The Great Depression, Unemployment and Recovery

Nice chart from Barry Ritholtz:

Source: Big Picture

Unemployment is very bad now — 9.7% — and it could very well get worse over the next six months or so. And, if you include those who have given up looking for work and those who are working part-time, but really want full-time employment, the number could be around 16%. Nonetheless, current unemployment is still far from the levels reached during the Great Depression. Here are two views of unemployment levels back in the 1930s:

Here is a chart that shows Depression-era unemployment statistics from Mark Perry’s Carpe Diem blog. The gray area on the left side of the chart covers the Depression years and I believe it is based on the lower BLS estimates mentioned above:

Source: Carpe Diem

This chart from Carpe Diem covers unemployment through 2008, which is why it shows 6.1% above.

Here is a fascinating chart from the Heritage Foundation that seeks to measure those who were unemployed in the Depression plus those who were employed in various ‘make work’ government programs:

Source: Heritage Foundation/Global Insight

As this chart indicates, unemployment remained very high until World War II began. This information coincides with other reports I have seen on the Great Depression. The New Deal policies were an attempt to revive the economy, but they did not do so.

In our current situation, many of the proposals being made resemble New Deal policies, such as proposals to do massive infrastructure spending. Those types of policies have not had a good record of bringing weak economies out of recession (see Bankruptcies, Bubbles & Bailouts).

Actual Bureau of Labor Statistics only go back to 1940, so unemployment for the 1930s can only be estimated. Most estimates use, as the starting point, statistics from the Census Bureau.

In case you are wondering — as I did — why the unemployment numbers in the Heritage Foundation chart look higher than other estimates for Depression-era unemployment, Heritage included in their estimate for the chart all the folks whose employment was in various government ‘make work’ projects.

I contacted Heritage and they confirmed that they used the Census Bureau unemployment statistics for their estimates. I then contacted the BLS and received their estimates for unemployment. The BLS estimates are lower because the BLS estimates count those employed in various government work projects as being employed.

Can We Screw Up The Recovery?

I believe the Great Depression itself should have been just a severe recession, but that government actions including higher income taxes (Presidents Hoover & Roosevelt), trade restrictions (Smoot Hawley Tariff Act of 1930) and a significant contraction in the money supply (Federal Reserve) all combined to drag the economy down much more than otherwise would have happened (see How to Squelch an Economic Recovery for much more detail on this issue).

Today, there are many levels of support that did not exist back then (unemployment insurance, bank depositor protection, brokerage firm protections, Social Security) that act to mitigate the downturn. Also, the Federal Reserve is acting aggressively to increase the money supply so these factors are good.

On the other hand, there are serious concerns such as Federal plans to raise income taxes and corporate taxes and, at the state level, sales taxes and vehicle taxes. In my opinion, raising taxes during an economic contraction is a serious policy mistake (see Stimulus: Is it timely, targeted and temporary?).

There are also big problems with potential trade barriers in the American Recovery & Reinvestment Act of 2009 along with other potential job-killing legislative initiatives. A modest economic recovery is about to begin. I hope our fearless leaders in Washington DC don’t screw it up by trying to ‘fix’ things.

Comments

[NUCLEAR1929:]

agree 100%, but i dont understand why there are so many fools who still hold stocks (i dont say buy stocks, because there is no new money to buy), it will go still 90% down

Sep 08 04:41 PM

[drewriders:]

How can the chart say that World War II not gov't spending prompted the economic recovery when the U.S. borrowed massive amount of money to employ people to build planes, tanks, etc. Where do you think we got the money to employ all these people to support the war effort (combat and non-combat)?

Sep 08 06:25 PM

[Pat C:]

What we need is a good # for what employment should be in a reasonably robost economy that isn't all hyped up with financial shenanigans and absurd consumer spending. Perhaps the standards are all wrong? Is a 40 hr. workweek the standard now? Should it be 30 or 60? I agree we can't go crazy with trade restrictions etc. But having China et. al. doing all our manufacturing isn't getting it done either. Everyone should be either employed or training for a new job. That takes a committment from everyone that we are going to pursue certain industries such as alternative energy, etc. etc.. and the employer/employee moral contract is re-established.

Sep 08 06:40 PM

[Pat C:]

Another thing, I am highly suspect of everything coming out of the Heritage Foundation - not exactly scientific thought coming out of that institution.

Sep 08 06:44 PM

[bmcon:]

Printing the money versus borrowing the money could be the rationale.


On Sep 08 06:25 PM drewriders wrote:

> How can the chart say that World War II not gov't spending prompted
> the economic recovery when the U.S. borrowed massive amount of money
> to employ people to build planes, tanks, etc. Where do you think
> we got the money to employ all these people to support the war effort
> (combat and non-combat)?

Sep 08 09:21 PM

[RatWatcher:]

I particularly like the 1935 comment on the chart, "Supreme Court declares much of New Deal unconstitutional." Any chance we'll get so much as a hearing from our Court? Is anything DC does unconstitutional anymore??

Sep 08 11:48 PM

[Fighting Yoda:]

One important difference that needs to be noted when looking at unemployment numbers from the two eras - the way unemployment is measured now is totally different. During 30s anyone above 16 and not working was counted as unemployed. Now we have plenty of qualifications that get excluded from ranks of unemployed- 'actually looking for work', part timers, recent graduates staying at home with parents. However self employed- even if they earn nothing or close to nothing get counted as employed - think real estate agents etc.

U-6 is at 16.8% if we extarpolate this into Depression era - would easily by 22-23%. It does not feel like Depression now only because of the safety nets - Unemployment benefits,FDIC, food stamps etc. However all these institutions have been streteched beyond all historical limits and are virtually going bankrupt.

Sep 09 01:03 AM

[jeremiah74:]

Fighting Yoda is right, these kind of charts are not apple to apple

Sep 09 03:43 AM