We need to get a grip, people. This is not The Great Depression—The Sequel.
Make no mistake, the economy is very bad, as rough as it has been since the early 1980s. But, despite what many are saying and writing, the recession that began in the winter of 2008 is not the Great Depression. Not even close.
Employment, price levels, Gross Domestic Product, the stock market. Pick a data series, any data series, and you’ll get the same result: awful, for sure, but hardly 1929. CEA chair Christy Romer, a highly respected scholar of the Depression before joining the Obama Administration, put the current unpleasantness in context the other day at Brookings.
A few facts: By 1933, one out of every four adults was out of work. So far in today’s slump, the unemployment rate has barely topped 8 percent.
Gross Domestic Product. Output collapsed by nearly 15 percent in the first year of the Depression and by 25 percent from 1929 to 1933. While real GDP fell by 6.2 percent from the third to the fourth quarter of 2008, it has dropped by only about 2 percent from its peak.
Prices: From 1929 to 1933, the price level fell by a staggering 25 percent. The Great Depression was a horrifying period of price deflation--a phenomenon that kills growth by driving people to stop spending. By contrast, consumer prices in January, 2009 were no lower than they were in January, 2008.
The stock market: Down by about half from its 2007 peak. It's been a pretty sickening plunge, but in 1929, the market fell by 90 percent. If that happened today, the S&P index would be about 140. As I write this, it is roughly 740.
Bank failures: 10,000 banks failed from 1929 to 1933. Thirty-six failed between January, 2008 and mid-February, 2009.
Finally, keep in mind that there was no safety net in 1929. And monetary and fiscal policy responses were slower and smaller than over the past year.
I am not saying we should underestimate how serious our economic crisis is. Not only is employment and consumer demand plunging, but we are faced with a credit market collapse unseen since the 1930s. As Romer notes, while the depth of today’s slump is not comparable to the Depression, many of the causes of the current mess are the same.
An unfortunate combination of more foolish financial decisions, poor policy responses, and plain bad luck could well throw us into a much steeper tailspin. But, so far, at least, the depth of today’s slump looks a lot more like the early 1980s than the 1930s. That’s bad enough, so hold the hyperbole.
