Worst Economic Decline Since the Great Depression?
Even during a speech at West Point regarding sending more of our men and women off to war in Afghanistan, the President could not help but invoke the “fact” that he inherited the worst economic crisis since the Great Depression. Well, that may be so. I can pull out data to support this (it was the longest by duration and had the largest gross number of jobs shedded of any recession for example) and much data to refute it. But rather than do that, I wanted to simply apply a little perspective.
The chart below depicts the real value of the output produced (and hence consumed) in the U.S. each year since 1929 (quarterly data for the past 60 years).
From the peak of the last business cycle to the trough in the second quarter of this year (growth “resumed” in the third quarter), U.S. GDP fell by 3.6%, or roughly $514 billion in real terms (2005 dollars). No doubt this is a massive number (in fact, it is larger than the total size of most economies in the world), but consider the following:
- A three and a half percentage decrease in well being (assuming this is a reasonable proxy for well being) is likely to be worse for you when you are poor than when you are rich. Why is that? Because when we were poorer back closer to World War II, a much larger share of our budgets was spent on things resembling “necessities” so that modest hit to our income would have a better chance of cutting into things we “needed.” Today, well, maybe we don’t take that family trip to Disney World. I read a Time Magazine story this summer profiling 30 people that were unemployed and it was startling to see how modest the impact really was on them in comparison to what happened to folks during the recessions after the Great Depression.
- With a world of 6.7 billion people, advanced communications, extensive trading networks and with relationships easy to forge all over the world, and with a seemingly easier time finding a spouse to also work, the options for someone who is currently unemployed are far greater than they were for people during any other post-war recession.
- Did you think life was OK during the winter and spring of 2006? I did. In fact, I would have purchased an insurance contract at that time that would protect me from having a living standard below that. Well, with the GDP (2005 dollars) at $12.99 trillion right now, that is roughly what GDP was like in Winter/Spring 2006. Go back into 2006 and ask folks if they found that existence to be intolerable? Because right now we are faced with the reality of living like we did back in 2006, and we are calling that a crisis.
- Consider that even if you believe this is intolerable, our current GDP understates how well off we are today as compared to 2006 (medicine has advanced for example).
- Consider that even if you believe this current downturn is intolerable, would it have NOT been even worse in 2001 to be forced to live like we did in 1998? Or in 1991 to be forced to live like we did in 1988 (the Dodgers won the World Series that year)? Or in 1958 to be forced to live like we did in 1956?