Could this recession be as bad as the Great Depression?

Could this recession be as bad as the Great Depression?

Could this recession be as bad as the Great Depression?

Moneybox
Commentary about business and finance.
May 2 2008 5:06 PM

How Bad Could It Get?

Will the recession be more like the 1990-'91 downturn or the Great Depression?

The question of whether the U.S. economy is in a recession is, at this point, a matter of decimal points. Since the population grows faster than 1 percent, anyway, Wednesday's announcement of a 0.6 percent rise in gross domestic product for the first quarter is functionally a drop.

The real question now is: How bad could it get? Are we facing another version of the brief recession of 1990-'91, which, as James Fallows once memorably wrote, "was over by the time it was identified"? Or are we going to be wearing barrels for clothes and burning Ikea furniture to heat our homes, in a rerun of the Great Depression?

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No one knows. But we may be able to arrive at a rough answer if we break the question down. How, exactly, do Americans distinguish a bad recession from a mild one—and using those yardsticks, can we at least make reasonable predictions about this one?

Here are three ways of measuring recessions.

Duration. This is a biggie, especially in terms of how history will remember the current downturn. What we think of as the Great Depression (which was actually two deep recessions separated by a few years of technical growth) is seared into the national memory in part because it lasted so long. The first phase—between August 1929 and March 1933—was nearly four solid years of declining gross national product. Many countries would find it hard to sustain such doldrums without revolution or war, and the United States has experienced only one worse downturn since reliable records have been kept—a five-and-a-half-year hell between 1873 and 1879. (A list of historic business cycle expansions and contractions can be found here.)

Could our current downturn last that long? The National Bureau of Economic Research is the body that "officially" declares a recession, and it's not yet done so because growth numbers haven't been negative (at least, not until they're revised). But Martin Feldstein, the economist who heads the NBER, said in early April that he personally believes that we're already in a recession and that it could last about twice the eight-month duration of the last two recessions ('90-'91 and March-November 2001).

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It's not hard to find economists with darker scenarios. Still, Feldstein's 16-month estimate is hardly Pollyanna-ish: It would make this recession a tie for the longest since the Depression. But that's another way of saying that recessions have been getting shorter. The average economic contraction since World War II has been 10 months and the average expansion 57 months. Both figures are much friendlier than historic norms and suggest that policymakers and other economic actors have gotten significantly better at managing the business cycle.

And remember: If Feldstein is right, then we've already been through six months of shrinkage, so only another 10 or so to go. Not a reason to cheer—but also not a reason to panic.

Joblessness. The age-old joke says that it's a recession when your neighbor loses her job and a depression when you lose yours. The joke contains a kernel of economic truth: The Great Depression involved massive job losses that affected nearly every American family. At one point during that 43-month ordeal between 1929 and 1933, one in every four working Americans was unemployed. Every significant industry cut jobs, and entire towns and regions—at least in economic terms—were wiped off the map.

It's never been that bad since. In the 1981-'82 downturn, the unemployment rate hit nearly 11 percent, but the postwar norm has been single digits. (The April rate is 5 percent, down from 5.1 percent in March.) True, unemployment is generally considered a "lagging indicator," meaning that if we're in a recession now, we may not yet have seen the worst of job losses. Moreover, critics say that the official definition of unemployed would be larger if it included people who work part-time but can't find full-time work, the substantial U.S. prison population, and so on.

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But no one would dispute that the American economy is more dynamic and resilient than it was in the '30s. The overwhelming majority of workers in those days toiled in either manufacturing or agriculture, sectors that are especially vulnerable to bust cycles. The employment market has diversified, workers have better skills, and global trade is much more important. So, if this recession leads to increases in unemployment—as it almost certainly will—not all job sectors will be uniformly hit. (Even in the severe '81-'82 recession, only 72 percent of U.S. industries experienced declining employment, compared with 100 percent during the Depression.) Wages may well flatten or shrink—as they've been doing for years—but it's difficult to find a credible scenario in which U.S. unemployment is going to hit 10 percent in the next 18 months.

Depth. The recession between 1973 and 1975 was punishing. Then as now, rising fuel costs led to inflation (more than 12 percent in 1974). An unprecedented wage and price freeze imposed by the Nixon administration did not stem the problem. Gasoline was rationed, and unemployment rose as high as 9 percent.

Yet for all that, the actual drop in gross national product, according to research by late economic historian Geoffrey Moore, was just under 5 percent. By that measure, '73-'75 was the worst recession since the Depression. The inflation-adjusted gross domestic product (as it is now called) has shrunk only in two brief periods since—in the early '80s and the early '90s, in both cases by less than 3 percent.

So, let's say this recession gets as bad as the one in '73-'75. The 2007 gross domestic product in current dollars is more than $13.8 trillion. A 5 percent hit this year would take the economy to $13.1 trillion, or a little less than what it was in 2005. Based on growth patterns that have been quite steady since 1939, we'd be back at $13.8 trillion by 2009. Undesirable, but not catastrophic.

Is this an argument for complacency? No. There are lots of important unpredictables, including what happens in the rest of the world and the ability of the financial sector to steady itself. The mortgage crisis and the decline in housing prices are not over. There's also no obvious path for getting out of the current rut. Recent recessions have not resolved themselves without a catalyst, like the tech boom of the '90s or the housing boom of the '00s (both of which eventually brought on their own crashes). Moreover, if the modern recession is relatively modest, so, unfortunately, is the modern recovery. Expansions may last long, but if the snapback from the 2001 recession is any guide, we're unlikely to see bursts of domestic hiring or big pay hikes once things pick up.