As the US economy plummets, many forecasters have dug deep into history books, looking for cues on what to expect. Often, they turned to the chapter of the 1930s.
“It is clear that people have made comparisons with the Great Depression,” said former Federal Reserve chairman Ben Bernanke.
“It is not a very good comparison,” he warned.
Bernanke, who is a student of the Great Depression, says the crisis was triggered by a financial crisis and made worse by bad political choices, including the decision of his Fed predecessors to raise interest rates.
Perhaps most importantly, the depression lasted a dozen years. Although Bernanke does not expect to rebound from the current crisis in the next six months, he also does not see him stretching indefinitely.
“If all goes well in a year or two, we should be in a much better position,” said Bernanke at a hearing at the Brookings Institution last month.
This optimistic view is supported by a different historical example from more than a decade before the Great Depression: the 1918 flu pandemic, after which the US economy rebounded relatively quickly.
“I think there is a lot to hope for,” said Carola Frydman, economic historian at the Kellogg School of Management.
The so-called “Spanish flu” pandemic has killed an estimated 50 million people worldwide, including hundreds of thousands in the United States. It also prompted some of the same “social distancing” measures that we have adopted against the coronavirus, with closed bars, schools and churches.
Yet the economic benefits have been “mostly modest and temporary,” wrote Frydman. And the United States experienced strong growth over the next decade.
She thinks it could happen this time too.
“As soon as people feel confident again to interact and be able to go about their business, I would not expect the economic benefits to last much longer,” Frydman told NPR.
Of course, no one knows how long it will take for people to feel comfortable shopping or traveling again – or how many businesses and families could fall in the meantime.
In 1918 government spending for the First World War helped offset some of the lost private demand, said Frydman. No one advocates another world war. But Fed President Jerome Powell said the federal government may have to spend more than the thousands of billions it has already spent to keep businesses and families afloat.
“Additional budget support could be expensive but worth it, if it avoids long-term damage and leaves us with a stronger recovery,” Powell said in an online forum sponsored by the Peterson. Institute for International Economics.
Other government policies – including protectionism – could hamper the recovery. President Trump has long argued for higher trade barriers. He gets less resistance, thanks to the pandemic.
“These stupid supply chains that are all over the world – we have a supply chain where they are made in all different parts of the world and a little bit of the world goes wrong and everything is messed up,” said Trump. in an interview with Fox Business last week. “I said we shouldn’t have supply chains. We should have them all in the United States. “
Here, the Great Depression offers a useful lesson. In the 1930s, the United States and other countries turned their backs on trade, adopting high tariffs to support their depressed economies. It backfired.
“And that, economists have come to believe, contributed to the duration of the Great Depression,” said Chad Bown of the Peterson Institute for International Economics. “It has made it very, very difficult for countries to develop their economies again and use trade to help them. “
Bown recognizes that protectionism is a natural reflex at a time like this, but he warns that it is counterproductive. The coronavirus doesn’t have to trigger another great depression, but with the wrong policy, it could.