Great Depression vs. 2008 Recession: Key Similarities and Differences

Introduction

In many ways and from many perspectives, the recent recession has been compared to the Great Depression of the 1930s. Many have stated that this most recent economic episode is the "worst since the Great Depression." There are many similarities, but the depth of the Great Depression far exceeds that of the 2008 recession. At its worst point during the current recession, unemployment reached 10.1% — a daunting number, but far short of the 25% of the American workforce that was unemployed during the Great Depression. Even during the recession of 1981, unemployment of 10.8% was higher than at the peak of the current recession. Although not as severe, the 2008 recession does present certain similarities and several contrasting characteristics when compared to the Great Depression. Similar to the 1930s, the U.S. government was quick to attack the problem. Fortunately, the policies initiated to address the current crisis differ from those employed in the 1930s.

Monetary and Fiscal Policies

The Great Depression was caused by a severe monetary contraction. During the Great Depression, the government unfortunately failed in its attempts to address the unemployment of 25% of the American workforce. Many economists have gone even further to suggest that some of the policies perpetuated the Great Depression and made it more severe than it might have been otherwise. This time around, the government took those lessons to heart, as seen by the large interest rate cuts and drastic fiscal measures. The government learned that a positive monetary and fiscal policy must be undertaken in order to expand the monetary base and revive a faltered economy. However, given the point on the timeline of this recession, the question that must be raised is whether the large fiscal injection from the Obama administration would help. Given the size and scope of the fiscal stimulus, a bad decision could restrain the economy and limit the means to affect other fiscal policies in the future.

Comparing the interest rate cuts during the two crises, the government responded with more drastic interest rate cuts during the Great Depression, not knowing that the monetary contraction was primarily responsible for the economic slowdown. Consequently, the money supply — due to monetary policies — increased at a faster rate during the latter crisis, while monetary contraction was experienced during the Great Depression.

From a fiscal perspective, one key change in policy was the willingness, after the Great Depression, to allow the government to run a deficit. Before the Great Depression, the government operated under a balanced budget premise, and only after President Roosevelt did it become acceptable for the federal government to run a deficit. Some economists, however, argue that fiscal policy placing the government in deficit puts undesirable debt on the shoulders of future generations and creates an undesirable increase in demand on rapidly expanding economies.

In conclusion, the environment of the 2008 recession differed from that of the Great Depression for two primary reasons. First, interest rate policy was different during the Great Depression. In order to undermine speculation, central banks increased interest rates and tightened monetary policy during the Great Depression. During the current recession, interest rates were relatively low at the outset and were lowered even further during the crisis. Second, fiscal policy was rarely used during the Great Depression.

Although running the government at a budget deficit became an accepted principle in the 1930s, two thoughts regarding fiscal policy must be considered. The first regards the consequences of the debt burden. Although the government could very well be correct to react to the current crisis with fiscal policy initiatives — especially since monetary policy is fairly ineffective when interest rates are at or near 0% — the size and scope of the Obama administration's fiscal policy may negatively impact the future by burdening future generations with higher taxes. The lesson from the Great Depression is that too little fiscal policy is bad, but perhaps the lesson of the current recession will be that too much fiscal policy is equally problematic.

References

Unemployment data for the 1930s are from Historical Statistics of the United States: Colonial Times to 1970 (Washington, D.C.: Government Printing Office, 1975), 135.

Temin, Peter (1991). Lessons from the Great Depression. MIT Press.

Krugman, Paul (2009). The Return of Depression Economics and the Crisis of 2008. W.W. Norton & Company.

Fabozzi, Frank J. (1992). The Handbook of Mortgage-Backed Securities, 3rd Edition. Probus Publishing Company, pp. 483–511.

Eichengreen, B. J., & O'Rourke, K. H. (2009). A Tale of Two Depressions.