Many economists believe that a recession is already underway. So do millions of Americans struggling with bills and job losses. While the ghosts of the 2008 financial crisis that sent inequality soaring to new heights in this country are still with us, it’s become abundantly clear that the economic disaster brought on by the Covid-19 pandemic has already left the initial shock of that crisis in the dust. While the world has certainly experienced its share of staggering jolts in the past, this cycle of events is likely to prove unparalleled.
The swiftness with which the coronavirus has stolen lives and crippled the economy has been both devastating and unprecedented in living memory. Whatever happens from this moment on, a new and defining chapter in the history of the world is being written right now and we are that history.
Tomorrow can be better than today. The only real way forward, in the end, is to meet the complex challenges of the Covid-19 moment with creative and long-lasting solutions.
Still, to get our bearings, it’s worth glancing back nearly a century, to a time when another economic crisis ravaged the country. While the U.S. has come a long way since the Great Depression, there are still lessons to be learned from it about where we might be heading today. Four key factors from that era -- unemployment, the economy, the market, and the Federal Reserve’s response -- can provide us with a roadmap for putting this era into historical context.
Unemployment Then and Now
In 1933, the height of the Great Depression, the U.S. unemployment rate reached a stunning 24.9%. In an eerie parallel with today, that double-digit increase had leapt from an era of remarkably low unemployment, 3.2% in the crash year of 1929. By mid-1931, mass layoffs were the new norm and despair was acute and widespread.
Fast forward to the present. In February, the unemployment rate stood at a similar 3.5%. Yet, by May 22nd, in the aftermath of city and state shutdowns and coronavirus shocks, including the collapse of the airline industry and professional sports, new filings for unemployment claims hit an estimated 40 million in 10 weeks, the most jobs lost in the shortest period in American history.
In April, the official unemployment rate reached 14.7%, the worst since the Great Depression, and that official figure doesn’t even account for the full scope of the disaster underway. It excludes workers the Bureau of Labor Statistics considers “marginally attached” to the workforce, meaning those not looking for a job because the prospects are so dim, or those who were only laboring part-time. If you factor them in, the unemployment rate already stands at a Great Depression-level 22.8%. Some industries, of course, felt more pain than others. Employment in the leisure and hospitality sector, for instance, fell in April by 7.7 million, or 47%.
Worse yet, low-wage workers have taken the hardest hit. According to a recent Federal Reserve survey, although one in five American workers have lost their jobs, among the lowest-earning Americans, 40% have done so. Among the highest-earning American workers (many of whom could work from home), the rate was “only” 9%.
Federal Reserve Bank of St. Louis President James Bullard has already predicted that the unemployment rate could reach 30% before the end of June. Other Fed economists have suggested that it could go even higher, exceeding Great Depression levels, a chilling thought. As the country, pushed by President Trump’s reelection desires, “reopens” relatively quickly (at whatever cost in further Covid-19 deaths), many workers will undoubtedly be brought back or rehired, but there’s no avoiding the obvious reality that any number of “temporary” layoffs will become permanent realities.
The Economy: A Century Apart Yet Much the Same
When Covid-19 first hit and self-isolation set in, the stock market plunged and many businesses were forced to shut down normal operations. Various economists and media commentators then began musing about a V-shaped economic rebound -- that is, a quick drop followed by a quick recovery.
As the fallout and uncertainty only expanded, however, it’s become increasingly evident that such a pattern was a fantasy. At this point, the best recovery outcome imaginable would be U-shaped in which the bottoming-out period lasted significantly longer before we started heading up again. But don’t count on that either. Consider the possibility of an elongated L, in which for the vast majority of Americans the economy just limps along for endless months, if not years (even if the stock market rallies).
In 1930, the American gross domestic product (GDP) shrank by 8.5% as the economy contracted in the wake of the stock market crash of 1929. It would shrink a further 6.4% in 1931 and another 12.9% in 1932. It wasn’t just the crash that did in that economy. The economic excesses of the 1920s and the borrowing that supported it were also responsible. Money funneled into the stock market in a previous age of inequality fueled grotesque financial speculation. Instead of financing productive investments, the markets provided only the illusion of stability and prosperity while enriching the few at the top. (Sound familiar in the age of Donald Trump?)
Yet the Republican president of that moment, Herbert Hoover, didn’t want to admit that the bottom had truly fallen out on his watch. On May Day 1930, for instance, he declared, “We have now passed the worst, and with continued unity of effort, we shall rapidly recover.” (Such a claim, too, should ring a few bells in 2020 America.) That statement became the marker for a nearly two-year Dow Jones average dive to a Depression-low of a mere 41 points on July 8, 1932. His inability to truly take in what was right in front of his eyes only lengthened the Great Depression.
Turning to the present, the CARES Act, signed into law by President Trump on March 27th, unleashed an estimated $2.2 trillion in government relief (significant parts of which were aimed at giant corporations and the wealthy). That, combined with the Federal Reserve’s backing of the economy, could add up to perhaps $6.2 trillion. What promptly transpired for Wall Street, which had previously seen the Dow plunge 34%, was one of the best months for the stock market in more than 33 years.
Beltway leaders had learned the pivotal lesson of the moment: even if the market’s not the economy, it always craves more. They stood ready to green-light Wall Street with yet another stimulus package skewed to help corporate interests, even as the majority of Americans on Main Street were simply left further behind.
Meanwhile, the gross domestic product had fallen 4.8% in the first quarter of 2020, before Covid-19 and the corresponding social shutdown really hit hard. In other words, GDP for the second quarter of this year is guaranteed to be truly awful. Estimates of its contraction range from 20% to 30%, either of which would eclipse the contractions of the Great Depression era.
The Stock Market: A Casino Shadowing an Economic Problem
The Roaring Twenties claimed that moniker not just thanks to the free-flowing bootlegged booze but rampant financial speculation -- and the lack of rules to protect citizens from nefarious Wall Street shenanigans. Having hit record highs in the summer of 1929, stock prices began their decline that September. By mid-October, the fall had gained steam. On October 24th, as panic set in on what would become known as “Black Thursday,” a then-record 12,894,650 shares were traded by investors and speculators seeking to lock in profits before the bottom fell out of the market.
By the next Monday -- “Black Monday” -- it had gone into free fall. And that would be followed by “Black Tuesday,” when stock prices plummeted yet further amid record trading volume. Billions of dollars were lost and thousands of investors wiped out. (Once upon a time, I even wrote a novel about that era called -- you guessed it -- Black Tuesday.)
By then, the Dow had dropped 24.8% in three days, though for several weeks thereafter stock prices would partially recover and bond prices rise on rumors that the Federal Reserve was going to purchase government securities. (Again, that should sound familiar in 2020.)
Bankers, then fortified by the Fed, did indeed inject yet more speculative money into the market in the post-crash moment, yet none of this could hide what were by then obvious systemic problems in the economy, which meant that prices soon headed south again. By July 1932, stocks were worth only 20% of their 1929 values and the country had plunged into the Great Depression. It would take years, substantive federal action, and ultimately an industrial mobilization for World War II to truly turn the situation around.
Fast forward to 2020. By March 23rd, when the coronavirus sell-off was underway, the Dow had lost about 35% of its value. Since then, equity markets, though down significantly from their February peaks, have ralliedand the Dow has risen about 30%.
As in 1929-1930, this could all prove to be an illusion, especially since the market’s April rally did not reflect the longer-term economic issues that lie ahead. It was in large part a response to something that didn’t exist during those crash years of the Great Depression: an extremely amped up Federal Reserve.
The Fed: A Revamped Mechanism from the Last Depression
In the wake of the Crash of 1929, Wall Street bankers pushed the Fed to keep interest rates low so they could borrow money more easily to make up for their losses. In May 1932, the Fed finally initiated a massive bond-buying program, agreeing to purchase $26 million of them from its member banks each week.
The idea was that those banks would sell their U.S. Treasury bonds to the Fed and use that money to pay off their debts. They could then lend out the remaining cash to a desperate Main Street. As it happened, however, they didn’t launch such a generous loan program (another Great Depression reality that might ring a bell today).
The Fed eventually lowered rates from to 2.5% in 1934 to 1.5% in September 1937 to inject more money into the system. That did not, however, inspire an outpouring of lending either, nor did rates make it down to zero.
In the wake of the Covid-19 shutdowns, the Fed has indeed cut rates to zero. As Fed Chairman Jerome Powell said on May 13th, “The scope and speed of this downturn are without modern precedent, significantly worse than any recession since World War II.” He added: “We have acted with unprecedented speed and force.” His counterpart, Treasury Secretary Steven Mnuchin, even termed what was going on “a war.”
Because of quantitative easing -- the Fed’s purchasing of securities, a term that didn’t exist in the Great Depression era -- its balance sheet now sits at nearly $7 trillion spent. That’s almost double the figure from just last summer and equivalent to one-third of the $21.5 trillion gross domestic product. The Fed has been injecting money into the markets and scarfing up securities backed by debt at -- to steal a term the president only recently applied toward developing a coronavirus vaccine -- “warp speed.”
With a genuine arsenal at its disposal to fight this “war,” the Fed's activities are jacked up on the financial equivalent of steroids. The nation’s central bank is prepared to provide money to the financial system in quantities and ways unimaginable in the Great Depression era.
Why History Matters
What's happening today is not, of course, a replica of the Great Depression. That nightmare was catalyzed by a prolonged market crash, thanks to banks lying about the real value of certain securities and too much debt in the system. Today’s crisis has been catalyzed by a viral pandemic spreading across the planet, by supply-and-demand shocks the world over, and by the collapse of a global economic system, as well as widespread lockdowns. Yet certain factors are common to both eras in which economic disaster was exacerbated by too much corporate debt, a Fed-stoked market rally, and grotesque levels of inequality.
A century ago, the Fed put just a financial toe in the water to support the markets on the assumption that this would be enough to sustain the economy. Today, it has jumped in big time and Chairman Powell has vowed that it “is not going to run out of ammunition.” The result could be a financial tug of war that lasts years.
The Fed can electronically print money, but it can’t print jobs. It can buy bonds, but it can’t cure a virus. It can continue to try to stimulate the market, but it can’t banish fear. As it happens, the economy needs much more than Fed-style monetary support. As even Powell noted on May 13th, “Additional fiscal support could be costly, but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery. This tradeoff is one for our elected representatives, who wield powers of taxation and spending.”
What’s needed, above all, is greater strategic action from Washington politicians who are more desperately divided and tribalized than ever in the Trump era. History tells us that political actions matter even more in times of crisis. During the Great Depression, the state of the country became so bad that, in 1932, Herbert Hoover lost the presidential vote to Democrat Franklin Delano Roosevelt in a landslide. However, it took until 1934, even with a president ready to do much to help Americans in trouble, for the country to slowly emerge from the malaise.
Though unemployment remained near 22% then, the national mood lifted (and people started to spend again) in part thanks to growing confidence in President Roosevelt’s New Deal programs. Those included the creation of the Tennessee Valley Authority -- the nation’s first regional supplier of public power -- numerous jobs programs, and the passage of the Social Security Act. Add to that the regulation of the banking system through the passage of the Glass-Steagall Act of 1933, which protected ordinary people’s bank deposits and note as well that such forward-looking, economy-stabilizing programs were bipartisan acts.
In the face of devastation today, despite multi-trillion-dollar federal stimulus packages, real political action has been lackluster at best. Relief efforts have been skewed toward helping banks and big corporations rather than the Main Street economy. No substantive plan has been offered for real national action to get people working again in ways that would reflect the new norms of the Covid-19 era.
Roosevelt saw such an opportunity to bolster confidence by taking on banking reform (with the surprising help of bankers), launching public worksinitiatives, and establishing infrastructure programs meant to build up the nation, the very opposite of the speculative activity that enflamed the Crash of 1929. That’s just the sort of thing that’s needed to sustain the economy in our truly bad times (whether the coronavirus becomes seasonal or not).
Floating trillions to Wall Street banks and big corporations might push their share prices up, but it won’t solve the issues that truly matter. Struggling small businesses, stranded high school and college graduates with nowhere to land, and workers in devastated businesses that won’t see their jobs return any time soon are now guaranteed one thing: they’ll be left behind by just about any version of an attempted bipartisan “recovery.” For them, a Newer Deal is desperately needed, one that provides a cushion for workers, new openings for the young, better healthcare prospects for all, and infrastructure projects that meet the challenges of a post-coronavirus world.
As President Roosevelt told Americans in the midst of the Great Depression: “There is a mysterious cycle in human events. To some generations much is given. Of other generations much is expected. This generation of Americans has a rendezvous with destiny.”
As long as Donald Trump is in the White House, focusing on optimizing his reelection prospects, he alone has a rendezvous with destiny. But it’s crucial, now more than ever, not to lose sight of the dream that tomorrow can be better than today. The only real way forward, in the end, is to meet the complex challenges of the Covid-19 moment with creative and long-lasting solutions.