Introduction
When the unemployment level hit a shocking 10% in October 2009, the world thought the scary depression of the 1930s was back. During this time, the economic recession which had begun two years earlier had dragged down economic growth and the gross domestic product a great deal. The stock market was performing poorly, but had really collapsed as it had during the great depression (Canterbery 45). For an individual that was a child during the great depression, the great recession is a minor economic downfall and does not even qualify to be modified by the term Great. Yet, to the person that did not experience the devastating results of the great depression, the great recession is a serious problem that appears to be paralyzing every part of the economy. The main questions that people are asking are: what are the primary differences between the great depression and the great recession? What are the similarities between the two? What impacts did the two economic crises have on economic growth? What are the effects of the two crises on unemployment? What are the policy reactions prominently embraced by economists and the government? This paper endeavors to answer these questions by focusing on the crises in terms in relation to unemployment, the state, remedies and economic growth.
The principal similarities between the two economic crises revolve around the adverse effects of the crises. Arguably, unemployment is the most significant common effect of the two great economic disasters. The employers could not afford to institute salary and wage cuts during the great depression employers could not sustain the high salaries as they increased the high costs of production (Hetzel 44). Similarly, they could not cut down the salaries since such employees were protected by the unions and associations. The industrial relations during that time were at their peak with the employers’ associations protecting the interests of employers and the trade unions rising to protest the low pay. What seemed like the only option to the employers was serious lying off of the staff members. This saw unemployment rise to a shocking 25%.
Similarly, since the beginning of the economic recession of 2007, the rate of unemployment has risen to 10% up from the low rate of 2-3%. Such unemployment has seen the government spend so much in as far as social security funding is concerned. The government expenditure has increased in a bid to sustain the people that have lost jobs during the last five years. Unemployment has been described as the worst economic crisis during the Obama administration. Unemployment, during the two periods, was the major cause of human suffering, crime rates and other social evils (Rosenberg 194). Such things as worker lay-offs and soaring rates of unemployment have led to such things as the widening of the space between the rich and the poor. Undeniably, the great recession has been described as the era of the extremes. The rich are extremely rich, just like the poor are exceptionally poor. This was the case during the late 20s and early 30s.
Both crises had negative implications on the economic growth of many countries. Even though the intensity of the effects was not as similar as many economists have argued, the adversity was felt in such economies as that of the United States. The rate of economic growth during the early 1930s dropped to zero. The economy was stagnated as the Gross Domestic Product declined severely. In the 2007-2009 depression, economic growth went as low as 4%. This slowed down economic development and affected international trade adversely. Worth noting is the fact that during the great depression, international trade practically went down to zero (Canterbery 56). Similarly, international trading between the United States and other countries dropped drastically during the economic recession of 2007. The International Monetary Fund reported that economic growth was too low at the unsustainable rate of 4%. The report released on the 17th day of April 2009 indicated that the United States was undergoing a serious decline in as far as economy was concerned.
Both the great Depression and the Great Recession had been preceded by economic booms. Notably, the Great depression was preceded by the famous economic boom of 1921 to 1929. The economic boom, commonly referred to as the Roaring 20s was associated with an economic growth rate of approximately 4.4%. During this time, international trade was at its peak, and capitalism was fast taking root in the United States of America. It is for this grounds that some economists have associated the beginning of the great depression with the rise of capitalism (Hetzel 119). Arguably, the effects of capitalism contributed to the widening of the breach between the rich and the poor. Similarly, the great Recession of 2007 was preceded by an economic boom that has come to be referred to as the Great moderation. This economic boom, which lasted for approximately 25 years, that is, between 1982 and 2007 was associated with an economic growth rate of 3.2%. During these periods, international trade was performing well with favorable balances of trade for the key players such as the US and the UK. Similarly, the stock market was doing well with people and firms investing in securities.
Both the great depression and Great Recession were preceded with a situation that saw banks moving into new forms of business. For instance, during the 1920s the banks made a major to real estate banking. Investment banking was a common economic idea among the major banks in the industry. Similarly, in the period preceding the Great recession, banks made a major move to securitization of mortgages. This move saw many people move from the low risk investments to the more profitable high risk investments. Still focusing on the banking industry, the bankers saw the period preceding the Great Depression characterized by high consumer credits. This was a novel innovation in the banking industry back in the day. Similarly, the period preceding the Great Recession saw the banks move into such novel ideas as the securitization of mortgages and real estate lending (Wiegand 39). This contributed to the recent popularity of real estate investment by the banking industry through the activities of commercial banks and nonfinancial housing cooperatives.
Among the principal remedies used in both the Great depression and the Great recession, are such economic tools as deficit spending. Prior to the Obama administration, the government of the United States advocated for a balanced budget. A balanced budget refers to a quantitative plan drawn by the ministry of finance, indicating the government’s projected spending and estimated revenue. The budget is referred to as balanced if and when the projected revenue is equal to the estimated expenditure. This means that no debt is employed in the funding of government projects and obligations (Wiegand 141). This is a case that is possible only in the developed nations where the economic stability is sustainable. During the Great Depression and the Great Recession the United States of America could not sustain its economy through government revenue. As a remedy to the downfalls in the economy, deficit spending appeared like a remedy and was indeed used as an economic tool to solve the negatives of the economic crisis.
During the Great Depression, the congress was torn into two opinion blocks and so was the world of economists. One opinion block was of the view that the government should participate actively in the efforts to find a solution to the declining economy. On the contrary, the other block was advocating for a do-nothing policy. They argued that the government was better off staying away from the economic crisis (Canterbery 86). The argument was that the market forces of a free market could easily correct the situation. At first, the government assumed the do-nothing policy and kept off the corrective endeavors. Later, they realized that this remedy was not appropriate as it served to enhance the gap between poor and the rich while promoting human suffering.
The third remedy used during the economic crises was increasing money supply. The government economists relied on ten arguments of the World Bank during the Great recession. The World Bank, which was a consequent of the Great Depression, saved the American economy through suggesting the increase of money supply within the economy. The money supply was increased through such activities as the selling of government bills and bonds. Printing more money was more disastrous than helpful. As such, the American government used the fiscal and monetary measures suggested by the World Bank as economic remedies.
Worth noting is the fact that the post Great Depression measures are the things that contributed to the Great recession not developing into yet another Great Depression. Principally, a depression is different from a recession in the sense that a depression lasts for more than 2 years and is characterized by a drop in economic growth of 10%. Clearly, the 2007 recession did not hit the 2 year period threshold. It lasted for close to twenty months. Again, the economic growth drop did not hit the 10% threshold. Worth noting is the fact that the occasion of the great depression contributed to the softer effects of the recession (Rosenberg 204). This is because the IMF as well as the World bank, which were instituted after the Great depression, are the same institutions that advised governments on what measures to take as a way of mitigating the adverse effects of the great recession. For instance, the World Bank came up with a number of economic tools that helped the United States of America, being the biggest economy in the world; handle the effects of the recession. Additionally, the international monetary fund, which released statistics relating to the recession, facilitated deficit funding.
The differences between the Great Depression and the Great Recession
The two economic crises had so many similarities but were so much different. The recession period was not as severe as the depression. Worth noting is the fact that the major difference between the two is that the effects were same but not to the same extent of severity (Hetzel 126). Perhaps, the great depression was associated with severe human suffering and death. The great depression was associated with zero economic growth. In simpler terms, the great depression was associated with economic stagnation. On the contrary, the great recession was associated with slower economic growth. This is to say that the economic growth at the time of the economic depression, the economy was not growing but declining. On the other hand, the recession only triggered a slow rate of economic growth.
While unemployment was unsustainably high at 25% during the great depression, it was lower at almost 10% during the recession period. This rate was manageable in the sense that the government could use such things as the social security funds to help the citizens sustain themselves. On the contrary, the great depression was unsustainably severe. The government which had not instituted such strong social security institutions failed to save the dying poor people. During the great depression, those people that had lost their jobs could not turn to the insurance firms as most of the few that were in existence had collapsed following poor establishment and failure in the banking industry (Wiegand 231). Unlike the great depression, the government of the united states provided extended benefits of unemployment to the people that been laid off.
Talking of the differences from the point of view of economic growth, the Gross Domestic Product (GDP) dropped by a severe 27% during the great depression. On the contrary, the rate at which the GDP dropped during the recession period was a manageable 4%. The difference here was the public policy in use. The recession period came at a time when the governments of the world were intellectually aware of how the economy functions. History has it that among the principal causes of the great depression was the fact that the administration f the United States was not intellectually informed on how the economy functions (Wiegand 145). For instance, the government of Franklin Roosevelt was not as informed of such things as imported inflation as the way the subsequent administrations were informed. It is for this reason that the United States dollar gained so much value after the second war of the world.
The remedies to the great depression were not effective. This contributed to the fact that the menace had to stay for more than a decade. The factors that contributed to the ineffectiveness of the measures and economic tools revolved around the fact that every country attempted to carry its own cross. The animosity that had been instigated by the by the First World War did not allow the countries to cooperate with one another in the implementation of the predetermined remedies (Canterbery 115). The effectiveness of the remedies during the great depression was motivated by such issues as globalization and integrated economies. Integration of the economies, which was motivated by international trade fostered cooperation in the modern world. This contributed to the effectiveness of the remedies designed to curb the negative effects of the great recession. Cooperation was of paramount importance in dealing with international crises. It is for this reason that the recession was handled without much hassle.
Another primary difference between the great depression and the great recession is that the great depression lasted for unreasonably long causing adversities that were not easy to deal with. The government could not remedy all the damage at once. As such, it took long to get the economy up from its knees. On the contrary, the recession period lasted for a remarkably short period in such a way that remedying its effects, which had not brought the economy to its worst, was comparatively easier (Rosenberg 132). Professor Michael Bordo of the Stanford University argues that the great depression was a result of ignorance, both within government and among the business firms. The professor argues that the recession on the other hand can be linked to the fact that the world economy is so much integrated that inefficiencies from one economy can easily be transferred to another through international trading and borrowing. Such impacts as imported inflation make international trade one of the principal causes of the great recession.
While the great depression was characterized by severe human suffering, the great recession was a little fair comparatively since the state safety measures were in place to absorb the economic shocks. The government back in the day had not gathered knowledge on the safety precautionary measures such as the social security fund (Hetzel 156). It is for this reason that it could not cater for the safety needs of the citizens. It is also for this reason that the response to the crisis took unreasonably long. While the depression was severely in operation for close to 44 months, the great recession was in place for almost twenty months. Such differences in duration are important to note as they explain clearly why the consequences took the form that they took after the end of the world economic crisis. During this period, industrial production went down by approximately 51.7%. This almost led to the collapse of the industries as labor and other material resources were becoming severely scarce.
The industrial production reduced from 14.9% during the great recession. This could not have led to the collapse of the industries since the drop was reasonable enough to be corrected by such measures as the fiscal measures designed by the World Bank. While consumer prices went up by 15.2% in the great recession, the rates of inflation remained at a single digit figure during the whole period (Canterbery 45). Even so, the public debt of the United States of America went overwhelmingly high, triggering blame games within the political circles. The situation was different during the great depression as the prices dropped by approximately 27.3%. This was accompanied by serious failures in the banking industry. 4000 bank failures came as a result of the great depression. On the other hand, only 443 bank failures were reported during the great recession.
In conclusion, it is essential to assert that the two crises were quite severe as they were felt all through the world. The fact that the term Great has been used to modify the two historic economic crises is a clear indicator that the menaces were a threat to the future of the US economy. Among the key similarities between the two is the fact that they were both associated with high levels of unemployment. Additionally, the two crises were associated with a decline in economic growth and development. Such negatives as the failure of the banking industry as well as the insurance institutions were characteristic of the great crises. Worth noting is the fact that the two crises promoted enhanced the movement of the banking institutions to newer businesses. Among the key differences is the fact that the great depression had more severe impacts such as zero economic growth and human suffering. The phenomenon was worsened by the fact that there was serious animosity among the nations. On the contrary, the great recession was only characterized by a slower economic growth.
Works cited
Canterbery, E R. The Global Great Recession. Singapore: World Scientific, 2011. Print.
Hetzel, Robert L. The Great Recession: Market Failure or Policy Failure? Cambridge: Cambridge University Press, 2012. Print.
Rosenberg, Jerry M. The Concise Encyclopedia of the Great Recession 2007-2012. Lanham, Md: Scarecrow Press, 2012. Print.
Wiegand, Steve. Lessons from the Great Depression for Dummies. Hoboken, NJ: Wiley, 2009. Print
