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Comparing the Great Recession and the Great Depression

A 1930s-era bread line in New York City. (Library of Congress photo) A 1930s-era bread line in New York City. (Library of Congress photo)

A 1930s-era bread line in New York City. (Library of Congress photo)

Louis Jacobson
By Louis Jacobson September 19, 2013

When President Barack Obama was inaugurated in January 2009, he inherited a horrendous economy. But was the economy back then really worse than it was during the Great Depression?

In a recent interview, Obama indicated that it was.

On ABC’s This Week, host George Stephanopoulos noted that it was five years after the failure of the investment bank Lehman Brothers, a pivotal moment in the financial collapse of 2008 that led to the most recent recession.

After five years, Stephanopoulos said, "two-thirds of the country still thinks we're going in the wrong direction, thinks the economy is no more secure. What do you say to those Americans who think Wall Street is winning but they're not?"

Obama responded, "Well, let's think about where we were five years ago. The economy was on the verge of a great depression. In some ways, actually, the economic data and the collapse of the economy was worse than what happened in the 1930s. And we came in, stabilized the situation."

Obama said the economy was worse "in some ways" -- a standard that strikes us as especially vague, and thus difficult to fact-check.

The White House spurned three attempts by PolitiFact to supply data backing up Obama’s claim. But we pored over old economic data and interviewed economists and historians familiar with both periods. We found some evidence both for and against the idea that the economy Obama inherited was worse than the one during the Great Depression.

Here, we’ll lay out the evidence and let readers draw their own conclusions.

Where Obama has a point

For some measurements, and for a limited period of time, the freefall was bigger and faster during the Great Recession than it was during the Great Depression.

For instance, the Dow Jones Industrial Average fell from its pre-recession peak of 14,164 in October 2007 to a low of 6,547 in March 2009. That’s a 54 percent decline in just under a year and a half.

By comparison, in the 1920s, the decline in stock prices during the first year and a half was more modest -- about 45 percent below the pre-crash peak.

This pattern was mirrored in worldwide share prices -- the initial drop in 2008-2009 was steeper than the one following the crash of 1929, according to calculations by economists Barry Eichengreen and Kevin H. O’Rourke.

Eichengreen and O’Rourke also found the decline in world trade to be steeper, initially, during the 2008-2009 recession.

One of the reasons for the quicker decline in 2008-2009 stems from greater ties between the world’s economies and the refinement of financial technology. Both developments can spread economic problems more quickly and widely.

"The overall banking situation was much worse in 1933 than it was in 2009, but it is probably true that modern financial instrumentation and technology meant that the crisis spread further and faster than it did in the late 1920s and early 1930s," said Eric Rauchway, a historian at the University of California-Davis and author of The Great Depression and the New Deal: A Very Short Introduction.

After Lehman Brothers fell, "the transmission of that collapse over to the ‘real economy’ -- soaring layoff rates, reduced hiring, and losses of investor and consumer confidence -- was astonishingly fast," added Gary Burtless, an economist with the Brookings Institution.

Where Obama’s wrong

However, this doesn’t tell the whole story. As it turns out, the statistics that fell faster after mid 2009 also recovered more quickly than they did during the Great Depression.

It took much longer for the Dow Jones to hit bottom in the 1920s -- three and a half years -- but by the time, the total fall was greater. By mid 1932, the Dow had lost 89 percent of its pre-crash value -- a far bigger loss, percentage-wise, than the 54 percent loss after the Great Recession.

Similarly, in mid 2009, both world equity prices and world trade had bottomed out and started heading consistently upward. That’s only about 10 to 15 months. During the Great Depression, both statistics hit bottom after about 35 months, a period two to three times longer.

And a number of statistics fared worse during the Great Depression no matter what time frame you look at.

Take unemployment. While the method used to calculate the unemployment rate has changed since the 1920s, it’s still possible to compare the rise in unemployment in each period on its own terms.

In 1929, the annual unemployment rate was 3.2 percent. By 1933, it had peaked at 24.9 percent -- a rise of 21.7 percentage points, or an average of 6.8 percentage points per year.

By contrast, unemployment rose from a low in May 2007 of 4.4 percent to a high of 10.0 percent in October 2009. That’s a rise of 5.6 percentage points, or 2.2 percentage points per year. That’s just one-third of the average annual increase during the Great Depression.

It’s a similar story for gross domestic product. Adjusting for inflation and population, GDP barely suffered a downward blip during the Great Recession, but during the Great Depression, GDP took a whopping eight years to return to its 1929 level.

And world industrial production fell equally fast in both periods, but it hit bottom and began rising much more quickly in 2009.

Why did the Great Recession end up being so much milder? Part of it, economists say, has to do with the stabilizing effects of the Troubled Asset Relief Program (which was initially signed by President George W. Bush), the actions of the Federal Reserve Board under chairman Ben Bernanke, and the policies pursued by foreign governments and central banks. But many say Obama himself also deserves significant credit.

A big reason for the faster turnaround starting in 2009 is the impact of the economic stimulus bill, "which averted a continuing freefall … even though it was not big enough to bring about a robust recovery," said Robert S. McElvaine, a Millsaps College historian and the author of The Great Depression: America 1929-1941.

Even Dan Mitchell, a senior fellow at the libertarian Cato Institute, gives Obama some credit, though a bit backhandedly. Under Obama, he said, "government policy has been misguided, but not nearly as bad as it was during the 1930s. That's why it's silly for Obama to say, in any way, that today's economy is worse."

Even though we’re not giving Obama’s claim a rating due to the way it was worded, we’ll note that the economists we checked with generally weren’t persuaded by his claim. His statement, Rauchway said, is "certainly not true in any important way."

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Our Sources

Barack Obama, interview on ABC’s This Week with George Stephanopoulos, Sept. 15, 2013

Barry Eichengreen and Kevin H. O’Rourke, "A tale of two depressions redux," March 6, 2012

Robert S. McElvaine, "Obama vs. Hoover" (New York Times blog post), Oct. 31, 2012, "Dow Jones Industrial Average (1920 - 1940 Daily)," accessed Sept. 18, 2013, "Dow Jones Industrial Average (2000 - Present Daily)," accessed Sept. 18, 2013

U.S. Census Bureau, "Historical Statistics of the United States, Colonial Times to 1970, Part 1," 1975

Bureau of Labor Statistics, "Labor Force Statistics from the Current Population Survey," accessed Sept. 18, 2013

Email interview with Tara Sinclair, economist at George Washington University, Sept. 17, 2013

Email interview with Gary Burtless, senior fellow at the Brookings Institution, Sept. 17, 2013

Email interview with Eric Rauchway, historian at the University of California-Davis, Sept. 17, 2013

Email interview with Dan Mitchell, senior fellow at the Cato Institute, Sept. 17, 2013

Email interview with Robert S. McElvaine, historian at Millsaps College, Sept. 17, 2013

Email interview with Dean Baker, co-director of the Center for Economic and Policy Research, Sept. 17, 2013

Email interview with Douglas Irwin, economist at Dartmouth College, Sept. 17, 2013

Email interview with Edward C. Prescott, economist at Arizona State University, Sept. 17, 2013

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