How Does Economy Compare To Past Downturns?

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Christina Romer, the head of President Obama's Council of Economic Advisers. i

Christina Romer, the head of President Obama's Council of Economic Advisers, says the current recession pales in comparison to what our parents and grandparents went through. Alex Wong/Getty Images hide caption

itoggle caption Alex Wong/Getty Images
Christina Romer, the head of President Obama's Council of Economic Advisers.

Christina Romer, the head of President Obama's Council of Economic Advisers, says the current recession pales in comparison to what our parents and grandparents went through.

Alex Wong/Getty Images

The headlines these days trumpet the bad news of housing foreclosures, layoffs and business failures along with stories about homelessness, food pantries and lost retirement funds. Obviously, the current economy is challenging, but just how bad is it compared to previous downturns?

The head of President Obama's Council of Economic Advisers, Christina Romer, says that in the past few weeks she's heard herself uttering these words far too often: "the worst 12-month job loss since the Great Depression, the worst financial crisis since the Great Depression, the worst rise in home foreclosures since the Great Depression."

Those phrases echo through the halls of Congress and tumble from the president's lips. Even Federal Reserve Chairman Ben Bernanke sounds off, saying this week that "the world is suffering through the worst financial crisis since the 1930s."

An Important Distinction

Now before we all open a window and jump out, let's focus on the words. When people say "the worst since," they're not saying "as bad as the Great Depression" — and that's an important distinction, says economist Alan Meltzer, who was a young boy during the 1930s.

"I don't like the comparisons with the Great Depression, because you're comparing 7.5-8 percent unemployment to 25 percent unemployment," Meltzer says. "You're comparing a system which has lots of safety nets in it to one that didn't have any safety nets. And when you're unemployed in the Great Depression, you went in the bread line, the soup line. You went back to the family farm. You had no support system. So I think those comparisons are simply overdrawn."

Romer agrees. She says the current recession pales in comparison to what our parents and grandparents went through. For instance, through the end of last year the economy had shrunk 2 percent, compared with nearly a 25-percent loss of output at the depth of the Great Depression.

Another way to put the current downturn in context is to ask whether it's worse than the recessions of the mid-1970s and early '80s. In terms of job losses, it's already worse, says Richard Trumka, secretary-treasurer of the AFL-CIO.

"This recession began in December of 2007, and we've already lost more jobs as a percentage of total employment than in the entire '73 or '80-'81 recessions," Trumka says.

Still, the total unemployment rate for this recession hasn't surpassed the unemployment rates in those two severe downturns — at least not yet. The latest data puts the current jobless rate at 8.1 percent, with most analysts predicting a peak of less than 10 percent later this year. During the recession of the early 1980s, unemployment peaked at 10.8 percent. And in terms of length, if the current slump lasts through April, which seems very likely, it will be longer than both those recessions.

Banking Problems At Core Of Both

One other way this recession is different is its breadth, Trumka notes. More industries are losing jobs.

"You have manufacturing jobs, you have construction jobs — all of those are similar, but you also have a lot of white-collar jobs that are going this time that weren't as bad in those past recessions," he says.

Plus huge segments of the population from all across country are feeling poorer as falling home prices and plunging stock markets destroy trillions of dollars in wealth.

But what really makes it troubling to hear people mention this downturn and the Great Depression in the same breath is that both have a banking crisis at their core.

"It was the financial crisis and the collapse of banks and other institutions in late 1930 and early 1931 that made the Great Depression great," Bernanke says. "And so we must have a commitment to stabilize our banking system to prevent the failures of any large systemically critical firms."

About a third of the banks in the United States failed during the Great Depression, depriving the economy of the lending it needed to recover.

Bernanke says policymakers have learned the lessons of the Great Depression and will not repeat the mistakes of their predecessors. But the country continues to wait for the full details of a financial stabilization program from the Obama administration.

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