Right now, it’s hard to find anyone whose grandparents are old enough to remember the suffering of the Great Depression or the flood of bailout programs the government launched in response. Memories of President Franklin Roosevelt’s “fireside chats,” his attempts to console an anxious populace and quell the “fake news” rumors of the time, are nearly all gone.
Nearly a century later, the US economy is virtually at a standstill and layoffs are skyrocketing in small businesses and large industries. A devastating global recession seems inevitable. Compounding the threat, a global oil price war has erupted. Some economists forecast an economic downturn to rival the depression.
“With markets destroying wealth so quickly, the two shocks we see globally – the coronavirus and the oil price war – could turn into a financial crisis,” said Carmen Reinhart, professor of economics and in finance at the Kennedy School of Harvard. Government. “We will see higher default rates and business bankruptcies. It could look like the 1930s.”
During the early years of the Depression, unemployment peaked at 25%. US economic output plunged nearly 30%. Thousands of banks have gone bankrupt. Millions of owners have been seized. Businesses failed.
No one knows how this recession might play out or how much government bailout programs might help. Triggered by an external event – a raging global pandemic – it is uniquely different from both the Depression and the financial crisis of 2008-09. And so its possible solutions are trickier.
This is not a conventional dislocation rooted in a financial meltdown, an overheated economy or a burst asset bubble. The twist this time is that the only sure way to beat the pandemic – with drastic containment measures like lockdowns, quarantines and business closures – is to deliberately cause a recession by shutting down business and social life. .
James Bullard, president of the Federal Reserve Bank of St. Louis, went so far as to warn that unemployment could reach 30% within months and economic output could decline by 50%. Other prospects are not so bleak. But they are all dark.
Some economists rejoice that the government has more powerful tools to stabilize the economy than it had in the 1930s, some of them created in response to the Depression. They include a social safety net in unemployment insurance, bank deposit guarantees and federally backed mortgages. And the 2008 financial crisis led to the creation of a series of programs aimed at strengthening the banking system and encouraging borrowing and spending.
President Donald Trump, after a hesitant start, is now backing a bold, multi-pronged federal response to the crisis. This is exactly the kind of sweeping government involvement in the economy that has been pushed this year by Democratic presidential hopefuls, long before the virus outbreak, but which Trump and other Republicans almost always resist.
After days of negotiations between congressional leaders and White House officials, Congress moved closer on Tuesday to agreeing on legislation that would provide, by far, the biggest economic bailout package in US history. United States. Worth around $2 trillion, the massive aid package is intended to support workers and businesses for at least 10 weeks. After that, additional help might be needed.
The final package is expected to include, among other things, one-time cash payments of $1,200 to individuals and $3,000 for a family of four; more generous unemployment benefits for workers sidelined by the virus; an extension of this coverage to site workers and independent contractors; and small business loans to help retain workers. An earlier package worth more than $100 billion passed by Congress last Wednesday and signed by Trump includes a guarantee of paid sick leave for some workers affected by the virus.
A major element of government intervention will continue to be the Federal Reserve, which injects trillions of dollars of liquidity into the financial system to support major lending programs. On Monday, the Fed made its boldest effort yet to protect the US economy by helping businesses and governments pay their bills. As credit markets threaten to close, the Fed’s intervention aims to ensure that households, businesses, banks and governments can get the loans they need at a time when their own incomes are drying up.
Overall, the emergent and flamboyant federal response is at least an echo of the economic stimulus that Roosevelt engineered in the depths of the Depression. Huge government aid programs put tens of millions of people to work constructing public buildings and roads, pursuing conservation projects, and developing the arts.
Rural poverty was solved, in part, by buying up marginally productive land from poor farmers and relocating them to collective farms. Fannie Mae was created to purchase home loans issued by the Federal Housing Administration. Once the crisis was over, Congress enacted sweeping financial and banking reforms and introduced unemployment insurance.
Unlike today, the workforce of the 1930s was primarily a male-dominated manual and agricultural labor force. This only changed later, when the wave of “Rosie the Riveter” women entered the factories to help mobilize America to fight World War II – a mobilization whose economic momentum eventually ended. the Depression.
The 21st century economy dominated by today’s service sector, populated more by retail, technology and financial services as well as entrepreneurs, freelancers and gig workers, is quite different. . A 2020 equivalent of the Works Progress Administration would be hard to imagine.
In the current environment, temporary measures such as cash payments and guaranteed paid sick leave are more likely than government-created jobs. Yet the options for government are so vast that experts say they could offer a significant advantage if deployed correctly.
“There are more levers now for government,” says Richard Grossman, who teaches economic and financial history at Wesleyan University. “There are a lot of things the government can do now that it wouldn’t even have thought of doing in the 1930s.”
One example was a rarely used lever from the 1950s that Trump invoked last week – the Defense Production Act. It empowers the government to mobilize private industry to expedite the production of critical supplies in the name of national security. (Critics complain that Trump has yet to fully implement the law by ordering companies to make protective masks and other equipment that hospitals say are dangerously low.)
Also last week, the president said he was willing to give the government broad reach in the private sector – taking equity stakes in companies that have been crippled by the virus, in return for providing loans. business emergency.
It would be reminiscent of the 2008-09 financial crisis, when the government staged a $700 billion bailout for banks and automakers – and, in exchange, acquired stakes in those companies. This allowed the government to profit years later when companies repaid taxpayer bailouts. The government took outright control of real estate lenders Fannie Mae and Freddie Mac.
“Right now the country is frozen,” said Anat Admati, a professor of finance and economics at Stanford University and a senior fellow at the Stanford Economic Policy Research Institute. “Policy makers have to decide what is really best for society.”
Admati notes that the New Deal and FDR’s unemployment insurance wove a new safety net after the ravages of the Depression. But the net has eroded over the past decade, she says, along with an increase in the number of gig and part-time workers and low-paid staff in health care and other industries. services. Many of these workers will not benefit much, if at all, from unemployment benefits and other programs designed for a different era.
As a result, income inequalities could worsen as a result of the crisis and the economic and social upheavals it causes.
“There are bailouts and grants coming in,” Admati said. “The key is how they are targeted.”
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