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Embargoed until 3/9/09 at 1:30 p.m. ET Lessons from the Great Depression for Economic Recovery in 2009 Christina D. Romer Council of Economic Advisers To be presented at the Brookings Institution, Washington, D.C., March 9, 2009 In the last few months, I have found myself uttering the words “worst since the Great Depression” far too often: the worst twelve month job loss since the Great Depression; the worst financial crisis since the Great Depression; the worst rise in home foreclosures since the Great Depression. In my previous life, as an economic historian at Berkeley, one of the things I studied was the Great Depression. I thought it would be useful to reflect on that episode and what lessons it holds for policymakers today. In particular, what can we learn from the 1930s that will help us to end the worst recession since the Great Depression? To start, let me point out that though the current recession is unquestionably severe, it pales in comparison with what our parents and grandparents experienced in the 1930s. Last Friday’s employment report showed that unemployment in the United States has reached 8.1%—a terrible number that signifies a devastating tragedy for millions of American families. But, at its worst, unemployment in the 1930s reached nearly 25%. 1 And, that quarter of American workers had painfully few of the social safety nets that today help families maintain at least the essentials of life during unemployment. Likewise, following last month’s revision of the GDP statistics, we know that real GDP has declined almost 2% from its peak. But, between the peak in 1929 and the trough of the great Depression in 1933, real GDP fell over 25%. 2 I don’t give these comparisons to minimize the pain the United States economy is 1
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Embargoed until 3/9/09 at 1:30 p.m. ET experiencing today, but to provide some crucial perspective. Perhaps it is the historian and the daughter in me that finds it important to pay tribute to just what truly horrific conditions the previous generation of Americans endured and eventually triumphed over. And, it is the new policymaker in me that wants to be very clear that we are doing all that we can to make sure that the word “great” never applies to the current downturn. While what we are experiencing is less severe than the Great Depression, there are parallels that make it a useful point of comparison and a source for learning about policy responses today. Most obviously, like the Great Depression, today’s downturn had its fundamental cause in the decline in asset prices and the failure or near-failure of financial institutions. In 1929, the collapse and extreme volatility of stock prices led consumers and firms to simply stop spending. 3 In the recent episode, the collapse of housing prices and stock prices has reduced wealth and shaken confidence, and led to sharp rises in the saving rate as consumers have hunkered down in the face of greatly reduced and much more uncertain wealth.
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Christopher Reinemann
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