Economic Scene: The Great Depression Then and Now
Rauf Naqishbendi
January 02, 2009
The uncertainty of the future health of the American economy has created an atmosphere of fear, doom, and gloom. The optimists among us persist on predicting a quick recovery, while the pessimists believe we are approaching another Great Depression. But for the optimists, as usual, recovery is one or two quarters away. The path to economic recovery will be a long and painful journey, requiring remedies to counter the cumulative missteps and misguided policies of the past several decades. The economic fallout has both differences and similarities to that of the Great Depression.
As reported by the Department of Labor, last November, the underemployment rate jumped to 12.5 percent, from 8 percent. During this one-month period, 621,000 workers were pushed into part-time work and 422,000 discouraged jobseekers simply dropped out of the labor force while 533,000 jobs lost.
During the Great depression unemployment didnīt start with 25 percent. In 1929, the unemployment rate was less than five percent and in 1930, unemployment was below 10 percent. It was not until 1933 that unemployment peaked at a staggering 25 percent. The obvious conclusion is that rising unemployment is a progressive consequence of continued economic deterioration.
During the Great Depression there was no Federal Deposit Insurance Corporation (FDIC), which resulted in a lack of faith in the banking system. By 1933, 11,000 of the United States' 25,000 banks had failed. To date during this current crisis only 24 small banks have failed. It is worth noting that, unlike the Great Depression era, we have a social safety net available to us, including welfare, food stamps and unemployment benefits.
During the "First New Deal" in 1933, President Franklin D. Roosevelt targeted his economic programs for short-term recovery for the nation. President Elect Obama is taking his cue from FDR and planning to do the same. Indeed, this is a first great step towards economic recovery. Additionally it will enhance and improve our aged infrastructure system of roads, bridges, tunnels, waterways, and schools. In the meantime, the best of the good news is the dramatic decrease in energy prices which should help consumers as well as businesses. Finally, the fiscal policy of cutting taxes for the middle class should provide a further stimulus to the economy.
During the Great Depression, white-collar workers were less affected than their blue-collar counterparts. Today's economic meltdown, on the other hand, started hard with white-collar workers and they remain among the most affected. Between 1929 and 1934 personal income plunged 44 percent. In the present circumstance, personal income is less impacted. By January 1, 1934, as many as half of all residential mortgages were delinquent with the very real risk of foreclosure. The current foreclosure rate is still in the single digit range. During the Great Depression the stock market lost almost 80 percent of its value while the current decline in share values is about half that figure.
Regarding unemployment, it is hard to say with any certainty if we are in middle of our economic crisis or toward the tail end of it. Here is where the Grape of Wrath comes in. A 12.5% underemployment rate doesnīt constitute an economic depression. However, with protracted economic sluggishness, that number can easily climb. Many economists as believe things will get worse before they get better. If that proves to be accurate, how high unemployment can climb depends on when the economic down turn will bottom out. The main problem for the economy is unemployment. Higher levels of unemployment can escalate the home foreclosure rate, and dry out consumer spending. The shock waves will reverberate throughout the economy. Without a meaningful job creation strategy there will be no economic recovery.
Any new New Deal must include more than temporary stop-gap jobs that cannot be sustained. Once FDR eased spending in 1937, America dipped back into recession again. Unsustainable jobs are like a Winchester House phenomenon: as long as the hammering continues, the project survives. The real recovery from the Great Depression didnīt come until America entered World War II and in the aftermath of the war.
By the end of the war America was a super industrial complex and exporter to the world. Now we are a net importer. We have lost our edge in industrial manufacturing by outsourcing jobs and manufacturing capacity to foreign countries such as China. In the service sector millions of IT jobs have been outsourced to countries like India. At the same time instead of the impetus provided by World War II in our economic recovery, we are fighting two costly losing wars with no end in sight.
Another plan aimed at revitalizing our economy is Obamaīs plan to invest in renewable energy. This is necessary and long overdue to be sure, but we are not sure if the number of jobs created by this plan will exceed or short the number of people who are currently employed in the fossil fuel industry. Nevertheless this is a necessary program and should be encouraged to reduce our dependency on foreign energy and secure price stability. Yet those who are short-term minded may be disappointed for this may take years or a decade to materialize.
When FDR took office, the federal deficit was minuscule relative to what Obama is about to inherit. Obama will inherit an accumulated deficit mainly from Ronald Reganīs presidency through George W. Bush. Make no mistake about it it is gigantic. Obama is a capable man, and he is young and has not allowed himself to be an instrument of special interest groups. This implies that he will advance the wellbeing of commonwealth rather than feeding the appetite of the rich.
We have to bear in mind that an incompetent president can do great damage to the life of the nation. But a capable presidentīs good deeds are often limited to and dictated by available resources and circumstances of his time.
As reported by the Department of Labor, last November, the underemployment rate jumped to 12.5 percent, from 8 percent. During this one-month period, 621,000 workers were pushed into part-time work and 422,000 discouraged jobseekers simply dropped out of the labor force while 533,000 jobs lost.
During the Great depression unemployment didnīt start with 25 percent. In 1929, the unemployment rate was less than five percent and in 1930, unemployment was below 10 percent. It was not until 1933 that unemployment peaked at a staggering 25 percent. The obvious conclusion is that rising unemployment is a progressive consequence of continued economic deterioration.
During the Great Depression there was no Federal Deposit Insurance Corporation (FDIC), which resulted in a lack of faith in the banking system. By 1933, 11,000 of the United States' 25,000 banks had failed. To date during this current crisis only 24 small banks have failed. It is worth noting that, unlike the Great Depression era, we have a social safety net available to us, including welfare, food stamps and unemployment benefits.
During the "First New Deal" in 1933, President Franklin D. Roosevelt targeted his economic programs for short-term recovery for the nation. President Elect Obama is taking his cue from FDR and planning to do the same. Indeed, this is a first great step towards economic recovery. Additionally it will enhance and improve our aged infrastructure system of roads, bridges, tunnels, waterways, and schools. In the meantime, the best of the good news is the dramatic decrease in energy prices which should help consumers as well as businesses. Finally, the fiscal policy of cutting taxes for the middle class should provide a further stimulus to the economy.
During the Great Depression, white-collar workers were less affected than their blue-collar counterparts. Today's economic meltdown, on the other hand, started hard with white-collar workers and they remain among the most affected. Between 1929 and 1934 personal income plunged 44 percent. In the present circumstance, personal income is less impacted. By January 1, 1934, as many as half of all residential mortgages were delinquent with the very real risk of foreclosure. The current foreclosure rate is still in the single digit range. During the Great Depression the stock market lost almost 80 percent of its value while the current decline in share values is about half that figure.
Regarding unemployment, it is hard to say with any certainty if we are in middle of our economic crisis or toward the tail end of it. Here is where the Grape of Wrath comes in. A 12.5% underemployment rate doesnīt constitute an economic depression. However, with protracted economic sluggishness, that number can easily climb. Many economists as believe things will get worse before they get better. If that proves to be accurate, how high unemployment can climb depends on when the economic down turn will bottom out. The main problem for the economy is unemployment. Higher levels of unemployment can escalate the home foreclosure rate, and dry out consumer spending. The shock waves will reverberate throughout the economy. Without a meaningful job creation strategy there will be no economic recovery.
Any new New Deal must include more than temporary stop-gap jobs that cannot be sustained. Once FDR eased spending in 1937, America dipped back into recession again. Unsustainable jobs are like a Winchester House phenomenon: as long as the hammering continues, the project survives. The real recovery from the Great Depression didnīt come until America entered World War II and in the aftermath of the war.
By the end of the war America was a super industrial complex and exporter to the world. Now we are a net importer. We have lost our edge in industrial manufacturing by outsourcing jobs and manufacturing capacity to foreign countries such as China. In the service sector millions of IT jobs have been outsourced to countries like India. At the same time instead of the impetus provided by World War II in our economic recovery, we are fighting two costly losing wars with no end in sight.
Another plan aimed at revitalizing our economy is Obamaīs plan to invest in renewable energy. This is necessary and long overdue to be sure, but we are not sure if the number of jobs created by this plan will exceed or short the number of people who are currently employed in the fossil fuel industry. Nevertheless this is a necessary program and should be encouraged to reduce our dependency on foreign energy and secure price stability. Yet those who are short-term minded may be disappointed for this may take years or a decade to materialize.
When FDR took office, the federal deficit was minuscule relative to what Obama is about to inherit. Obama will inherit an accumulated deficit mainly from Ronald Reganīs presidency through George W. Bush. Make no mistake about it it is gigantic. Obama is a capable man, and he is young and has not allowed himself to be an instrument of special interest groups. This implies that he will advance the wellbeing of commonwealth rather than feeding the appetite of the rich.
We have to bear in mind that an incompetent president can do great damage to the life of the nation. But a capable presidentīs good deeds are often limited to and dictated by available resources and circumstances of his time.
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