A Tale of Two Economic Crises?
Five questions for economic historian James Siodla
Economic historian and Assistant Professor of Economics James Siodla compares the current pandemic economic crash with the Great Depression. He tells us there are similarities—and big differences.
How does the scale of government intervention (CARES Act, etc.) compare to the scale of the government relief projects that FDR belatedly introduced to take the edge off the Depression?
We hear a lot about the scale of the CARES Act. It is certainly unprecedented. To put it in perspective, the federal deficit was never more than about 5 percent of GDP in the 1930s; this year, with the help of the CARES Act, it is projected to be near 20 percent. The New Deal of the 1930s was a drop in the bucket, and economic historians have found that it really wasn’t very expansionary, at least not in the aggregate. In many ways, Hoover was a bigger spender than FDR.
The scope of the intervention is also incredible. Not only has the Federal Reserve used every tool in its arsenal, it has extended loans to businesses and cities. By providing relief to local governments, we are venturing into territory that has not been explored since the Great Depression. In the depths of the Depression, many cities were fiscally strained and appealed to the federal government for financial help. The federal government came to the rescue, and as a result, the U.S. entered into an era of closer federal involvement in local affairs. Given the scale of its impact on local governments, the current crisis may again realign the relationships between various levels of government.
Does the COVID crash risk lasting for a full decade, like the Depression?
There is certainly risk of a long-term decline in economic activity. Much like the 1930s, we will probably see a jobless recovery. Production may bounce back quickly; the best-case scenario is a V-shaped recession. But even in this scenario, the unemployment rate will likely remain high as many businesses close their doors, other firms learn to be more productive with fewer workers, and people reenter the workforce and search for new jobs. The U.S. economy during the Depression shrank nearly 30 percent over a period of four years. However, the unemployment rate, having reached 25 percent in 1933, had declined to only about 10 percent by 1941. On the bright side, even though unemployment was high in the 1930s, the decade was one of the most technologically progressive of the 20th century. The U.S. made advancements in manufacturing processes, adopted new communication technologies, and invested in power and transportation infrastructure. This helped set the stage for immense postwar economic growth.
Do any of the post-recession government reforms from 2008 to 2010 come into play during the COVID crash? Or is this a new beast?
This is certainly a new beast. Never have we intentionally shut down the economy to this extent. Many of the reforms we drew up following the past crisis have in fact left banks in better financial positions to face the current slowdown. Much of this has come through new regulations and the more attentive eye of the Federal Reserve and federal regulators. The bottom line is that banks are more solvent today than they were in 2007.
How does an economic collapse caused by a pandemic contrast with one caused by speculation/financial instability/stock crashes? If they’re different in important ways, does that have implications for our prospective recovery?
Some economic collapses are what we might call “Wall Street” crises. We can think of today’s pandemic as a “Main Street” crisis. The real economy has been shut down in order to save lives. So there is nothing structurally wrong with the economy or its financial gears. Presumably, we can turn the dial and ramp up production once the crisis has passed. It won’t be that easy, of course, especially since so many lives have been disrupted, particularly those with school-aged children or jobs that cannot be done remotely. The scale of unemployment is so vast, and it has already reached levels in excess of those during the 2007-08 financial crisis. It took about a decade to reach full employment after the collapse in 2008. After the Great Depression, the unemployment rate fell to its 1929 level only as we entered World War II. If history is any guide, we can expect a long job-market recovery from the COVID-19 crisis.
We also can more directly treat a “Wall Street” crisis than we can a crisis primarily impacting Main Street. The Federal Reserve was designed specifically to deal with financial turmoil by acting as a lender of last resort to banks. Its new role as a lender to businesses involves a lot of learning. Getting loans into the hands of small business owners is an amazing administrative challenge, and one we’ve never faced before. The recovery may indeed depend on the extent to which these new programs work to sustain workers and businesses as we slowly get our resources back to work.
The economy is far more globalized than in 1929, and the roots of this crash are global. Does that imply a larger global depression than in 1929?
This is certainly possible. We are rethinking everything from air travel to global supply chains. For instance, firms may decide to trade efficiency in global production for diversity in supply chains. In the short term, this could help some countries and hurt others. But the economy was fairly globalized in 1929 as well. Before the Great Depression, much of the world was on the gold standard, which helped transmit that crisis across countries. Of course, the crisis today is being transmitted through a virus, and until we’ve turned a corner, countries will be timid in their economic interactions with the rest of the world.
What makes today’s crisis unique is the variation in the impact and responses to the pandemic, both across countries and across time. Some countries have shut things down to a greater extent than others; some have good healthcare systems while others don’t; some are just now experiencing the exponential growth in COVID-19 cases that other countries have already endured. These responses, and the impact of the virus in different countries, will most certainly have implications for the size of the global depression and subsequent recovery. The global contraction may not be larger than previous ones—especially the Great Depression—but, much like the virus, may instead transpire over time in fits and starts.
James Siodla is an assistant professor of economics. He received his Ph.D. in economics from the University of California, Irvine. His current research focuses on urban land use and municipal finance in the early 20th century. He teaches courses in U.S. economic history, urban economics, and macroeconomic principles.
