Not the Great Depression 2.0

NEW UPDATE: For updated data and an even better discussion of the issues raised here, please start with this post from August 2, 2009.

UPDATE:  Please see two related posts:  “The Long U” and “A Plane Crash Averted?”

The Great Depression was an unspeakably bad time for the U.S. economy.  I know that sounds obvious, but it seems necessary to say given all the recent rhetoric about “the worst economy since the Great Depression.”

Our economy has indeed been in terrible shape lately, with millions of families struggling with falling incomes, job losses, home foreclosures, and plummeting wealth.  The current recession is severe by any reasonable metric.  But it still pales in comparison to the Great Depression.

One simple way to see these basic facts — that the current recession is severe by historical standards, but falls far short of the Great Depression — is to consider how much overall economic output declined during past downturns.  The following chart shows the five largest declines in real gross domestic product (GDP) since the end of World War II.  For the current downturn, I have used official estimates of GDP through the first quarter of this year plus the median forecast for Q2 (-1.4 percent) from the Wall Street Journal’s May survey of forecasters).

Five Downturns

As you can see, the current downturn is in the running to be the worst in the post-war period.  If the WSJ forecasters are too optimistic or recent GDP figures get revised downward, the current downturn will overtake the 1957-58 contraction as the worst since 1947.

Now let’s add the Great Depression to the Chart — note the change in scale: (updated 8/2/09 to correct GD figure; see 8/2/09 post for latest data):

Six Downturns

As you can see, the economy would have to fall much, much further than economic forecasters expect for the losses to come anywhere near those experienced in the Great Depression. the current downturn bears absolutely no resemblance to the Great Depression. (Edited 5/30 in response to comments.)

46 thoughts on “Not the Great Depression 2.0”

  1. ALOHA !!

    There are other differences you do not mention. From 1929 to 1930 the US TREASURY ran “surpluses” not deficits as we do today. So the year of the worst stock market crash in US history, 1929, the US government was running a surplus and that surplus continued through 1930.

    The current SPEND RATE for US TREASURY, receipts versus outlays, is at 5.78. In other words for every $1USD of receipts(revenues) the US TREASURY is spending $5.78USD.

    At the height of FDR’s job works programs when spending was rampant FDR was spending at a rate of 2.40 less than half what Obama is.

    What was FDR spend rate during the height of WW2(1945)? 2.05 … it went down not up. Care to guess why? Can you compare the WAR ON TERROR to WW2? Certainly we are getting a whole lot less BANG for our WAR BUCKS now!

    So what has the US government spent so far for FY2009? $7.7TRIL USD is the answer. Since the FY 2009 started in Oct, we have four more months left. I am sure Obama can spend much more in four months time.

    What I am trying to point out here is that without equal SPEND RATES you are comparing apples to oranges. What would happen to America if Obama suddenly started spending at the same Great Depression levels that FDR did? What would happen to America today, if we did not save any of the US Banks? In 1929 Goldman Sachs filed BK.

    This info can be found at the US TREASURY DAILY STATEMENT.

  2. I agree with Kaimu. As a New Yorker, I might add that during the great depression the firms of Lehaman , Merrill and Bear Stearns survived the storm. One reason is proper valuation of risk and a stake in the investment.

    Today the MBA derivative superhero’s ( aka legion of doom) created fancy products (CDO’s Default swaps) which were in fact shams.
    Our past economic growth was caused by ” cashing ” out home equity. Betting on real estate as an investment that will not go down.
    Now, few can cash out and purchase “harley’s, Cruises, boats, second cars, etc. Therefore no more growth in GDP to the past leveraged levels. We are ” tapped out”.

    In the past persons placed 20% down and had “good credit” . They paid off the debt and than could live debt free.
    Now, even seniors, refinance in their 60’s cashed out, now as in Florida, they have no more access to ez money, they are often just barely making the mortgage.

    Donald is so so wrong and sophmoric in his up beat observation that this is not as bad as the great depression, its much worse. Frankly, im not shocked that apast or present White House staff’s tend to be more and more ” pop masters” and less and less substantive thinkers who never deliver ” bad ” news and warnings” rather than hurbris.

  3. What you say is true as far as it goes. But I think it is important to note add that if the government hadn’t taken the extraordinary steps it has, particularly its bail-out of several (and by extension, maybe all?) of the country’s largest financial institutions and the commercial paper market, we’d definitely already be in the Great Depression II. So, yes, we didn’t have it. But we could easily ahve been there. So this is, then, as one historian has put it, “The Great Repression.” A plane crash averted does bear some resemblance to a plane crash that happened…not in the final outcome, but in the chain of events that took place up until the time the pilot pulled out of the nose dive.

  4. Mr. Marron,

    I heard about your blog over at The Corner on NRO and I first heard about you from Greg Mankiw’s Blog. And I’m thankful – keep it up!

    In a sense I’m kind of depressed that anyone even has to make this point anymore. Seriously, comparing the problems with the economy today to the problems of almost 80 years ago is a seriously worn-out campaign slogan that has served its purpose. We are not living through the Great Depression II. Ugh!

    @donlawny: Minor quibble, it wasn’t MBA superheros that created the Gaussian copula function – those were the math and engineering geeks (so burn them in comment flame effigy). Most of the rest of what you wrote is spot on but your accusation of former government economists is unfair. Many poke holes in the “green shoots” claim, for example, and others, like Mankiw, have highlighted how the unemployment rate is rising faster than expected *without* the current stimulus plan. It’s not all rainbows and unicorns from economists.

    @MerleHazard: Your position is that hellfire and damnation would have happened if not for the Bush/Obama/Geithner/Paulson bailout/stimulus plan of ’08/’09. Maybe you’re right and America would be one big Hooverville by now but I have my doubts. I’m not going to Pollyanna you, if we would have not bailed out the banks and instead opted for tax cuts and/or solutions that didn’t have the government finalizing Chrysler’s marketing budget things may very well be worse now. But we will never know for sure. What we will have to deal with is the repercussions of our bailout/stimulus plans.

    Alright, that’s enough. Good post Mr. Marron and continued good luck!

    1. I have no problems throwing the math guys under the bus as well. Im just a cop with a law degree, and business undergrad from tier 3 schools.

      However, in New York I did real estate closings for purchasers of real estate ( cops, fireman, teachers) People were putting down 3 % and than modifying the price upward to get a “seller’s Concession , so they could finance their closing costs. ( Average N.Y. Home $400,000.00) So the banks were letting people put 12K down. )

      The lenders let them take out 2 loans a primary mortgage usally adjustable after 3-5 years and a second un-secured home equity loan. ( credit card interest rate terms)

      This was insanity, I could not belive that “A” lenders would finance a defacto 103% of a home, condo or cooperative purchase.

      The circus went like this (1) Bank gives out cash in excess of sales price. ( Hello RISK ANALYSIS) Where were the CPA’s, Lawyers, Economist to say this lending disregards every rule of banking and purdent lending).

      (2) Realtor- generally a local elected offical or spouse of same who also sits on the zoning and planning board steers the consumer to a bank that can ” make dreams come true.

      (3) Closing Agent- elected offical, sibling or friend gets payment for the ceremony.

      (4) Like a Perscription that can be refilled, we do this every three years, while the market is going up up and away.

      (5) The problem, breach of professional standards, breach of duty to shareholders, treating humans as cash cows instead of neighbors.

      The music stops, and now people have no seats. Here is my guns and butter. GE was a big subprime lender. The average loan they made was for $300,000.00. Now the property is worth $150,000. and going down. If GE makes 50 % profit on every appliance that retails for $1200.00 how many appliances must they sell to recoup the $ 150,000.00 they lost on every mortgage that defaulted.

      I don’t know Mr. Marron, maybe he even tips 20% and im sure his Dogs and Kids love him. But don’t give me a BS chart and tell me things are good. This is a disaster and more is to come and those who suggest otherwise must be somkin some funny stuff.

      1. Hey, I agree, things are going to get worse but this is not the Great Depression… yet. Could it get that bad? Yeah, it could.

      2. Fascinating that at no point does any of the blame fall on people that finance 103% of their house.

        For every predatory lender there was a predatory borrower playing the system to get a bigger house than they could afford, taking out a double-mortgage at usury rates because they couldn’t be bothered to read the fine print.

        If I drive 90 mph down the road and crash and end up in a wheelchair is that the fault of the civil engineers that didn’t out speedbumps on the highway? They “let me” drive that fast!

  5. Thanks for the comments folks.

    @donlawny: Yes on the tipping. No pets or kids at the moment but yes, they would be big fans too. I think you may have overlooked my first point (and chart) which is that yes indeed this is either the worst or second-worst decline in output since 1947. I’d hardly call that upbeat. And that’s assuming that mainstream forecasters are right that Q2 will be the last down quarter.

    My larger point is that, as bad as things are, we shouldn’t diminish how incredibly bad the Great Depression was. It’s a disservice to their suffering to equate it with where we are today.

    Unfortunately, we can’t rule out the possibility that the mainstream forecasters are way off (again) and things will turn out materially worse. Reasonable people can certainly have that view. But that’s a forecast.

  6. Your argument is facetious. You are comparing less than 2 years of data(2008-9) to 4 years of data (1929-1933). This is unfair and imprecise and will result in flawed expectations being correlated incorrectly to prove a point that is unprovable. The current economic crisis has not finished, therefore its scope and duration is unknowable.

    To compare today’s troubles to the Great Depression is not difficult as many parallels exist, however the size and scope of our greed, stupidity, lack of oversight and massive finagling by the Federal Reserve practically guarantee today’s economic panic will be unique and difficult to calculate until it has run its course.

    I would only advise those certain that today presents a golden opportunity for investment based on the happy talk by minions of the government, realize that until the banking system actually has tangible assets in its reserves, the economic chaos will continue which can and will wipe out what we may perceive as “safe” investments today.

    We are in a new paradigm, the government is massively lending monies to everyone with a hand out – propping up banking,insurance,markets and auto makers. This is something never before seen in any normal recession of the last 70 years. This certainly points to the possibility that the great depression may have finally found a suitable sucessor and we are destined to live through it.

  7. I agree that our current recession has not and probably will not surpass the Great Depression, but it comes a lot closer than you are letting on in this post. In particular, the 29% decline of real GDP during the Great Depression was after 4 years. A better comparison is that our current real GDP is down 3 percent in 3 quarters, whereas it was down only 8 percent in the first year of the Great Depression. I just posted some pictures of these comparisons over time at

    With regard to employment, jobs are currently down 4 percent in 14 months versus 5 percent in the first 12 months of the Great Depression. The Dow Jones Industrial Average is currently down 40 percent in the 19 months since October 2007 while it was down 60 percent in the first 19 months of the Great Depression. However, the Dow was down nearly 54 percent on March 5, which was virtually the same decline in the Dow during the Great Depression over the same time period.

    My point is that our current recession is the most severe and the most similar to the Great Depression since the Great Depression. And it looks like our economy will decline further before it starts growing again. The Great Depression didn’t hit bottom until four years after it began. We are only 18 months into this current one. And it still has room to run.

  8. Umm…pardon me, I was looking at the chart, it’s very pretty.

    I’m afraid I don’t really get something though.

    You see I was thinking…

    GDP = consumption + gross investment + government spending + (exports − imports)

    Last year the government injected a pretty big cash stimulus which would (it seems) be counted as government spending and likely much of it would also count as consumption.

    This year the government spending is on banks and auto companies (which are still heading into bankruptcy)…

    Yet, despite these desperate injections of borrowed and printed money, we still have negative GDP growth.

    What do you think those numbers would look like without those injections?

    Here is the deal as I see it…the Government has decided that we will split the difference with the great depression. We are going to suffer high inflation and high unemployment rather than just high unemployment while prices fell greatly during the great depression.

    It’s also going to take longer to see the full effect….which is nice….spread the pain and all…but here is what I don’t get….How am I going to pay the bills when my money doesn’t buy nearly as much?

    I mean I’m expecting 10-30% inflation year on year for 3-5 years…or roughly 1 year past the time when the Government spends more than they get…whichever happens first.

    At this point I’m pretty sure they are nearly tapped out.

    Watch Japan…it should happen there first.

  9. You don’t need to tell lies to make your point.

    Let me see… I’ll just put add up four years of one thing and compare it to one year of something else and voila! The four years of gdp contraction dwarf the year-ish of other contractions.

    You’re smart enough to make a legitimate case that we are not in another Great Depression without having to resort to misleading graphics.

  10. Thanks for the post Donald. I like these macro-oriented discussions and gives a lot of perspective to the currents recession. Nice work, you are providing a public service.

  11. Comments range from insightful to insulting.

    Maybe have a reader “thumbs up & thumbs down” so we can vote on the comments?

    Maybe turn off the comments? Other blogs do this allowing you to ignore the trolls

    Agree with the many commentators who pointed out you are comparing apples (1yr:2008-2009) with oranges (4yr:1929-1933).

    Better to write “the jury is still out”; although a hearty Bravo-Zulu “The Zero” is talking more hope and less doom. Think he’ll wise-up on the Constitution’s Contract Clause?

    Good Luck 🙂

  12. It would be interesting to see the 1981-82 recession combined with the 1980 recession. That was a difficult period from Jan 1980 to November 1982 as NBER called it two separate recessions, but they were so close together (double dip) that it was almost like a three year recession.

  13. Most of the people who are complaining that the Depression was 4 years and this is 2 years are missing the point. The overall effect of the Depression was a 30% decline in GDP.

    Part of the reason why the Depression was so bad was its duration, so when you’re making statements like “Great Depression 2.0,” you have to factor in the length of the Great Depression (and multiple failed government policies, and so on) compared to this one. So yes, Marron’s comparison is fair, for the most part.

    The only reason why the comparison would be bad is if this recession ends up being significantly worse than it has currently been. But from what we have seen so far, it’s probably not going to be the Great Depression 2.0.

  14. I would have to agree with the commments that the second graph is misleading. While the GD figures show 4 years, the other recession show a year’s worth of data. Maybe you should have done yearly average decline? That would be 7.3%, worse than now but much less misleading when comparing the two. I could have the wrong idea, I am only an econ undergrad student.

  15. Hi folks — Thanks for all the comments (well, most of them). On the four-year issue, my thinking was as Daniel Reeves describes. What made the Great Depression great was a combination of pace of decline and duration of declines. My calculation is an effort at the peak to trough decline in the economy, regardless of how long it took. So I believe e that the graph is, indeed, apples-to-apples, with the one obvious caveat that the estimates for the current downturn are based on economists’ forecasts.

  16. The only way out is to encourage people to rack up more debts, devalue the dollar so that the existing debts become almost nothing, raise minimum wage to the moon, existing debts become… nothing. Then, consumers either pay off the debts or die hungry.

    And of course, we’re all in it together. Except the policymaker who drive us to that stage.

    On second thought, we are in that stage.

  17. I hope you will update and revise this theme as time allows. It would certainly be nice to see it on a quarterly basis, but certainly a year end update would be great.

    Perhaps sometime in January 2010, you could show how the economy is performing vis-a-vis past economic crisis. I’d love to see an inclusion of food stamp rates, along with foreclosures, bankruptcies and unemployment to help us get a feel just how much better off we are in this crisis than in previous ones. I’m certain the fact that many homeless are sleeping in nicer cars than we had in the 1982 recession is a good indicator of how much better off we all are now.

  18. Well, this post is actually the best on this laudable topic. I agree with your conclusions and will eagerly await your next updates. Just saying thank you will not be enough, for the fantastic clarity in your writing. I’ll immediately grab your feed to stay abreast of any updates. Delightful work and much success in your business efforts!

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  20. Just about time for that one year update. Can’t wait to see the new data point plotted over the old. The fantastic, robust growth of the past 12 months will look spectacular when compared to the lackluster previous year. Or not.

  21. Just a quick thought, when you update this with the most current 12 months of data, can you add a chart comparing the number of sovereign debt crisis in our current economic maelstrom versus the previous panics/recessions/depressions?

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