budgets, and did not increase the outlays in his last year in office.  Franklin Roosevelt’s New Deal then established dozens of new programs while expanding federal outlays in 1939 to 11 percent of 1929 GDP (10 percent of 1939 GDP).   Most of the outlays went to poverty work relief programs like the FERA and the WPA, which paid wages of about half to two-thirds of wages paid on public works projects.  As a share of lost wages, the payouts were somewhat better than modern unemployment insurance benefits, but there was a work requirement in the 1930s programs.  Part of the New Deal money went to public works projects that paid full wages.  About 10 percent went to payments to farmers that helped them but pushed tenants, croppers, and farm workers out of agriculture.  Other programs included loan programs for farmers, homeowners, and businesses; recognition of labor unions; new financial regulations; and the National Recovery Administration’s unconstitutional attempt to allow each industry to avoid cutthroat competition by setting prices, wages, weekly hours, and quality of goods.  For the long run, the Social Security Act established old-age pensions, federal matching grants for state poverty programs, and unemployment insurance.  Like Hoover, Roosevelt also tried to balance the budget, and deficits as a share of GDP were lower than deficits in multiple years under Reagan, the first Bush, Obama, and Trump.

Someone recently asked me if  society today has the will to call on governments to help the way they did during the New Deal.  That struck me as an odd statement.  Above we showed that it took ten years to raise federal outlays to rise from 3 to 11 percent of 1929 GDP.   This crisis has arisen because the President, governors, and mayors in trying to save lives have ordered people to stay home and businesses to shut down.  In the past few weeks, the Federal Reserve has opened up lending facilities throughout the economy in unprecedented ways.   Unemployment benefits for the first time are going to workers whose employers did not contribute to the system, and the federal government is adding $600 weekly payments that raise benefits well above the usual 50 percent of the weekly wage.  Finally, a sharply divided Congress and President have established 2.7 trillion dollars in  spending authority in emergency packages that are raising federal outlays from about 21 percent to 34 percent of 2019 GDP.  This will drive the federal deficit to from 5 to at least 18 percent of GDP, and nearly every state will run substantial deficits as well.  On Thursday, Nancy Pelosi called for an additional trillion dollars in support for state and local governments.  That trillion raises government outlays as a share of GDP to 39 percent, just short of the 40 percent that American spent fighting World War II at the peak of the war in 1944.  The American public and leaders on both sides of the aisle today are clearly willing to allow governments to take steps that go far beyond what the New Deal government did in the 1930s.  They may well soon rival federal spending at the peak of World War II.

Price Fishback is the Thomas R. Brown Professor of Economics at the University of Arizona.

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John nye on the great depression, political economy, and the evolution of the state, reader comments.

• READ COMMENT POLICY

May 6 2020 at 12:00pm

Our government, our society has decided that we have a class of business enterprises that are “too big to fail.” Right now we are putting money behind companies like Boeing, the airlines, and the oil companies. The 1930s depression lasted a decade. I understand (a little) the academic arguments against government action, but I wonder about the cost of several years of downturn versus a quicker fix. I recognize that a certain amount of cronyism is inevitable whenever the government acts.

May 6 2020 at 1:42pm

I think that there is a mythologizing of FDR that tells a story of how he was willing to try anything to get people back to work, including by using the government to directly employ people. I think that people aren’t wondering about why people are unemployed at this moment in time, but rather are worried about how quickly the labor market will recover after the pandemic is no longer such a threat.

The experience of the very slow recovery of the labor market during the Great Recession seems to be the relevant comparison, with people worried that leaders will not make jobs and the economy their number one priority, which I think is contrasted with the folk history of the Great Depression.

Thomas Hutcheson

May 7 2020 at 11:20pm.

The common element is that the Fed failed to provide enough monetary stimulus to keep NDGP rising.

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The impact of coronavirus could compare to the Great Depression

And a corresponding rise in nationalism and xenophobia may follow, just as it did in the 1930s.

The coronavirus crisis will be the biggest financial crisis of our generation, much larger than the 2007-2009 global financial crisis.

It is very likely that the economic impact of the coronavirus crisis will be comparable with the Great Depression, the period of devastating economic decline between 1929 and 1939, which saw mass unemployment, factory closures and the accompanying personal trauma.

The coronavirus outbreak will bring an economic depression – that is, a severe and prolonged economic decline with high levels of unemployment and company closures.

Record numbers of people will likely suffer from post-traumatic stress disorder (PTSD), the combination of stress, anxiety and depression that develops in some people who have experienced a traumatic event.

The coronavirus outbreak is already such an event. More than three million people around the world have been infected by the virus and more than 200,000 have died of it. Estimates show that the coronavirus may kill 100,000 Americans, the equivalent to double the number of Americans who died in the Vietnam War.

By comparison, the Spanish flu pandemic of 1918-1919 infected 500 million people, or one-third of the world’s population, with 50 million deaths, of which 675,000 occurred in the US. The world’s population in 1918-1919 was estimated at 1.5 billion. If one translates this to today’s figures, with a world population of 7.8 billion, it would be the equivalent of 2.6 billion people infected and 250 million deaths.

The United Nations Conference on Trade and Development (UNCTAD), the UN’s trade and development agency, says the slowdown in the global economy caused by the coronavirus outbreak is likely to cost at least $1 trillion in 2020 alone, in terms of reduced growth measured in gross domestic product (GDP). 

Over time, the cost to the global economy is likely to be three or four times that figure.

As a comparison, it is estimated that the 2007-2009 global financial crisis cost the US around $4.6 trillion in terms of lost growth in GDP, or 15 percent of its GDP compared to the years before the financial crisis. 

During the Great Depression, unemployment in many countries hovered around 25 percent, with one in four people in industrial countries made jobless by it. In the US, nearly half of the banks collapsed, 20,000 companies went bankrupt and 23,000 people committed suicide.

The current pandemic will cause individual economies to plunge into recession; businesses will close down and jobs will be lost at similar levels to that of the Great Depression. Moreover, the pandemic is impacting both industrial and developing countries; whereas the Great Depression was largely concentrated in industrial countries.

The International Labour Organization (ILO) has predicted that the pandemic will wipe out 6.7 percent of working hours in the second quarter of this year – the equivalent of 195 million full-time workers. 

This is already playing out. In the US, more than 22 million people filed claims for jobless benefits in the four weeks ending April 11, according to the US Department of Labour. To put these latest numbers into context, in 2008, at the height of the global financial crisis, 2.6 million people in the US filed for unemployment in that year, making 2008 the year with the biggest employment loss since 1945. 

Suicides, domestic violence and murders increase during times of economic hardship and this may be further exacerbated by lockdowns and self-isolation.

Wealthier countries such as Germany, the UK and the US have rolled out large aid programmes – larger than those which appeared in the aftermath of the 2008 global financial crisis – to support businesses, the self-employed and the unemployed for loss of income during the lockdown. Germany will give unlimited loans to large companies, pay 60 percent of salaries of troubled companies to allow them to reduce the working hours of employees without having to lay them off and financial support to the self-employed.

The US has unveiled a $2 trillion coronavirus rescue package for struggling companies and employees, which includes loans, equity stakes for government in businesses in strategic sectors and direct cash payments to individuals.

While these bailouts might provide interim relief, they will plunge countries, companies and families into debt for years, while we will also have to deal with the social crises of deaths, suicides and mental disintegration for a long time after the coronavirus pandemic. 

After the Great Depression there was a rise in nationalism around the world – as a direct result of the financial, social and emotional hardships of the depression – creating the  conditions  that eventually led to the second world war. 

There has been a similar rise in nationalism , populism and xenophobia during the coronavirus outbreak. Of course, this had been growing for many years before the pandemic, in part as a result of austerity measures that caused financial hardship in the aftermath of the 2007-2009 financial crisis.

The coronavirus crisis will likely make those austerity measures worse.

Although there have been pockets of solidarity in response to the coronavirus – Cuba sending medical personnel to Italy and China sending medical equipment to Poland, for example – some countries have stopped vital medicines, equipment and food from being exported to other countries. 

Once the crisis has passed, some countries may continue turning themselves into fortresses, excluding outsiders, whether immigrants, refugees or foreign companies.

Nationalist, populist and extremist leaders and governments could ride the wave of post-coronavirus financial and emotional hardships, in the same way they did after the Great Depression. There is a real danger that the hardships caused by the coronavirus pandemic will lead to authoritarian governments coming to power in many countries, while those already in power become more entrenched.

If they do, the methods used to prevent the virus from spreading: sealing off borders, tracking infected individuals using surveillance technology and restricting people’s movements, could be used for more menacing purposes.

The views expressed in this article are the author’s own and do not necessarily reflect Al Jazeera’s editorial stance.

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Covid-19 could be the worst economic crisis since the great depression.

Shoppers leave a Target store after shopping in Niles, Ill., on Nov. 28, 2020. (AP)

If Your Time is short

Economic crises are based on factors such as gross domestic product, unemployment rate, and duration.

COVID-19 caused the worst economic crisis since the Great Depression, but the current recession is different from the recessions we’ve seen in the past 100 years. 

It’s too soon to say what the long-term effects of the pandemic will be, since it is still going on. 

With COVID-19 cases rising, and parts of California shutting down again, some economists say the COVID-19 recession is going to get worse. 

In a Nov. 29 Facebook post, Cori Bush made her own claim about the economy. Bush, a Democrat, was elected on Nov. 3 to serve Missouri’s 1st Congressional District. 

"Decades of incremental change led to a moment where we have 265K dead from COVID-19, the worst economic crisis since the Great Depression, an impending climate catastrophe, & a police brutality epidemic," Bush said.

Can Bush really say that it is the worst economy since the Great Depression?

We decided not to give the statement a rating — largely because it is too soon to determine that and given the degree of uncertainty about the future. Still, we wanted to look into how the current economy compares to the past eight decades. 

Bush didn’t respond to PolitiFact’s emails, so we don’t know how she defines an economic crisis. But we know COVID-19 is creating a different economic crisis than any we’ve had in the past 100 years, according to previous PolitiFact reporting . 

A big factor: COVID-19 is limiting people’s ability to spend the money that many have. By contrast, MU economics professor Alina Malkova said during the Great Recession in 2008, people were running out of money or going into debt. 

That recession took years to recover from. In early 2020, people had money, but they couldn’t spend it because of business closures and shut-downs. 

There’s still plenty of uncertainty to when, where and how the pandemic will pass, which leaves uncertainty about the economy as well. According to Allan MacNeill, a professor of political economy at Webster University, there are two common ways to define an economic crisis. 

"The two biggest things we look at for an economic crisis are the GDP decline and unemployment," MacNeill said.

Gross Domestic Product , or GDP, is the market value for goods and services within a country over a specific time period. GDP helps measure a company’s economic health.

In order to find out if the current economy is the worst since the Great Depression, we need to compare it with the Great Recession (2007-09), which before 2020 was considered to be the worst economic crisis since the Great Depression. (The Great Depression lasted from 1929-1933 by some accounts, but some argue it lasted until 1939.)

The GDP decline in 2020 far exceeded the decline of the Great Recession. GDP decline in the second quarter of 2020 was 31.4%. MacNeill says this is unprecedented. According to the Federal Reserve, GDP fell by only 4.3% over the two years of the Great Recession. 

The unemployment rate in April was also higher than it was during the Great Recession. In April 2020, the unemployment rate was almost 15%, while the Great Recession never went higher than 10%. 

Since the GDP decline and the unemployment rate are the highest since the Great Depression, wouldn’t that make it the worst economic crisis? Well, experts say it’s not that simple. 

MU economics and public affairs professor Peter Mueser says it’s hard to compare the COVID-19 economy to other recessions and crises. The Great Depression lasted about a decade, while the Great Recession spanned about three years. 

In just several months, COVID-19 caused the GDP to decline by 31.4% and the unemployment rate rose from 3.5% to 14.7%. Mueser says the speed at which COVID-19 did this was unheard of. 

"It has almost no comparison, in that, in that period," he said. "You know the number of people put out of work and in a short period of time, was essentially unprecedented in the U.S."

But with the unprecedented decline came an unprecedented bounceback. According to the latest Bureau of Labor Statistics report, the unemployment rate is now at 6.7%. In the third quarter, the GDP went up by 33.1%, which MacNeill says is an amazing recovery. 

While the Great Recession took years to improve significantly, the COVID-19 economy is recovering in just a few months. The problem is, economists don’t know where the economy will go from here. The key unknowns are how much assistance the federal government provides to support the recovery, and how well, and how quickly, a coronavirus vaccine enables economic activities to go back to normal.

MacNeill says he hopes this crisis doesn’t last several years, but there’s a real possibility that things could get worse.

"You know, in the Great Recession, there were lots of job losses that were permanent. That wasn't that long ago, really. And this is another big hit," MacNeill said. 

Mueser says if the vaccine comes out and everything continues improving within the next year, the COVID-19 economy will not be considered worse than the Great Recession, which would mean it is not the worst economy since the Great Depression, either. However, Mueser can’t rule out that the economy will take a dip again. 

"I think the best guess is that we aren't going to have improvement in the next four or five months," Mueser said. 

Both MacNeill and Mueser agree it's too early to call it the worst economic crisis since the Great Depression. There’s simply no way of telling how long it will last. 

Our Sources

Interview, Allan MacNeill, Webster University professor of Political Economy, Dec. 2

Interview, Peter Mueser, MU professor of economics and public affairs, Dec. 3

Cori Bush Facebook Page, Nov. 29 Facebook Post , Nov. 29.

Investopedia, Gross Domestic Produc t, Dec. 5

Trading Economics, United States GDP , Dec. 5

St. Louis Federal Reserve, Unemployment Rate , Dec. 5

Bureau of Labor Statistics, Employment Situation Summary , Dec. 5

The Balance, US Unemployment Rate History , Dec. 5 

Federal Reserve History, The Great Recession , Dec. 5

Interview, Alina Malkova, MU professor of economics, Nov. 13, 2020

PolitiFact, Vicky Hartzler Fact-Check , Nov. 18 2020

Politifact, How the 2008 and 2020 recessions will be different , Dec. 8 2020

Browse the Truth-O-Meter

More by veronica mohesky.

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The fiscal and monetary response to COVID‐19: What the Great Depression has – and hasn't – taught us

George selgin.

1 Center for Monetary and Financial Alternatives, The Cato Institute, USA

Although some regard the New Deal of the 1930s as exemplifying an aggressive fiscal and monetary response to a severe economic crisis, the US fiscal and monetary policy responses to the COVID‐19 crisis have actually been far more substantial – and, so far, much more effective in reviving aggregate spending. Although many fear that these responses, and the large‐scale increase in bank reserves especially, must eventually cause unwanted inflation, the concurrent sharp decline in money's velocity has thus far more than offset any inflationary effects of money growth, while forward bond prices reflect a general belief that inflation will remain below 2 per cent for at least another decade. Notwithstanding the growth of the Fed's balance sheet, Fed authorities can always check inflation by sufficiently raising the interest return on bank reserves. Nonetheless, recent developments have heightened the risk of ‘fiscal dominance’ of monetary policy at some point in the future.

1. INTRODUCTION

The Great Depression remains ‘great’ in the particular sense of holding the record for severity that every downturn since has vied for, albeit in vain. It was therefore inevitable that the sharp downturn that followed the outbreak of the COVID‐19 crisis in March 2020 would be compared to it. In April, Gita Gopinath, the IMF's Chief Economist, said it was “very likely that this year the global economy will experience its worst recession since the Great Depression” – one “far worse” than the 2009 crisis (Rappeport & Smialek,  2020 ). And recently World Bank President David Malpass observed that the current crisis is itself “truly a depression, a catastrophic event” that continues “to add to the ranks of those in extreme poverty” (New One Entertainment,  2020 ).

Just as inevitably, some have looked to the 1930s, and to the US Roosevelt Administration's New Deal especially, for ways to cope with, if not end, the present crisis. “For many Americans”, writes Harvard American Studies Professor Lizabeth Cohen, “the New Deal … remains the standard for how the federal government should respond to a major national emergency. … Many hope to replicate that achievement today.” But to do so, Professor Cohen says, “We need to know not just what [Roosevelt and his associates] did, but how they pulled it off” (Cohen,  2020 ).

Professor Cohen herself offers a very good, if brief, account of how the New Dealers ‘pulled off’ their programme. Here I wish to consider just what they did, and whether and how their successes and their failures might assist efforts to deal with today's crisis.

2. CRUCIAL DIFFERENCES

If we're to make good use of the New Deal experience in formulating or revising policy responses to the current downturn, we must first recognise that, despite some similarities, today's crisis is very different from the Great Depression. It follows that some policies that helped then may not be relevant today, whereas others may prove useful now that wouldn't have been useful then.

One especially important difference between the Great Depression and the present downturn is that today's crisis hasn't involved a collapse of the financial system. Deposit insurance has ruled out 1930s‐style bank runs, while the shoring up of bank capital ratios since 2008 has helped to reassure holders of uninsured or only partially insured deposits.

The banking system's present strength has several important implications. Most obviously it means that we've been spared a dramatic collapse of money and credit of the sort that took place in the early 1930s. To be sure, spending has collapsed, both suddenly and much more severely than it did in 2008. Yet this collapse, which has mainly been a consequence of travel restrictions and lockdowns, has still been small compared with that of the 1930s (see Figure  1 ).

Downturn and recovery in the 1930s Great Depression and the 2020 recession

Note: SPF, Survey of Professional Forecasters

Source: Wheelock ( 2020 )

Furthermore, the recovery from the present downturn is already well under way, and (as the following figures show) proceeding at an encouraging pace, whereas recovery was slow both in the 1930s and after 2008, as is often the case when downturns are caused or accompanied by financial crises. 1

An important implication of these differences is that at least one set of New Deal policies, considered by many to among be its greatest triumphs, cannot be of any use to policymakers today. I refer to the national bank holiday and steps taken during it to end banking crises and get the banking system back on its feet. Those steps marked the end of the ‘Great Contraction’ that began in 1929, and the start of a process of recovery, albeit one that would suffer many setbacks (Selgin,  2020a ).

For obvious reasons, President Roosevelt's decisions to suspend the gold standard, and, after an interval of ‘dirty’ floating, to officially devalue the dollar, which are also supposed by many to have assisted the recovery, can also have no analogues in today's world of irredeemable fiat money. Neither, for that matter, can the heavy gold inflows that occurred between 1933 and the outbreak of World War II. Yet those inflows, which were the result of European unrest rather than any New Deal measure, were the most important factor behind the post‐1933 recovery (Selgin,  2020b ).

Instead, for lessons we might fruitfully apply to today's saturation, we must look at other aspects of the New Deal, and especially at both New Deal fiscal policies and Federal Reserve credit policies. And lessons we shall find. Unfortunately, those lessons are mainly negative: if, as David Kennedy claims, “the Depression demonstrated the indispensable role of government … when it comes to dealing with the kinds of crises we face now and that we faced in the 1930s” (De Witte,  2020 ), it did so mainly by showing what happens when the government doesn't take appropriate steps. We have, in other words, more to learn from the New Deals failures than from its successes.

3. FISCAL STIMULUS

Many still suppose that the unprecedented growth in government spending, and deficit spending in particular, during the New Deal together played an important role in promoting whatever recovery took place prior to World War II. But while both total and debt‐financed federal spending did indeed increase to record levels during the New Deal, their levels were not remarkably greater than those seen during the last years of the Hoover administration (1929–33); and in both cases the deficit grew to record levels not because either government had actually embraced deficit spending (though Roosevelt's finally did so starting in 1938), but despite concerted efforts to avoid them through higher tax rates, new taxes, or both.

And while New Deal fiscal policy was indeed more expansionary than anything seen before then, as a share of GNP both total and deficit spending were very modest in comparison with recent pre‐crisis levels, let alone current ones. Indeed, the scale of New Deal government spending was, according to Christina Romer ( 1992 ), Price Fishback ( 2010 ), and other economic historians, too small to have contributed to any substantial degree to the post‐1933 recovery. Only the far greater outlays following the outbreak of World War II, which eventually raised government spending to over 44 per cent of GDP (a record still not surpassed), but which was not itself part of the New Deal's recovery programme, can truly be said to have ended the depression.

Congress's response to the present crisis has, in contrast, been both rapid and substantial. Whereas “it took ten years to raise federal outlays … from 3 to 11 percent of 1929 GDP”, Fishback ( 2020 ) observes, by May 2020 the fiscal response to COVID‐19 was already “several orders of magnitude larger than the New Deal response to the Great Depression”.

According to recent Congressional Budget Office projections, as reported by Chris Edwards ( 2020 ), the current spike in deficit‐financed outlays (see Figure  2 ) will be followed by more modest but continually rising future deficits, owing mainly to the rising cost of servicing the debt (Figure  3 ), causing the publicly held share of federal debt to surpass its previous record of 106 per cent of GDP sometime in 2023, and to approach 200 per cent of GDP by 2050.

Total US government outlays and revenues, 2005–2050 Source: Edwards ( 2020 )

Breakdown of US government spending, 2005–2050 Source: Edwards ( 2020 )

Although mandatory unemployment insurance was the main cause of the recent spikes in total and deficit spending, the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 also provided for a substantial increase in discretionary spending. Among other things, Fishback explains, that Act extended unemployment benefits to workers whose employers had not paid for their insurance, while adding $600 to ordinary weekly payments – enough to avoid the normal 7 per cent decline in spending among the newly unemployed. 2 Finally, by providing for another $3.7 trillion in emergency spending, including a trillion dollars to support state and local governments, Congress raised government spending to a share of GDP approaching that of World War II. In short, despite being divided, the government, having long since overcome its New Deal‐era fear of deficit spending, was willing “to take steps that go far beyond what the New Deal government did in the 1930s” (Fishback,  2020 ).

Thanks in large part to this aggressive fiscal response, the pace of aggregate spending recovered relatively rapidly from its sharp decline between late January and mid‐April. As Figure  4 shows, by late September it had almost returned to its value a year before. However, that return still leaves the level of spending well below its former trend. Nor should the revival of total spending, so far as it goes, be allowed to obscure the dramatic change in its composition, which has left whole industries languishing even as it has invigorated others.

Change in all consumer spending, 2020 Source: Opportunity Insights Economic tracker ( https://tracktherecovery.org/ )

4. RELIEF, RECOVERY, AND REFORM

Although the scale of the fiscal response to COVID‐19 seems more reminiscent of that witnessed at the outbreak of World War II than of New Deal fiscal policy, today's fiscal response shares one important – and deleterious – feature with its 1930s counterpart, to wit, a tendency to conflate fiscal policies conducive to genuine recovery with policies that serve instead either to provide temporary relief only or to implement reforms that, whatever their long‐term merit, do little if anything to revive private market activity.

While President Roosevelt famously insisted upon distinguishing the ‘three R's’ of Relief, Recovery, and Reform, the distinction has not always been adequately appreciated by later students of the New Deal. Some, for example, insist on gauging the pace of recovery during the 1930s using Michael Darby's revised unemployment statistics (Darby,  1976 ), which include those working in the Works Progress Administration and other New Deal work‐relief programmes among the employed, instead of conventional series that consider them ‘unemployed’. Although one may well complain that ‘unemployed’ is the wrong word to describe persons who were in fact working, if only for modest wages, the fact remains that the series that commits this terminological offence is also the more reliable indicator of the progress of recovery.

Some assessments of the CARES Act's success likewise conflate its effectiveness as a source of temporary relief with its ability to promote lasting recovery. According to a recently published study (Ganong, Pascal, & Vavra,  2020 ), by August CARES Act relief recipients, having used up most of their emergency support, began to rein in their spending again, thereby exposing the US economy to a further downturn. “With savings dwindling and no further economic relief in sight”, the Wall Street Journal observes in reporting on the study, “nearly 11 million jobless workers may curb spending even further or fall behind on debt or rent payments” (Davidson,  2020 ). The same report has Peter Ganong, one of the study's authors, observing more bluntly that “[t]he economy right now is essentially running – or not running – on the exhaust fumes of the CARES Act”. In other words, notwithstanding claims made by President Trump and some other Trump administration officials, the (partial) revival of spending since April, like the post‐1933 decline in Darby's New Deal unemployment measure, may reflect the extent of relief only, rather than the true extent of recovery. 3 Only once the public's fear of infection subsides and presently restricted activities are allowed to resume will a more complete disgorgement of savings accumulated by those whose livelihoods were not cut off by the crisis (Bird,  2020 ) provide the basis for a sustained recovery.

It is also the case that some actual New Deal programmes seemed to honour the distinction between relief, recovery, and reform more in the breach than the observance. This was especially true of the National Recovery Administration (NRA), which was based on the premise that reforms long sought by labour representatives on the one hand and businessmen on the other would also serve, if implemented, to spur recovery. For reasons very thoroughly set forth in a 1935 Brookings Institution study, that premise was tragically mistaken; and the NRA, instead of hastening recovery, impeded it until the Supreme Court, by declaring it unconstitutional, brought the ill‐fated experiment to an end (Selgin,  2020c ).

A similar confusion of the goals of reform and recovery has also limited the effectiveness of the government's response to the COVID‐19 crisis. It has done so, most obviously, by inspiring attempts to treat both the original CARES Act and negotiations concerning a second stimulus package as Trojan horses by which to introduce or expand government programmes that, whatever their other merits, are unlikely to help to either shorten the COVID‐19 crisis or render it less painful. The $25 million in CARES Act support earmarked for the Kennedy Center was an especially notorious (and successful) instance of such an attempt; but there have been many others, both Republican and Democratic (Waldman,  2020 ). Mostly unsuccessful attempts by clean‐energy trade groups and environmentalists to include ‘green’ legislation in the CARES Act were an important cause of disagreements that delayed its passage (Brady,  2020 ). Similar attempts to smuggle (mostly progressive) reforms into a second stimulus package (Boehm,  2020 ) in turn contributed to the gridlock that dashed any hope for its passage by the Trump administration (Kane,  2020 ; Schalatek,  2020 ).

5. MONETARY POLICY

If the difference between New Deal and recent fiscal policy measures is great, that between the Fed's conduct during the New Deal and its recent conduct is even more pronounced. Indeed, it comes close to being a difference between doing nothing and doing (or trying to do) everything!

Thanks to Friedman and Schwartz ( 1963 ), the fact that the Fed failed to make adequate use of open‐market security purchases to prevent a ‘Great Contraction’ of the US money stock between 1929 and March 1933 is now notorious – so much so that former Fed governor Ben Bernanke felt obliged, on the occasion of Friedman's 90th birthday on November 2002, to apologise on the Fed's behalf to him and Anna Schwartz, while promising that the Fed would never “do it again” (Bernanke,  2002 ). What is not so well appreciated is the Fed's almost entirely passive role throughout the remainder of the 1930s, when, as Figure  5 shows, the Fed's total security and commercial bill holdings remained almost constant. The Fed's balance sheet did grow, thereby allowing the money stock to grow as well; but that growth was fuelled almost entirely by gold imports over which the Fed itself exercised no control and for which neither it nor the US government deserved credit. Instead, their main cause was the increasing likelihood of war following Hitler's rise to power. Even President Roosevelt's official devaluation of dollar in January 1934 contributed much less to US money growth than it might have: although the devaluation meant an immediate increase in the nominal US gold stock, instead of adding to banks' reserves the proceeds from it were appropriated by the US Treasury, which used most of them to establish its Exchange Stabilization Fund.

Federal Reserve's total security and commercial bill holdings, 1933–1939 Source: National Bureau of Economic Research

True to Bernanke's word, both during his tenure and since the Fed has avoided a repetition of its performance during the 1930s – and how! In one month starting in mid‐September 2008, the Fed's assets doubled; by early 2015 three rounds of quantitative easing had doubled them again, to about $4.1 trillion. The Fed's response to the current crisis has been even more dramatic: at the start of 2020 its assets were at roughly their level five years earlier (see Figure  6 ). They have since increased by another $3 trillion, and for the time being the Fed remains committed to buying at least $120 billion more each month.

Federal Reserve's total assets (2007–2020) less elimination from consolidation (Wednesday level) Source: Board of Governors of the Federal Reserve System

While the impressive scale of the Fed's open‐market purchases makes for a sharp contrast with the situation in the 1930s, low interest rates were a feature of both episodes. Those low rates discouraged Fed authorities from buying securities during the New Deal, and have limited the stimulus effect of their recent purchases. In March 1934, the New York Fed reduced its discount rate to 1.5 per cent – its lowest level since the Fed was established; in September 1937 it lowered it another 50 basis points, to just 1 per cent, where it remained until the start of 1948. Yet even those record‐low discount rates were high compared to then‐prevailing rates on Treasury securities. The rates for three‐month Treasury bills are shown in Figure  7 , from a 2010 article by Gerald Dwyer. As Dwyer ( 2010 ) explains,

Interest rates on three‐month Treasury bills, January 1931 to December 1941

Note: The two average monthly rates are the interest rates at auctions of new issues of three‐month Treasury bills and the rate quoted by dealers on three‐month Treasury bills.

Sources: Auction rate, National Bureau of Economic Research ( www.nber.org/series no. m1302b); dealer quote, from the Board of Governors of the Federal Reserve System

With the exception of a brief period in 1937, interest rates on these securities never averaged as high as 25 basis points in any month from October 1934 to November 1941. Although interest rates on reserves were zero, interest rates on three‐month Treasury bills were not far from zero.

As Figure  8 shows, between them, banks' desire to keep liquid following the trauma of the Great Contraction, and the trivial opportunity cost of reserve holding caused them to accumulate reserves acquired as a result of heavy gold imports. Fed officials therefore concluded that open market purchases would only supply banks with that many more reserves to stockpile. This view was aired by then Fed Governor Marriner Eccles in his now famous exchange, during the hearings on what became the 1935 Banking Act, with Democratic Representative Prentice Brown and Republican Senator Phillip Lee Goldsborough. The exchange began when Representative Brown asked Eccles what the Fed might do were granted greater freedom to engage in open market operations:

Total reserves and excess reserves, January 1931 to December 1941

Notes: Assets in banks that were members of the Federal Reserve System were about 85 per cent of all assets in US banks. Data on excess reserves for March 1933 are missing in the source document.

Source: Dwyer (2010)

GOVERNOR ECCLES: Under present circumstances there is very little, if anything, that can be done.

MR. GOLDSBOROUGH: You mean you cannot push a string.

GOVERNOR ECCLES: That is a good way to put it, one cannot push a string. We are in the depths of a depression and, as I have said several times before this committee, beyond creating an easy money situation through reduction of discount rates and through the creation of excess reserves, there is very little, if anything that the reserve organization can do toward bringing about recovery. I believe that in a condition of great business activity that is developing to a point of credit inflation monetary action can very effectively curb undue expansion. (Banking Act of 1935 , 1935, p. 377)

The accumulation of excess reserves also caused Fed and Treasury officials to worry that, despite the economy's still depressed state, banks would soon attempt to shed those excess reserves, triggering unwanted inflation. In hearing this Keynes is supposed to have quipped that the officials in question “profess to fear that for which they dared not hope”. But the officials were all too in earnest. To avert the risk of inflation, the Fed took advantage of powers granted it by the 1935 Banking Act to double banks' reserve requirements, while the Treasury for its part began to sterilise gold inflows (Irwin,  2012 ). Inflation, sure enough, never broke out. On the contrary: the measures helped cause the ‘Roosevelt Recession’ of 1937–38, which undid much of the recovery of the preceding four years.

Treasury rates today are roughly as low as they were during the New Deal; and the result now as then is that banks have been accumulating reserves 4 sent their way, instead of employing them to achieve any corresponding growth in loans or deposits. Figure  9 , comparing the relative response of reserves, banks deposits, and M2, to the Fed's asset purchases, shows just how slight the effect of reserve growth has been on broader money measures. If one considers as well the sharp decline in M2 velocity that has taken place since February, it becomes evident that, if the Fed's asset purchases have indeed been helping to revive aggregate demand, they have not done so by way of any of the more conventional money and credit transmission mechanisms. So far as those mechanisms are concerned, today's Fed officials might well be said to have entirely overcome their predecessor's reluctance to go on ‘pushing on a string’.

Response of reserves, banks deposits, and M2, to the Fed's asset purchases, 2020 Source: Board of Governors of the Federal Reserve System

Banks' accumulation of reserves has nonetheless raised concerns about future inflation echoing those of 1930s – and just as misplaced. As the Fed's balance sheet expanded in April, various experts warned that the long‐term result might be “an ugly spell of high inflation ” (Long,  2020 ). Observing that in six weeks the “M2 money supply has increased by 7.7 percent, an annual compounded rate of 90.4 percent”, Martin Hutchinson ( 2020 ) claimed on 23 April that “you can't produce money at that rate without the dollar going the way of the continental, the assignat, the reichsmark or the 1946 Hungarian pengo”. In a Wall Street Journal opinion piece published that same day, Tim Congdon ( 2020 ) employed similar reasoning, albeit more soberly. The going rate of M2 growth, he wrote, approaches peak rates previously seen during the two world wars and the Vietnam War, all of which “were followed by nasty bouts of inflation”. Were inflation to break out again, Congdon concluded, “policy makers today being cheered for their swift, decisive action will instead have to answer for their grave lack of foresight”. The Fed's more recent decision to embrace average inflation targeting raised further alarms: writing in the Financial Times , Gavyn Davies ( 2020 ) observed that, although the Fed was “justified in deciding to risk higher inflation for the immediate future”, a similar regime “triggered the great inflation of five decades ago”.

Such dire warnings all share the implicit view that banks are bound eventually to try to rid themselves of all the new reserves the Fed's purchases have placed at their disposal, and that this will confront the Fed with an increase in the base money multiplier too sudden and large to be fully offset by any concurrent shrinkage of its balance sheet. But neither view is correct: under the Fed's post‐2008 ‘floor’ operating system (Selgin,  2018 ), the inflation rate no longer depends on the size of the Fed's balance sheet. Instead, to check excessive money growth the Fed has only to raise the interest rate it pays on bank reserves sufficiently to keep the base multiplier at a level consistent with its inflation target. Of course, it might fail to do so; but that possibility, far from being imminent, appears remote at present. Nor, to judge from the ten‐year breakeven inflation rate, which on 21 October 2020 was just over 0.142 per cent, do bond speculators suppose otherwise.

Justified or not, the fear that we may be risking a serious outbreak of inflation has thus far been voiced by pundits only, and not by any government officials. That is just as well, because it means that the government is not about to resort prematurely to anti‐inflation measures that might prove fatal to the ongoing recovery.

6. NEW DEAL ‘CREDIT’ POLICY

It is now common for economists to distinguish between monetary policy in the strict sense and ‘fiscal’ or ‘credit’ policy, where credit policy consists of direct central bank support to particular private firms and markets or foreign government entities, while monetary policy operations seek to regulate the general state of credit and liquidity, whether by means of central bank purchases and sales of domestic government securities or by adjusting central bank‐administered interest rates.

According to this distinction, the Fed's ‘credit policy’ undertakings during the 1930s were just as limited as its monetary policy undertakings. The Fed's direct lending then was almost entirely confined to Fed member banks (meaning all national banks and the relatively small number of state banks that chose to join the system); and even that aid was legally limited to very short‐term loans secured by ‘real’ (commercial) bills. The trivial scale of the Fed's New Deal‐era discount‐window lending is evident from Figure  10 , comparing the value of the Fed's commercial (‘real’) bill purchases with that of total member bank reserves. In January of 1939, for example, member banks held over $10 billion in reserve balances, while Fed's bill purchases amounted to just $1 million.

The value of the Fed's commercial (‘real’) bill purchases versus the value of total member bank reserves, 1929–1941 Sources: Board of Governors of the Federal Reserve System; National Bureau of Economic Research

It was mainly to supplement the Fed's limited lending, and especially to make emergency credit available to non‐member banks, that the Treasury‐funded Reconstruction Finance Corporation (RFC) was established at the start of 1932. With the coming of the New Deal, the scale of the RFC's support for banks increased dramatically. The cause of this was an amendment to the 1933 Banking Act that allowed the RFC to purchase and lend upon banks' preferred stock, and also to purchase their unsecured debt instruments. The amendment law made it possible for banks to take advantage of the RFC's support without having to part with their best collateral. Over the course of the New Deal the RFC purchased over $1 billion in preferred stock, capital stock, and debentures from thousands of banks. In addition to supporting banks directly, the RFC helped them indirectly by lending to railroads, whose bonds were an important component of many bank portfolios. Eventually it also helped to finance federal public works projects and state unemployment relief programmes. Finally, in mid‐1934 the RFC was authorised to lend to ordinary business firms.

Two attempts were also made during the Great Depression to involve the Fed in lending to non‐bank businesses. The first, enacted in July 1932 as an alternative to allowing the RFC to lend to ordinary businesses, gave rise to the Federal Reserve Act's now notorious section 13(3) (Board of Governors of the Federal Reserve System,  2017 ). In its original form, 13(3) granted the Federal Reserve Board the authority, under certain conditions, to authorise member banks

to discount for any individual, partnership, or corporation, notes, drafts, and bills of exchange of the kinds and maturities made eligible for discount for member banks under other provisions of this Act when such notes, drafts, and bills of exchange are indorsed and otherwise secured to the satisfaction of the Federal Reserve Bank.

However, because few businesses held the stipulated collateral, section 13(3) was almost stillborn: throughout the entire Great Depression the Fed only made 123 13(3) loans, amounting to just $1.5 million. Nor would the Fed make any further 13(3) loans until 2008, when modified 13(3) collateral requirements allowed it to lend extensively to non‐bank borrowers for the first time (Fettig,  2008 ).

The second Great Depression attempt to have the Fed lend to ordinary businesses left no permanent mark, but was more important at the time. This took place in 1934, and consisted of another Federal Reserve Act amendment – section 13(b) – which allowed Fed banks to make loans of up to five years to non‐bank businesses either directly or in partnership with commercial lenders (Selgin,  2020d ). Although the Fed made many more 13(b) than 13(3) loans during the depression – by the end of 1935, the former summed to $124.5 million spread among 1,993 businesses – this outcome was still disappointing, amounting as it did to a tiny fraction only of concurrent private sector business lending. Even so, the Fed continued to make 13(b) loans until 1958, when section 13(b) was repealed.

7. COVID‐19 CREDIT POLICY

Just as the Fed's limited Great Depression‐era open market purchases contrast sharply with its massive post‐COVID purchases, its Great Depression exercises in credit policy pale in comparison with those of recent months. Indeed, the Fed's recent undertakings, undertaken mainly on the basis of its 13(3)‐lending authority, overshadow the combined efforts of the Fed and the RFC during the 1930s, exceeding them in both scale and scope. Among other steps, the Fed has lent to ordinary business firms both through its own ‘Main Street’ lending facilities and by extending credit to banks taking part in the Small Business Administration's Paycheck Protection Program; it has provided short‐term funding to state and local governments through its Municipal Funding facility; and it has contributed to the supply of credit to larger enterprises through both direct and secondary‐market purchases of their securities via its Primary and Secondary Market Corporate Credit facilities.

The Fed's heavy involvement in credit policy has been extremely controversial. Politicians have berated it for doing too much for Wall Street and not enough for Main Street (Saraiva & Matthews,  2020 ); and even the Wall Street Journal ( 2020 ) agrees with them. Economists have in turn argued that, by involving itself so heavily in credit policy instead of leaving it to Congress and the Treasury, the Fed has put its independence at risk. Observing that, thanks its extensive 13(3) programmes, the Fed now resembles a “giant, multi‐faceted GSE [government sponsored enterprise]”, former Richmond Fed economist Robert Hetzel wonders whether its independence can long survive politicians' discovery that the change allows them “to transfer risk to the Fed's books where it is invisible to taxpayers” (Hetzel,  2020 , pp. 25, 35).

8. MAIN STREET DÉJÀ VU

Of the Fed's current emergency lending programmes, only those aimed at Main Street have a close Great Depression counterpart, consisting of the Fed's previously‐mentioned 13(b) lending. As we have seen, the results of that earlier programme were disappointing. One might therefore expect Fed officials this time around to have launched their Main Street facilities only after studying that earlier experiment and convincing themselves that the new plan would be free of its predecessor's shortcomings.

Alas, that doesn't seem to have happened. Instead, so far as the record reveals, in designing the Fed's Main Street facilities, neither Fed nor Treasury officials referred to the earlier experience. In any event, the new Main Street lending programme very much resembles its predecessor both in its particulars and in its disappointing results thus far (Selgin,  2020d ). According to the Fed's disclosure of 8 October, 5 in four months the Main Street facilities have only taken part in 253 business loans summing to under $2.2 billion, or just 0.366 per cent of the Main Street facilities' capacity. In comparison, commercial banks had almost $2.8 trillion in ordinary commercial and industrial loans outstanding in September. The number of banks that have taken part in the Main Street programme this far has been even more disappointing: so far fewer than 100 have done so, and just one – the City National Bank of Florida – has originated 40 per cent of the programme's loans, worth almost one‐quarter of the outstanding total (McCombie,  2020 ). It is all but impossible to reflect upon this record, and that of the Fed's depression‐era 13(b) lending, without thinking of Santayana's hackneyed saying about the past. 6

9. AN UNEQUAL RECOVERY

There is one further, unflattering respect in which current efforts to counter the economic damage from COVID‐19 and the activity restrictions it has inspired resemble the New Deal: both have been charged with racial discrimination.

As NPR's Christopher Klein reports ( 2018 ), the New Deal's Civilian Conservation Corps assigned African Americans to separate camps, while the Federal Housing Administration refused to insure mortgages made to their neighbourhoods. African Americans were also denied Social Security benefits. Otis Rolley, Senior Vice President of the Rockefeller Foundation's U.S. Equity and Economic Opportunity Initiative, adds that they were also denied the protections that the National Labor Relations Act afforded to other workers. Most of all, African Americans suffered from the Agricultural Adjustment Association, which by paying (mostly white) farm owners to grow fewer crops, forced hundreds of thousands of African‐American sharecroppers to take part in the Great Migration from the rural South to northern and western cities, were they added to the already bloated ranks of unemployed African Americans. According to Rolley, this discrimination was not at all inadvertent. “Roosevelt”, he explains, “intentionally cut out occupations dominated by people of color, including domestic and agriculture workers, from New Deal initiatives as part of a strategy to win the support of Southern Democrats in Congress.” Nor were the consequences temporary. Instead, discriminatory New Deal legislation “created deeply‐entrenched racial and financial inequities that persist to the present day” (Rolley,  2020 ).

The CARES Act has likewise been accused of neglecting African Americans and racial minorities, who thanks to their relative poverty have also suffered disproportionately from the COVID‐19 virus itself (Bouie,  2020 ). Because it relied on tax filers' bank account information, the Treasury Department's chosen method for delivering stimulus checks delayed payments to poorer persons, a disproportionate share of whom are minorities (Davison,  2020 ). It also denied many immigrants the COVID‐19 testing and care benefits offered to US citizens (Waheed & Moussavian,  2020 ). That only $10 million of the CARES Act's $2.3 trillion in relief funding went to the Minority Business Development Agency (MBDA) has also been seen by some as evidence of deliberate discrimination (Perry & Hopkinson,  2020 ).

For all their merit, such complaints inevitably suffer from some blurring of the distinction between recovery and reform pointed out in section 4 . That is, they often call, implicitly if not explicitly, not simply for measures calculated to hasten the general pace of economic recovery, but also for ones that would help to lesson racial inequality regardless of their effects on macroeconomic aggregates. This doesn't mean that some trading‐off of one objective for the other isn't worthwhile – nor could there be any scientific basis for such a claim. It is merely a reminder that the two objectives are not always congruent.

LEGISLATION CITED

Banking Act of 1935 (US). https://www.govinfo.gov/app/details/USCODE-2010-title12/USCODE-2010-title12-chap3-subchapI-sec228/context (accessed 8 December 2020).

Coronavirus Aid, Relief, and Economic Security (CARES) Act 2020 (US). https://www.congress.gov/116/bills/hr748/BILLS-116hr748enr.pdf (accessed 8 December 2020).

Federal Reserve Act 1913 (US). https://www.federalreserve.gov/aboutthefed/fract.htm (accessed 8 December 2020).

Selgin G. The fiscal and monetary response to COVID‐19: What the Great Depression has – and hasn't – taught us . Economic Affairs . 2021; 41 :3–20. 10.1111/ecaf.12443 [ CrossRef ] [ Google Scholar ]

1 See Cerra and Saxena ( 2008 ), Reinhart and Rogoff ( 2009 ), Reinhart and Reinhart ( 2010 ), and Ikeda and Kurozumi ( 2018 ).

2 See Farrell et al. ( 2020 ). According to this study, “unemployed households actually increased their spending beyond pre‐unemployment levels once they began receiving benefits. The fact that spending by benefit recipients rose during the pandemic instead of falling, like in normal times, suggests that the $600 supplement has helped households to smooth consumption and stabilized aggregate demand.”

3 In fact, as Jason Taylor ( 2011 ) explains, because almost all the decline in unemployment between 1933 and 1937 was due to “work sharing” policies rather than to an increase in total working hours, even the conventional unemployment numbers exaggerate the pace of economic recovery during that time.

4 Because reserve requirements were eliminated in March, it is no longer possible to refer to ‘excess’ reserves.

5 See Excel file mslp‐transaction‐specific‐disclosures‐10‐8‐20.xlsx.

6 “Those who cannot remember the past are condemned to repeat it.”

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One Parallel for the Coronavirus Crisis? The Great Depression

“The idea that the federal government would be providing emergency relief and emergency work was extraordinary,” one sociologist said. “And people liked it.”

Today’s soaring unemployment, small business failures, and uncertainty about the future are like nothing most of us have seen in our lifetimes. If there’s any useful historical parallel, it might be the Great Depression.

Like the coronavirus-driven economic crash, the Depression devastated a nation where things were already awful for a lot of people. In the 1920s, business owners pretty much did whatever they wanted. The rich got obscenely richer. Progressive, pro-worker policies had little place in national politics. The crisis changed everything. By the end of the 1930s, the country’s unions were stronger than they’d ever been and Congress had passed huge, unprecedented economic policies. The notion that the federal government didn’t have a central place in securing middle-class wellbeing was relegated to the political fringes. But how, exactly did that transformation happen? How did the economic suffering of the 1930s birth a new political and economic era?

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“People often look at the Great Depression [and think], ‘Oh, it’s obvious that shattered everything and something new had to happen,’” Elisabeth Clemens, a sociologist at the University of Chicago who studies social movements, told me over the phone. “That overlooks all the work that had to be done to convince people that there actually was a crisis.”

In a 2015 paper for Social Science History , Clemens noted that many regular people were suffering depression-like conditions well before the stock market crash of 1929. Drought devastated small farmers. Urban workers faced frequent bouts of unemployment with inadequate help from municipal relief agencies and private charity. After the crash, it wasn’t at all obvious how much worse things would get—or how much the wealthy and powerful should care. Unemployment didn’t hit its high point, 24.9 percent, until 1933. Clemens writes that President Herbert Hoover responded to the crisis with the tools at his disposal—largely rallying private and local response efforts—and that it was not immediately clear that it wouldn’t be enough.

This spring’s plunge in employment has been a different story. Unlike the long stretch of droughts that gradually led to the ruined farms of the Dust Bowl, the coronavirus hit fast and hard. By mid-April, the official unemployment rate was already over 14 percent—and that’s probably an underestimate . Rather than a financial crash, the job losses today reflect deliberate choices by individuals, business, and governments to dial down commercial activity. But the results look remarkably similar: shuttered businesses, families too worried about the future to make big purchases, long lines at food banks. Clemens said that there are also parallel questions now about whether the situation demands a version of conventional political responses or something genuinely new.

“There’s going to be an ongoing struggle over how to just describe what we’re going through,” she said. “The stakes in the characterization of the crisis are really high.”

Nineteen thirty-two presidential candidate Franklin D. Roosevelt was among those who treated the early 30s as an essentially normal time.

“A lot of Roosevelt’s campaign in ’32 is ‘I’m not Herbert Hoover,’” said Erik Loomis, a labor historian at the University of Rhode Island. “It’s not policy-driven, not about organizing the masses.” In fact, Loomis told me, if FDR had been a left-wing figure, he couldn’t possibly have won the nomination of the 1932 Democratic Party, which, like the Republican Party, was deeply beholden to big corporations.

Actually, the most powerful force working for fundamental change in the early 1930s was probably the Communist Party. It was a group that represented a tiny portion of the U.S. public, but it was highly organized and savvy. In 1929, it went to work organizing the jobless, eventually forming local Unemployed Councils around the country. Writing in the American Political Science Review in 1989, historian Michael Goldfield describes massive communist-led demonstrations , including a national day of action that brought more than a million people out on the streets, in March of 1930. Goldfield writes that local councils fought evictions and demanded relief in militant local actions:

In one incident in 1931, five hundred people in a Chicago southside African-American neighborhood brought back furniture to the home of a recently evicted widow. The police returned, opened fire, and three people lay dead. The coffins were viewed… under an enormous portrait of Lenin. The funeral procession with 60 thousand participants and 50 thousand cheering onlookers was led by workers carrying communist banners.

The communists’ devotion to their cause, and their unusual willingness to organize multiracial coalitions , helped the councils gain power.

But, as the sociologist Steve Valocchi explained in a 1993 paper for Sociological Forum , councils were most successful when they evaded the top-down control of the Communist Party, instead drawing on local strengths. In Pennsylvania coal country, that meant recruiting leaders from the region’s strong Polish community. In Harlem, it meant drawing on the cooperative traditions of black churches and community organizations. The Unemployed Councils succeeded in winning more relief funds from local cities and counties. They also changed the perspective of the unemployed workers themselves. Valocchi quotes Dorothy Healey, a Communist Party organizer:

At the start of the depression many of the unemployed blamed themselves for having lost their jobs, thinking it was all their fault. Watching the changes in consciousness that took place over the next few years taught me lessons I never forgot, as we moved from agitation to organization and began to form neighborhood based unemployment councils.

Valocchi writes that the unemployed movement created pressure that helped Roosevelt and his Congressional allies pass the 1933 Federal Emergency Relief Act, sending money to states for their relief efforts.

In 1934, a new wave of organizing ramped up pressure on employers and governments. Workers across the country staged strikes. Longshore workers in San Francisco and Teamsters in Minnesota led two of the few general strikes in U.S. history. In Toledo, unemployed workers came to the aid of striking auto workers and clashed with bayonet-wielding National Guardsmen. The dramatic clashes caught the imagination of workers across the country. By the end of the year, more than 600,000 workers had formed unions, a jump of 20 percent.

Goldfield writes that the labor rebellion shook lawmakers and gave new ammunition to those who wanted to pass reforms. In the 1935 debate over the National Labor Relation Act (NLRA), which created a legal framework for union organizing and strikes, legislators declared the current situation unsustainable. “Unless this Wagner-Connery dispute bill is passed we are going to have an epidemic of strikes that has never before been witnessed in this country,” one Ohio congressman warned.

Pressure from organized workers may have forced politicians to do something , but that in no way meant that unions or Unemployed Councils—let alone the Communist Party—really got what they wanted. As Jeff Manza wrote for the Annual Review of Sociology in 2000 , Congress didn’t pass the 30-hour work week that the American Federation of Labor wanted. It did pass a minimum wage, which labor largely opposed. And, in writing the NLRA—the law that would shape labor’s legal rights for decades—lawmakers barely consulted labor leaders.

Instead, the shape of major New Deal programs—including public hiring through the Works Progress Administration, Social Security’s old age and unemployment insurance, the NLRA, and progressive taxes—largely followed ideas that had been brewing on the liberal side of mainstream political conversations for decades. To many policymakers, relief for workers was a way of supporting capitalism. It powered the economy by encouraging consumer spending.

“When those measures are passed in the ‘30s, the left considers them all sell-out measures,” Loomis said. “FDR is heavily criticized on the left.”

One notable failure of the New Deal was its racism. Despite the huge role that black workers played in the radical movements that helped make them possible, many scholars believe that many of the era’s programs were crafted to exclude them. Roosevelt and New Deal advocates in Congress struck deals with white Southern Democrats to get their bills passed. For example, the Social Security Act of 1935 barred domestic and agricultural workers—a large portion of the African-American workforce—from unemployment and old-age benefits.

Still, even the unequal benefits were enough to sway many black voters to the Democratic Party—especially since the party of Lincoln had long since stopped taking them seriously as a constituency. Other working-class voters also moved toward the Democrats. The party widened its majority in Congress in 1934—a rarity for a midterm election. And in 1936, FDR won reelection in one of the most lopsided votes in U.S. history, carrying 46 out of 48 states. Despite setbacks politically and economically over the next few years, a new political landscape had been created. Union membership continued to rise dramatically, producing a national politics that—during and after World War II—centered the needs of working people.

“The idea that the federal government would be providing emergency relief and emergency work was extraordinary,” Clemens said. “And people liked it.”

This spring, workers have staged spontaneous strikes at hundreds of workplaces: Amazon warehouses, meatpacking plants, and other workplaces where employees are getting sick and dying. The crisis has made historically devalued work, from child care to stocking grocery shelves, more visible to the middle and upper classes. In wonky progressive circles, there’s endless talk of the ways we could rebound from this crisis with a more equitable, ecologically sustainable economy—a job guarantee, local food systems, a permanent universal basic income, and much more. Clemens noted that one obvious way the crisis might change the political consensus is by plunging formerly secure workers into precarious situations. Already, many have lost employer-sponsored health insurance or been forced to deal with dysfunctional unemployment insurance systems.

“There is, I think, a moment where because it’s happening fast and because it’s happening to everyone all at once, some of these things become more visible and less taken for granted in a striking way,” Clemens said. “I think the question will be, can all of that be stuffed back in an argument about ‘return to normal?’”

Clemens and Loomis said progressives are better positioned to argue for something beyond “normal” than they were in the last economic crisis, which began more than a decade ago with the mortgage lending crisis of 2008. Between now and then, new ideas have drifted toward the mainstream. The Occupy Wall Street protests of 2011 brought economic inequality into mainstream conversations. Black Lives Matter, the Fight for $15, and resistance to President Trump’s policies on immigrants have built new frameworks for political work. But, Loomis said, racism remains an enormous stumbling block when it comes to building these policies—or even supporting and protecting workers in the current crisis.

“It’s absolutely my belief that if it wasn’t for the fact that you have higher rates of COVID among people of color—if it was white people that were suffering at that rate—you would not have this right-wing push to reopen the economy,” Loomis said.

He added that progressive economic movements are unlikely to succeed without taking on explicitly anti-racist work.

“It’s the single most important issue,” he said. “It’s something that I think even the left struggles to admit because it forces them to talk about the white working class in a way that does not fit with the kind of narrative that there’s all these people that are just waiting to be organized cross-racially.”

Right now, both Clemens and Loomis said, it’s simply hard to see what this crisis will bring. Maybe we will eventually return to “normal.” Maybe suffering will keep ratcheting up for many people, with no adequate response in sight. Or, perhaps, we’ll shift toward something better.

“We’re not in 1934 right now, we’re in 1929, 1930,” Loomis said. “What people are doing now in these very nascent moments may be laying the groundwork for things that are coming in a series of years.”

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• People/Staff

The impact of coronavirus could compare to the Great Depression

5 May 2020 - William Gumede

And a corresponding rise in nationalism and xenophobia may follow, just as it did in the 1930s.

The coronavirus crisis will be the biggest financial crisis of our generation, much larger than the 2007-2009 global financial crisis.

It is very likely that the economic impact of the coronavirus crisis will be comparable with the Great Depression, the period of devastating economic decline between 1929 and 1939, which saw mass unemployment, factory closures and the accompanying personal trauma.

The coronavirus outbreak will bring an economic   depression   - that is, a severe and prolonged economic decline with high levels of unemployment and company closures.

Record numbers of people will likely suffer from post-traumatic stress disorder (PTSD), the combination of stress, anxiety and depression that develops in some people who have experienced a traumatic event.

The coronavirus outbreak is already such an event. More than three million people around the world have been infected by the virus and more than 200,000 have died of it. Estimates show that the coronavirus may kill 100,000 Americans, the equivalent to   double   the number of Americans who died in the Vietnam War.

By comparison, the Spanish flu pandemic of 1918-1919 infected 500 million people, or one-third of the world's population, with 50 million deaths, of which 675,000 occurred in the US. The world's population in 1918-1919 was estimated at 1.5 billion. If one translates this to today's figures, with a world population of 7.8 billion, it would be the equivalent of 2.6 billion people infected and 250 million deaths.

The United Nations Conference on Trade and Development (UNCTAD), the UN's trade and development agency, says the slowdown in the global economy caused by the coronavirus outbreak is likely to cost at least $1 trillion in 2020 alone, in terms of   reduced growth   measured in gross domestic product (GDP). 

Over time, the cost to the global economy is likely to be three or four times that figure.

As a comparison, it is estimated that the 2007-2009 global financial crisis cost the US around   $4.6 trillion   in terms of lost growth in GDP, or 15 percent of its GDP compared to the years before the financial crisis. 

During the Great Depression, unemployment in many countries hovered around 25 percent, with one in four people in industrial countries made jobless by it. In the US, nearly half of the banks collapsed, 20,000 companies went bankrupt and 23,000 people committed suicide.

The current pandemic will cause individual economies to plunge into recession; businesses will close down and jobs will be lost at similar levels to that of the Great Depression. Moreover, the pandemic is impacting both industrial and developing countries; whereas the Great Depression was largely concentrated in industrial countries.

The International Labour Organization (ILO) has predicted that the pandemic will wipe out 6.7 percent of working hours in the second quarter of this year - the equivalent of   195 million   full-time workers. 

This is already playing out. In the US, more than 22 million people filed claims for jobless benefits in the four weeks ending April 11, according to the US Department of Labour. To put these latest numbers into context, in 2008, at the height of the global financial crisis, 2.6 million people in the US filed for   unemployment   in that year, making 2008 the year with the biggest employment loss since 1945. 

Suicides, domestic violence and murders increase during times of economic hardship and this may be further exacerbated by lockdowns and self-isolation.

Wealthier countries such as Germany, the UK and the US have rolled out large aid programmes - larger than those which appeared in the aftermath of the 2008 global financial crisis - to support businesses, the self-employed and the unemployed for loss of income during the lockdown. Germany will give unlimited loans to large companies, pay 60 percent of salaries of troubled companies to allow them to reduce the working hours of employees without having to lay them off and financial support to the self-employed.

The US has unveiled a $2 trillion coronavirus rescue package for struggling companies and employees, which includes loans, equity stakes for government in businesses in strategic sectors and direct cash payments to individuals.

While these bailouts might provide interim relief, they will plunge countries, companies and families into debt for years, while we will also have to deal with the social crises of deaths, suicides and mental disintegration for a long time after the coronavirus pandemic. 

After the Great Depression there was a rise in nationalism around the world - as a direct result of the financial, social and emotional hardships of the depression - creating the  conditions  that eventually led to the second world war. 

There has been a similar rise in   nationalism , populism and xenophobia during the coronavirus outbreak. Of course, this had been growing for many years before the pandemic, in part as a result of austerity measures that caused financial hardship in the aftermath of the 2007-2009 financial crisis.

The coronavirus crisis will likely make those austerity measures worse.

Although there have been pockets of solidarity in response to the coronavirus - Cuba sending medical personnel to Italy and China sending medical equipment to Poland, for example - some countries have stopped vital medicines, equipment and food from being exported to other countries. 

Once the crisis has passed, some countries may continue turning themselves into fortresses, excluding outsiders, whether immigrants, refugees or foreign companies.

Nationalist, populist and extremist leaders and governments could ride the wave of post-coronavirus financial and emotional hardships, in the same way they did after the Great Depression. There is a real danger that the hardships caused by the coronavirus pandemic will lead to authoritarian governments coming to power in many countries, while those already in power become more entrenched.

If they do, the methods used to prevent the virus from spreading: sealing off borders, tracking infected individuals using surveillance technology and restricting people's movements, could be used for more menacing purposes.

William Gumede is Associate Professor,  School of Governance , University of the Witwatersrand, and author of Restless Nation: Making Sense of Troubled Times (Tafelberg). This  article was first published  on Al Jazeera .  

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How the COVID-19 Recession Has Differed from the Great Recession

• By Brian Wallheimer
• December 15, 2020
• CBR - Economics
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In just two weeks this past March, the COVID-19 pandemic pushed US employment off a cliff. New applications for jobless benefits surged 20 percent to 250,000 in the week ending March 14. Two weeks later, they topped 6 million, shattering the 1982 record of 1 million. By then, a recession was underway.

Researchers moved quickly to unravel what happened and seek out policy prescriptions, and University of Illinois’s Alexander W. Bartik , Chicago Booth’s Marianne Bertrand , University of Chicago PhD student Feng Lin , University of California at Berkeley’s Jesse Rothstein , and UC Berkeley PhD candidate Matthew Unrath  have joined in this task. Their research indicates that the COVID-19 recession has been in some ways strikingly different from other recent downturns, including the Great Recession.

For their analysis of the job market from the start of the pandemic through early July, the researchers used two monthly government surveys of households and employers. Those snapshot sources proved unsuitable for tracking the rapidly unfolding jobs shock, so they tapped into almost-real-time data collected by Homebase and Kronos, two companies that provide time-clock services to employers. The researchers also evaluated data on physical mobility from SafeGraph, which tracks mobile phones, to measure the effects of state shutdown orders.

“Altogether, our findings show that this recession has differed sharply from other recent downturns in its speed, the types of firms and workers it affected, workers’ beliefs about its longevity and their likelihood of recall, as well as in the nature and size of the policy response,” the researchers write.

The lessons from this recession and response are ongoing, the researchers note.

For example, in the Great Recession, construction and manufacturing were the hardest hit. But the COVID-19 collapse disproportionately affected the leisure and hospitality industries, where employment fell by nearly 50 percent, the researchers find. Repair and maintenance services, laundry services, and services to private households had declines of 20 percent by mid-April, the data show.

In the COVID-19 downturn’s first two months, increases in joblessness and declines in employment “were roughly 50 percent larger than the cumulative changes over more than two years in the respective series in the Great Recession,” the researchers write. They point out that if job-market dropouts were taken into account, “the adjusted unemployment rate in April would have been well above 20 percent” rather than the 14 percent that the Labor Department reported.

People whose hours were tracked through Homebase said in surveys that they mostly expected their jobs to come back, but by the third week of June, there had been just a 50 percent job recovery. Larger companies and those that recorded employment growth in the year before the pandemic were less likely to close and were more likely to reopen after temporary shutdowns, the researchers find.

Age, race, and education factored into who lost jobs and who got them back. Those 65 or older or aged 16 to 25 were more likely to lose a job in April than those aged 26 to 37. People without high-school diplomas were more likely than college graduates to have stopped working in April. Black, Asian, Hispanic, single, and female workers lost jobs at higher rates than white, married, and male employees. By May and June, older, Black, Asian, single, and female workers who lost jobs were less likely to have gotten them back, the researchers find.

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Government shutdown orders did little to exacerbate job losses, according to the study. The data did show significant declines in hours worked and consumer foot traffic following shelter-in-place orders, but these drops occurred even in states where there were no such orders. The researchers estimate that “government shutdown and reopen orders account for only a modest portion of the changes in labor markets and economic activity during the crisis.”

The federal government’s unprecedented fiscal interventions were fairly successful, the study suggests. The sweeping, $2 trillion Coronavirus Aid, Relief, and Economic Security Act provided $600 a week in addition to state unemployment benefits until the end of July. During the Great Recession, the Emergency Unemployment Compensation Act of 2008 simply extended jobless benefits by 13 weeks or more.

Many of those who lost jobs this year were low-wage workers, and as such, the supplemental CARES Act payments meant that some people made more on unemployment than at work. This led to suggestions from some lawmakers that the program encouraged people to stay home rather than look for work or go back to their jobs. If that were the case, the researchers write, employment in states where the wage-replacement rates were lowest would have bounced back the fastest. But the research suggests that states with the lowest replacement rates had larger worker-hour losses and slower recoveries.

The CARES Act also included funds for forgivable loans to small businesses under the Paycheck Protection Program. While these funds were quickly depleted, the researchers find that the money did help. The loss of worker hours was worse in states that got the fewest such funds, and those states recovered more slowly. More PPP money in a state was associated with fewer layoffs and faster rehiring.

The lessons from this recession and response are ongoing, the researchers note. About the recession, they write, “much of its story remains to be written.”

Works Cited

Alexander W. Bartik, Marianne Bertrand, Feng Lin, Jesse Rothstein, and Matthew Unrath, “Measuring the Labor Market at the Onset of the COVID-19 Crisis,” Working paper, July 2020.

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How the Pandemic Has Changed Us Already

The Great Depression permanently altered many people’s behavior. Could COVID-19 do the same?

During the past five months, many prognosticators have prognosticated about how the coronavirus pandemic will transform politics , work , travel , education , and other domains. Less sweepingly, but just as powerfully, it will also transform the people who are living through it, rearranging the furniture of their inner life. When this is all over—and perhaps even long after that—how will we be different?

For one thing, we’ll better understand the importance of washing our hands. When I interviewed roughly 20 people from across the country about their pandemic-era habits, most of them planned to keep aspects of their new hygiene regimen long into the future, even after the threat of the coronavirus passes. “I will more regularly wash my hands throughout my life and I will never be anywhere without hand sanitizer and a mask,” Leah Burbach, a 27-year-old high-school teacher in Omaha, Nebraska, told me.

Read: The questions that will get me through the pandemic

Those I interviewed said they imagine they’ll continue to be conscientious about how viruses spread and what they can do to protect themselves and others. “I think I’ll wear a mask if I’ve got a cold, now that I understand it’s most effective in keeping me from spreading germs,” said Josh Jackson, a 48-year-old in Decatur, Georgia, and the editor in chief of the culture magazine Paste .

Others foresaw themselves avoiding many activities that are currently risky, possibly for the rest of their life. “I’ve heard wonderful things about Alaskan cruises and had always hoped to go on one someday. No more,” said Jaclyn Reiswig, a 39-year-old homemaker in Aurora, Colorado. “Packing so many strangers together just gives me the germ creeps now.” Also on the list of destinations that made people wary were gyms, indoor concerts, public pools, and restaurant buffets.

Though people may feel as if their habits have been changed forever, these careful behaviors may not persist once they’re less urgently necessary. Katy Milkman, a behavioral scientist at the University of Pennsylvania’s Wharton School, told me that habits are more likely to stick if they are accompanied by “repeated rewards.” If the threat of the virus is neutralized, she said, “the reward for scrubbing your hands won’t endure, and I think the average person will go back to a simpler routine.”

The pandemic “looms large right now because it’s our everything,” Milkman said. “Certainly there will be some stickiness [in people’s behaviors], and no one’s ever going to forget going through this, but I think people are overestimating the degree to which their future actions will be shaped by the current circumstances.”

But even if our behaviors do fade, perhaps our mental landscapes will remain changed. Some people I reached out to said that the pandemic had infiltrated their dreams, possibly lastingly. “These days I have ordinary dream problems, only they happen in an environment where doing ordinary things will kill me,” said Jane Brooks, who’s 54 and works at a software company in Seattle. “I touch a dream hand railing and know the clock is now ticking on my death.” She fears that these scenarios will populate her dreams even after the pandemic is over: Growing up during the Cold War in a small town in Alabama, she was haunted by nightmares that blended apocalypses both nuclear and Christian. The dreams started when she was about 5 and didn’t recede until well into adulthood.

Photos: The visual landscape of a world shaped by pandemic

The pandemic may also alter the way we think about social interactions. Alyssa, a 17-year-old high-school senior in northern Indiana, said that it “was a rather extreme wake-up call to the fact … that the things you hold on to dearly can be taken away nearly instantly.” She expects that this lesson will give her heightened FOMO—fear of missing out—and make her more likely to say yes to social invitations well into the future. (I’ve identified her by only her first name to protect her privacy.)

The flip side of this renewed appetite for socializing is that more than one person told me that they expect to be less trusting of strangers. “I’m generally more fearful of people,” Burbach said. “Men on the street have demanded that I take my mask off. People get too close to me.”

The seriousness with which someone treated the pandemic might become one more trait that Americans use to size up new acquaintances. Marge Smith, a 53-year-old clinical psychologist in New Orleans, said that while she’s usually “willing to befriend people who are diametrically opposed in terms of their beliefs or attitudes,” she won’t want to spend time with people who were more preoccupied with, say, being able to dine out or go on vacation than with doing all they could to keep the virus from spreading. “It’s likely to be a question going forward when I meet people,” she told me.

A clear historical precedent for a traumatic, drawn-out collective experience that scars the American populace is the Great Depression. The roughly decade-long crisis led many people, later in life, to fear discarding anything that might turn out to be useful. “That’s definitely part of [what came out] of adapting to the hardships of the ’30s and then moving into a period that’s really quite well-to-do,” said Glen H. Elder, Jr., a sociology professor at the University of North Carolina at Chapel Hill and the author of the book Children of the Great Depression , first published in 1974.

One reason he thinks the Depression affected so many people permanently was simply its duration. For an extended period, it “called upon people to do a lot of things that they would not [otherwise] have been called upon to do.” For instance, in some of the hundreds of families he studied, children were expected to cook family dinners, deliver packages, or mow the grass; this shaped how many went on to think about the appropriate amount of responsibilities to assign to their own children.

But Elder said that the long-term effects of living through a global crisis are “idiosyncratic” and vary from person to person: “Everyone has their own experiences.”

Duration is perhaps the key to understanding why another global tragedy, the 1918–19 influenza pandemic, didn’t seem to shape people’s habits much in the long term. “The whole thing was very swift,” John Barry, the author of The Great Influenza: The Story of the Deadliest Pandemic in History , told me. During the pandemic’s second and third waves, when daily life was affected most, Americans typically endured no more than a few months of disruption. And unlike today, “the stress was not continuous,” Barry noted—in many places there were “several months of relative normalcy in between” the two waves. (The first wave was far milder , and didn’t interrupt daily rhythms.)

In 2020, five months—and counting—of deviating from our previously normal routines have given us an opportunity to reevaluate old habits. “Normally we go about our daily lives and … tend not to change our” behaviors, Milkman said. “We need some sort of triggering event that leads us to step back and think bigger-picture.”

Read: The pre-pandemic universe was the fiction

This trigger can come in the form of a “temporal landmark”—Milkman has studied the importance of recurring ones, such as new years, new weeks, and birthdays, in prompting behavior adjustments—or a change, big or small, that interrupts well-trodden patterns. “We’ve got both things going on with the pandemic,” she said. “There’s a mental time boundary—everyone’s like, ‘Whoa, in March of 2020, I opened a new chapter’—and we have this constraint [of social distancing] that forces us to explore new things. So it’s a double whammy.”

In this way, the pandemic has led to welcome discoveries for some. “After being locked indoors for months I realized my skin and hair look great without any products, expensive creams, serums, conditioners, or treatments,” said Lizzette Arroyo, a 34-year-old in Ontario, California, who teaches community-college economics classes. She anticipates that, after the pandemic, she’ll greatly reduce her previously $100-a-month skin-care budget, and buy less new clothing and wear less makeup as well.

Naomi Thyden, a 31-year-old doctoral student in Minnesota, said that she’s been happily wearing a bra less often during the pandemic, including out of the house. “The only reason a lot of people wear bras is because our breasts, as they exist naturally, are deemed inappropriate by society,” she told me. “For some people bras provide needed support, but for a lot of us they serve no other purpose and are uncomfortable.”

And Caitlin Kunkel, a 36-year-old writer and humorist living in Brooklyn, has stopped carrying a big bag when she leaves the house, because she’s no longer out and about for extended periods. She expects she’ll be less likely to bring it with her even after the pandemic. “I’ve gotten used to not having shooting pain up my left shoulder,” she said. “That big shoulder bag full of 12 hours’ [worth] of stuff is a relic of 2019 and before.”

The constraints of the present moment have even helped some break established, unhealthy habits. Smith, the New Orleanian, has been smoking for most of the past 40 years, but she quit six weeks ago. “The pandemic was a time when I really couldn’t go anywhere or do much of anything and I felt this was a good time to start, since any crabbiness wouldn’t impact anyone else,” she told me. Likewise, Zach Millard, a 28-year-old in Sioux Falls, South Dakota, used to have about 15 to 20 drinks a week, in part because it soothed his social anxiety. But when the pandemic kept him at home, he started drinking less and reflecting on his habit. “If COVID-19 never happened … I would have barreled right into alcoholism,” he told me. He’s now down to two or three drinks a week.

Of course, the pandemic can just as easily promote unwelcome behaviors. “In general, the more out of control [peoples’] life circumstances, the more stressed they feel by what is going on around them, and the less social support people experience, the more vulnerable they are to using maladaptive coping,” Bethany Brand, a clinical-psychology professor at Towson University, told me. That can manifest as excessive sleeping or drinking, among other things. Further, Brand said, the threats of the pandemic can fuel anxiety, including after they’re gone.

“I struggle with anxiety so it’s basically hit me in the face during this,” said Alex Tanguay, who’s 30 and works in TV-news production in Tempe, Arizona. “Anything that comes into the apartment, I’m disinfecting.” She told me she feels as if she might be paranoid, but at the same time she wants to keep her roommate and co-workers safe. (She’s been going to work in person.)

One thing that’s given Tanguay some comfort, though, is doing puzzles, and I heard of many stress-relieving activities that people had recently adopted, beyond the pandemic clichés of watching more Netflix and baking sourdough bread. People have been spending more time meditating, birding, gardening, cooking, and sewing. Alexander Aquino, a TV and film editor in Los Angeles, said the pandemic has led him to check in more regularly with friends and family, something he hopes to maintain well into the future. Zeeshan Butt, a health psychologist in Oak Park, Illinois, has started riding 50 to 75 miles a week on his bike. “Before the pandemic, I rode next to never,” he said.

The most unusual stress reliever I heard about was from Millard. Each morning, he puts on some soft music and works his way through the pile of dirty dishes and kitchenware deposited the previous night by him and his three roommates, scrubbing away in the early light. “The hot water washing over my hands and the steam hitting my face brings this unique sense of calmness to me as I’m still waking up for the day,” he said. “It’s similar to a hot shower.”

Although Millard thinks the dishwashing habit may taper off after the pandemic—he’d have to wake up early to do it and still get to work on time—many of these new routines, hobbies, and preferences may remain after the pandemic subsides. Milkman pointed me to a 2017 paper , titled “The Benefits of Forced Experimentation,” that studied the commuting paths of Londoners before and after a public-transit strike that shut down some Tube stations for two days. The service interruption led many people to come up with new routes to work—and some of them, an estimated 5 percent, found that their new route was better than their old one. They stuck with it even after the strike ended.

This is how Milkman thinks about which behaviors might outlast this era, and which will fade. “If what they discovered is overall actually better [than what they used to do], then it’ll stick,” she said. In contrast, behaviors like hand-washing and mask wearing would be more likely to abate if the threat of the virus—and thus the reward of keeping up those habits—recedes. In other words, most of us will probably revert to our old ways—except for when, through awful circumstances, we stumbled upon new ones that work better.

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The great depression vs. coronavirus recession: 3 metrics that will determine how much worse it can get.

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It took U.S. markets more than three years to recover after the devastating stock market crash of ... [+] 1929.

Topline: As the United States enters recession territory and investors say goodbye to an 11-year bull market, comparisons to the Great Depression—the worst economic downturn in American history—are inevitable, but how does that comparison actually stack up?  

Unemployment

• Peak unemployment during the Great Depression reached a staggering 24.9% in 1933, according to the Bureau of Labor Statistics ; in 1929, just four years prior, unemployment was just 3.2% .
• This past February, the unemployment rate was 3.5%, according to the Bureau of Labor Statistics (that number does not take into account the coronavirus-related layoffs that have ramped up in earnest this month).
• Unemployment hasn’t risen above 4% since February 2018.
• Federal Reserve Bank of St. Louis President James Bullard told Bloomberg that the U.S. unemployment rate could hit 30% next quarter while last week, Treasury Secretary Steven Mnuchin walked back comments that the unemployment rate could hit 20% if lawmakers failed to pass a relief bill, saying, “ we’re not going to let that happen .”
• In 1930, U.S. gross domestic product—the value of all the goods and services the country produces— shrank by 8.5% as the economy contracted; it lost another 6.4% in 1931, and yet another 12.9% in 1932.
• It didn’t ease back into the black again until 1934, the year after the New Deal was first enacted.
• Next quarter, Bullard predicts a 50% drop in GDP as a result of the outbreak. 
• Wall Street’s predictions have also been bleak, if slightly less dire than Bullard’s: last week, Goldman Sachs forecast a 24% drop next quarter, while JPMorgan estimated 14%.
• Yesterday, Morgan Stanley said it is predicting a 30.1% decline in GDP next quarter —that would be the worst quarterly performance in 74 years, according to Politico. 
• It took the United States more than three years to recover after the devastating stock market crash of 1929.
• During the depths of the Great Depression, in 1931, the Dow Jones Industrial Average lost a little over 30% over the course of one month, according to data from Morningstar Direct. 
• Since the current sell-off began late last month, the Dow has lost 24.5%.
• According to Bespoke Investment Group, the S&P’s 34% decline over the last month is the steepest market drop in that period of time since 1931 (the S&P 500 itself did not exist prior to 1957). 

Key background: “This is an economic tsunami,” Mark Zandi, chief economist at Moody’s Analytics, told Vox’s Ezra Klein . “We’re about to see dizzying decline in economic activity,” he said. “There’s no analogue to it in the modern era.” The U.S. economy was relatively healthy prior to the current crisis, and as for the aftermath, “no one knows how deep the economic downturn will be,” Bespoke writes. 

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Stock markets are volatile. is this a bear market rally.

What to watch for: President Roosevelt’s New Deal policies, like the creation of the Social Security Administration and a slew of new banking regulations, are widely credited with jumpstarting the economy in the 1930s. Now, all eyes on are a multi-trillion-dollar bipartisan stimulus bill being negotiated in the Senate. Both the Republican and Democratic proposals would provide stimulus checks directly to taxpayers, delay the federal income tax deadline, and provide assistance to small businesses.

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How does the coronavirus pandemic compare to the Great Recession, and what should fiscal policy do now?

Subscribe to the hutchins roundup and newsletter, louise sheiner louise sheiner the robert s. kerr senior fellow - economic studies , policy director - the hutchins center on fiscal and monetary policy.

March 12, 2020

How does this episode differ from the Great Recession of 2007-09?

The underlying cause of the economic slowdown—and possible recession—likely in coming quarters is fundamentally different from that of the Great Recession. The Great Recession was a result of financial imbalances—starting primarily in the housing sector. This one is from a totally external factor, the coronavirus disease (COVID-19).

Why is that important?

It is possible that this downturn will be a lot shorter and shallower than the Great Recession. It may be V-shaped—perhaps negative growth for a quarter or two, followed by a period of strong growth. In the Great Recession, in contrast, there were fundamental imbalances that had to be worked off.

Nonetheless, these are very early days and there is a huge amount of uncertainty. We don’t know how bad the health effects from the virus will be or how long they will last, how many countries will be affected and to what degree, what kinds of disruptions to production might ensue, whether the economy will spiral down if this lasts a long time, etc. It is worth remembering that in the early days of the housing market downturn, many of us thought that the problems would be limited to the subprime mortgage market and wouldn’t be macroeconomically important. We were very wrong.

For government economic policymakers, there is another big difference. In 2008, some worried that remedies such as mortgage relief or bailing out the banks would encourage people to make and take riskier loans in the future, confident that the federal government would bail them out if things went wrong. Moral hazard is simply not a concern now; no one will wish for a virus in the future in the hopes of getting some government aid.

What lessons did we learn from the Great Recession?

The post-2008 focus on promoting financial stability has left us in better shape to weather a downturn. Banks have much more capital than they did before, and the Federal Reserve and other financial regulators have learned how to step quickly to ensure that credit markets function smoothly.

Hopefully, we also learned that economic downturns are very costly, and that fiscal stimulus (spending increases and tax cuts) can cushion the blows to households and businesses. In hindsight, most analysts wish the 2009 $800 billion stimulus package had been larger, not smaller.

What should fiscal policy do now?

With interest rates extremely low—inflation-adjusted, or real, interest rates are negative—there is little cost to borrowing heavily and doing what turns out to be too much. On the other hand, there is a tremendous cost to underestimating the extent of the problem and doing too little. We need to err on the side of doing more rather than less. This is especially true now because the Fed—which helped stabilize the economy in the Great Recession—has much less room now with the benchmark federal funds rate before any hint of the coronavirus at just 1½ percent. In 2007, the federal funds rate was 5¼ percent, so the Fed had a lot more room to cut.

What principles should fiscal policymakers use?

Do whatever it takes to minimize the health costs of this pandemic ..

That means making increased COVID-19 testing a national priority. That also means making sure that infected people stay away from the general public, which involves paid sick leave (paid either by employers or, if necessary, by the government) so that they don’t show up for work, free testing and treatment for those with the virus, and making sure that the undocumented do not fear showing up at a health facility.

Address the costs of the near-term downturn .

At a minimum, economic activity in the second quarter is likely to fall. We need to make sure that people are protected from the loss of income—think of the Uber and Lyft drivers, florists, cruise crew, hotel maids who may be out of work. We should do things like expand unemployment insurance benefits to those otherwise ineligible, increase SNAP benefits so low-income families can afford food even if they aren’t getting paychecks or their children aren’t getting free meals at school. We should also follow the suggestions of Jason Furman , the former chair of the Council of Economic Advisers, who has proposed sending checks to households: $1,000 per family and an additional $500 per child. This will help people who are hurt by the downturn, and also provide some support for the economy even after the virus threat recedes. (And this is smarter than a payroll tax cut, as my colleague Jay Shambaugh argues .)

Prepare for the possibility of a far deeper, more protracted downturn.

Congress should enact now programs that will automatically kick in if the unemployment rate increases without the need for any additional legislation or Congressional-White House haggling. One particularly attractive proposal (see this proposal by my colleague Matt Fiedler and coauthors) is to raise the federal share of Medicaid spending, the health insurance program for the poor that is jointly funded by the federal and state governments. We know that states and localities will be on the front lines of the crisis, and that their balanced budget requirements mean that any increases in spending coming from the crisis, and any reductions in tax revenues from the downturn, will turn into cutbacks into future years. An enhanced federal match is an efficient way of getting money to states to prevent these cuts. We might also consider a host of other programs that would be triggered if unemployment rises, perhaps another round of checks to households or increased unemployment-insurance checks. And the legislation could be written so the extra benefits trigger off automatically once the crisis passes and unemployment falls.

What about the federal debt?

Yes, the federal debt is large by historical standards, and it is projected to keep rising. But interest rates are also at historic lows, meaning that debt is not costly. The federal government can borrow for 10 years at an interest rate of just 0.87 percent as I write this. In any case, the fiscal policies I am advocating are one-time policies that will end when the need for fiscal stimulus is over. They won’t have much effect on the long-run trajectory of the debt, which is driven largely by population aging and rising health costs. Insuring the economy against a significant downturn is a better way to boost living standards than pinching pennies in the face of a crisis.

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U.S. Government Accountability Office

GAO at 100: Our Role During Times of National Crisis—The Great Depression, The Great Recession, and The Coronavirus Pandemic

During times of national crisis, Congress has responded by directing funding and federal programs toward providing relief to struggling Americans. While responding to crises quickly is important, so is ensuring federal programs and taxpayer resources are used as intended.

Today’s WatchBlog post looks at GAO’s role during times of crisis—specifically in monitoring the federal responses to the Great Depression, the Great Recession, and the coronavirus pandemic.

The Great Depression

GAO was founded in 1921 and was very much still a young agency when the stock market crashed in 1929—causing the prolonged period of economic downturn known as the Great Depression.

In response to the Great Depression, Congress approved President Franklin Roosevelt’s New Deal, which provided $41.7 billion in funding for domestic programs like work relief for unemployed workers.

As federal money was pouring into the recovery and relief efforts of the 1930s, GAO’s workload increased. With about 1,700 employees at the time, GAO soon found itself shorthanded and needed to hire more employees to process paperwork, such as vouchers. By 1939, our workforce nearly tripled to 5,000.

Around this same time, our auditors began expanding their role in overseeing federal programs. Fieldwork began in the mid-1930s, including reviews of government agriculture programs in Kentucky and several southern states. This gradual change in mission from serving as federal accountants to program and policy analysts would continue through 2003, when GAO changed its name from the General Accounting Office to the Government Accountability Office.

The Great Recession

The Great Recession that began in December 2007 was believed to be the worst economic downturn the country had experienced since the Great Depression.

In response, Congress passed the American Recovery and Reinvestment Act of 2009, which included $800 billion to promote economic recovery.  The Recovery Act assigned GAO a range of responsibilities to help promote accountability and transparency in the use of those funds. For example, we provided bimonthly reviews of the use of funds by selected states and localities. We also provided targeted studies in areas like small business lending, education, and trade adjustment assistance.

While the Great Recession ended in 2009, our work examining its impacts on the health of our financial system and related government assistance continues. For example, in response to the 2008 housing crisis, the Treasury Department used Troubled Asset Relief Program (TARP) funding to establish 3 housing programs to help struggling homeowners avoid foreclosure and preserve homeownership. During the recession and subsequent years, we examined TARP programs every 60 days and recommended actions to enhance Treasury’s management of the programs and use of funds. We continue this work today—auditing TARP financial statements and providing updates on active TARP programs each year. Our most recent report was issued in December 2020 .

Similarly, we continue to monitor the stability of the nation’s housing finance system—including Fannie Mae and Freddie Mac, which buy mortgages from lenders and either hold these mortgages or package them into mortgage-backed securities that may be sold.  In 2008, the federal government took control of Fannie and Freddie and has continued to maintain this role 13 years later—leaving taxpayers on the hook for any potential losses incurred by the two entities. In January 2019 , we reported about the risks of this prolonged conservatorship and the need to reform the housing finance system.

The Coronavirus Pandemic

In response to the pandemic, Congress appropriated $4.7 trillion in emergency assistance for people, businesses, the health care system, and state and local governments. We have been following the federal response by—among other things—regularly issuing reports on the impacts of the pandemic and response efforts on federal programs and operations. 

Our reporting has looked at programs and spending across the federal government, including—among things—vaccine development and distribution, small business lending, unemployment payments, economic relief checks, tax refund delays, K-12 and higher education’s response to COVID-19, housing protections, and more.

On July 19 , we issued our latest report about the federal response and our recommendations for continued improvement of this effort. Our next report issues in October. Visit our  Coronavirus Oversight page frequently as we will continue to report on the federal response to COIVD-19 as the crisis continues.

GAO’s Ongoing Benefits

While GAO has played a critical role in overseeing federal spending and programs during times of crisis, we’re also playing this role during less trying times. Each year, we issue hundreds of reports and testify before dozens of congressional committees and subcommittees on the issues affecting our nation. In fiscal year 2020 , we saved taxpayers $77.6 billion in federal spending. That’s $114 dollars for every dollar Congress invests in us!

Learn more about our work by visiting GAO.gov .

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Related products, state and local governments: knowledge of past recessions can inform future federal fiscal assistance, product number, american recovery and reinvestment act: gao's role in helping to ensure accountability and transparency, troubled asset relief program: treasury continues winding down housing programs, housing finance: prolonged conservatorships of fannie mae and freddie mac prompt need for reform, covid-19: continued attention needed to enhance federal preparedness, response, service delivery, and program integrity.

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