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Thursday, October 29, 2015

Great Depression vs. Great Recession GDP Growth Rates - Updated As of Third Quarter 2015

In March 2015, two illustrious economists, both Former Fed Chairman Ben Bernanke and Former Treasury Secretary Larry Summers have been duking it out on the blogosphere about secular stagnation.  In layman's terms, both are attempting to describe why does the US Recovery from the Great Recession feel so sluggish.

Although the overall collapse in REAL GDP was relatively shallow  (-3.1% from peak to trough in real terms and -0.4% in nominal terms) and took place over two years (2008 to 2009), the recovery in the five years since then has been very anemic.  The economy reached parity with its pre-recession peak GDP in nominal terms in 2010, only three years after the Great Recession started in December 2007.   In real terms, it took an additional year, by 2011, to reach parity with its pre-recession peak.  By 2014, the US economy is only 20.81% larger, in nominal terms, than the bottom in 2009, averaging only 3.85% growth every year since the Great Recession bottomed out. In real terms, the US economy is only 11.56% larger than the bottom in 2009, averaging only 2.21% growth every year since 2009.

The overall economic contraction during the Great Depression was much more severe (-46% in nominal terms and -27% in real terms from peak to trough) and took much longer (four years from 1930 to 1933).  In real terms, economic parity with its pre-depression peak was only reached in 1936, seven years after the start of the Great Depression. Despite the severity and depth of the economic contraction, it only took three years after the 1933 bottom for the US economy to reach parity (in real terms) with pre-depression peak in 1929.  Recovery, in terms of economic growth rates, was a lot more robust, averaging 10.9% annually during this period.  In the four years since the US economy bottomed out in 1933, the US economy was 43.5% larger than the bottom in 1933, averaging 9.44% growth per year every year. In nominal terms, the US economy only recovered its pre-depression peak only sometime in 1941, when WWII spending began in earnest.

Source:,, Reinhart and Rogoff: "This Time is Different"

Given this very sluggish recovery with no end in sight, it is no wonder that Ben Bernanke, who is only 60, said that he doesn't expect the price of money (interest rates) to rise in to its long-term average of around 4 percent in his lifetime.

Wednesday, October 28, 2015

Great Depression vs. Great Recession: Unemployment - Updated July 2015

The reported unemployment rate during the Great Depression was significantly higher than the reported unemployment rates of the Great Recession. 

But are the two rates comparable? Before 1938, children were a significant part of the labor force.  In 1900, children younger than sixteen made up as much as eighteen percent of the labor force.  It was only when the Fair Labor Standards Act of 1938 became law that children younger than sixteen were barred from working in manufacturing and mining but not agriculture.

To make the numbers more comparable, it is better to get the ratio of Employment to the Total Population (which includes children). When we do this, the two measures are not so far apart.  In 1929, the year "0" for the Great Depression, 54.41% of the total population was employed.  By 1933, year "4", only 41.97% of the population was employed. But the rise in employment was dramatic.  Four years later, 47.63% of the population was employed, almost six percentage points higher. The employment momentum only stalled when the tax hikes of 1937 induced another recession in 1938 and new child labor laws barred children from the labor force.  If the momentum had continued, the employment ratio would have recovered in less than five years.

In 2007, the year "0" of the Great Recession, 48.38% of the population was employed.   Four years later, only 44.82% of the population was employed, a drop of less than 4 percentage points.  By July 2015, around four years later, only 46.30% of the population is employed, an increase of only 1.48% percentage points.  The growth rate of employment was less than a third that of the Great Depression.  At this rate, it will take six more years before employment recovers to that of Year "0".

Great Depression vs. Great Recession

Source:,, Reinhart and Rogoff, "This Time is Different"