The COVID Crisis in Comparison with the Great Depression
By Price Fishback
People have been asking how the Great Depression and the New Deal compare with the current COVID-19 crisis. The economic situations are nothing alike, and the current response by U.S. governments is several orders of magnitude larger than the New Deal response to the Great Depression.
Currently, we know exactly why the economy has fallen off a cliff. To stop the expansion of a nasty disease that can lead to horrifying deaths, officials from all levels of government have required all but “essential workers” to stay at home and practice social distancing when going to grocery and drug stores. The move has “flattened the curve” and reduced transmission of the disease. As a result, economic sectors that involve face-to-face activity have mostly gone dormant, causing workers to lose work opportunities and businesses to struggle to survive.
By contrast, even now we still do not fully understand the causes of the Great Depression of the 1930s. Real output in both 1932 and 1933 was 30 percent lower than in 1929. It did not reach the 1929 level again until 1937. Unemployment rates rose from around 2 percent in 1929 to nearly 10 percent in 1930 and then stayed above 10 percent through 1940, including four years above 20 percent. We know we made policy mistakes: the Hawley-Smoot tariff, monetary policy that offered too little too late, and the 1932 tax increase that raised income taxes for the top 10 percent and added new excise taxes that hit all members of the economy. Yet, there were other factors that are not as easy to identify that contributed to such a huge drop in economic activity.
Before 1929 the populace did not ask much of the federal government. State and local governments had responsibility for labor and poverty policies. Federal government outlays were 3 percent of GDP in 1929. Few realize that Herbert Hoover’s government by 1932 had raised federal outlays to 6 percent of 1929 GDP (8 percent of a shrunken 1932 GDP) because Herbert Hoover did it within existing programs, loudly called for balanced budgets, and did not increase the outlays in his last year in office. Franklin Roosevelt’s New Deal then established dozens of new programs while expanding federal outlays in 1939 to 11 percent of 1929 GDP (10 percent of 1939 GDP). Most of the outlays went to poverty work relief programs like the FERA and the WPA, which paid wages of about half to two-thirds of wages paid on public works projects. As a share of lost wages, the payouts were somewhat better than modern unemployment insurance benefits, but there was a work requirement in the 1930s programs. Part of the New Deal money went to public works projects that paid full wages. About 10 percent went to payments to farmers that helped them but pushed tenants, croppers, and farm workers out of agriculture. Other programs included loan programs for farmers, homeowners, and businesses; recognition of labor unions; new financial regulations; and the National Recovery Administration’s unconstitutional attempt to allow each industry to avoid cutthroat competition by setting prices, wages, weekly hours, and quality of goods. For the long run, the Social Security Act established old-age pensions, federal matching grants for state poverty programs, and unemployment insurance. Like Hoover, Roosevelt also tried to balance the budget, and deficits as a share of GDP were lower than deficits in multiple years under Reagan, the first Bush, Obama, and Trump.
Someone recently asked me if society today has the will to call on governments to help the way they did during the New Deal. That struck me as an odd statement. Above we showed that it took ten years to raise federal outlays to rise from 3 to 11 percent of 1929 GDP. This crisis has arisen because the President, governors, and mayors in trying to save lives have ordered people to stay home and businesses to shut down. In the past few weeks, the Federal Reserve has opened up lending facilities throughout the economy in unprecedented ways. Unemployment benefits for the first time are going to workers whose employers did not contribute to the system, and the federal government is adding $600 weekly payments that raise benefits well above the usual 50 percent of the weekly wage. Finally, a sharply divided Congress and President have established 2.7 trillion dollars in spending authority in emergency packages that are raising federal outlays from about 21 percent to 34 percent of 2019 GDP. This will drive the federal deficit to from 5 to at least 18 percent of GDP, and nearly every state will run substantial deficits as well. On Thursday, Nancy Pelosi called for an additional trillion dollars in support for state and local governments. That trillion raises government outlays as a share of GDP to 39 percent, just short of the 40 percent that American spent fighting World War II at the peak of the war in 1944. The American public and leaders on both sides of the aisle today are clearly willing to allow governments to take steps that go far beyond what the New Deal government did in the 1930s. They may well soon rival federal spending at the peak of World War II.
Price Fishback is the Thomas R. Brown Professor of Economics at the University of Arizona.