Which was worse: Great Depression or Great Recession?
I saw a fascinating claim last month that's been on my mind ever since. Specifically, that GDP growth during the decade of the Great Recession essentially tracked that of the Great Depression. It seemed extraordinary and so, in an age of fake news, I decided to look into this myself.
In the chart below, I've plotted the compounding GDP growth rates for the decades beginning in 1930 and 2007. I've also gone and added the compounding stock market growth rates (DOW) for the same decades, which I think adds some context and flavor to the story.
Some takeaways for me:
- If anything, it appears that our fiscal and monetary policy reactions in 2007 saved us from the volatility of the 1930's — we didn't suffer the worst of the Depression-decade decline in the real economy this time — but didn't really put us in a better place long-term. Essentially, it's been a smoother ride to the same general, crappy destination.
- Today's stock market doesn't, in any way, reflect underlying economic conditions. We've basically had a decade of Depression-level growth but the stock market is up, to use a popular phrase, bigly. Why? We could debate the many potential reasons but it seems a policy of creating money out of thin air and then giving it to bankers and the wealthy may be good for stocks. Who knew?
- Given the big gains in stocks, how much of our GDP growth is actually a (false) wealth effect? This might have been the policy objective, but creating the illusion of wealth — paper wealth — is not a substitute for actually creating things of value. At some point, the gap between illusion and reality must be reconciled.
- Where's the purge? Before the Great Depression we had the 1920's and a decade of free spending excess. The weak and fragile firms that were propped up by the easy money of the '20's didn't survive the purge of the Depression. Where was our purge? We had a decade (or more) of free spending excess, where bad ideas and poor management were given money and comfort, yet there was no proportionate purge to clean them out. Did we fix anything or just buy time before the purge that needs to happen? I think the latter, and the fact that we chose to put things off is going to make that inevitable purge must, much worse.
- If you are middle class and own stocks, you've probably been able to make ends meet, maybe even experience some modest gains over the past decade. You're part of the winners in this economy, albeit a very small winner compared to others (and you probably don't feel like a winner, even though you are, in comparison). If your family has not been able to save to the point where you could participate in the stock market — even through a 401(k) or other retirement vehicle — then you've basically experienced the past decade as a Depression-level event, albeit one with a (minor) social safety net. In other words, our economic policies have kept the pitchforks and torches at bay, for now. That seems like a pretty fragile construct.
At the end of the Depression decade, we began six years of austerity and belt tightening — and a huge burst of government spending — to fight a world war. We emerged from that war with an economy that was lean, young and hungry. And globally, we had no economic rivals; they were all on their knees. In a sense, we had the gold and therefore we made all the rules.
Today we end the Recession-decade in a much different place. We're the opposite of lean, young and hungry; we're obese, old and feeling defensive about protecting our gains from loss. We have credible economic rivals everywhere and our policies of tariffs and currency devaluation look more and more third-worldish by the day.
But, hey....check out that stock market!
Charles Marohn (known as “Chuck” to friends and colleagues) is the founder and president of Strong Towns and the bestselling author of “Escaping the Housing Trap: The Strong Towns Response to the Housing Crisis.” With decades of experience as a land use planner and civil engineer, Marohn is on a mission to help cities and towns become stronger and more prosperous. He spreads the Strong Towns message through in-person presentations, the Strong Towns Podcast, and his books and articles. In recognition of his efforts and impact, Planetizen named him one of the 15 Most Influential Urbanists of all time in 2017 and 2023.