With the US economy in free fall, many forecasters are digging deep into history textbooks for guidance on what to expect. They often turn to the head for the 30s.
“Obviously people have made comparisons to the Great Depression,” said former Federal Reserve Chairman Ben Bernanke.
“This is not a very good comparison,” he warned.
Bernanke, a student of the Great Depression, said the crisis was caused by a financial meltdown and was exacerbated by poor policy choices, including his Fed’s predecessors’ decision to raise interest rates.
Perhaps most importantly, the Depression has dragged on for a decade. Although Bernanke does not expect to recover from the current crisis in the next six months, he also does not see it stretching indefinitely.
“If all goes well, in a year or two, we should be in a much better position,” Bernanke told an audience 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’s a lot to hope for,” said Carola Friedman, an economic historian at the Kelling School of Management.
The so-called Spanish flu pandemic has killed approximately 50 million people worldwide, including hundreds of thousands in the United States. This also triggered some of the same “social distancing” measures we took against the coronavirus, with closed bars, schools and churches.
Yet the economic downturn was “mostly modest and temporary,” Friedman wrote. And the United States enjoyed strong growth over the next decade.
She believes this could happen again.
“Once people feel confident about interacting and running their business again, I wouldn’t expect the economic downturn to last much longer,” Friedman told NPR.
Of course, no one is sure how long it will take people to feel comfortable shopping or traveling again – or how many businesses and families can move in the meantime.
In 1918, government spending on World War I helped offset some of the lost private demand, Friedman said. No one is advocating for another world war. Fed Chairman Jerome Powell said the federal government may have to spend more than the trillions already postponed to keep businesses and families on board.
“Additional fiscal support can be expensive, but it’s worth it if it helps avoid long-term damage and leaves us with a stronger recovery,” Powell said during an online forum sponsored by the Peterson Institute for International Economics.
Other government policies – including protectionism – may hamper recovery. President Trump has long advocated 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 small piece of the world breaks down and the whole thing goes wrong,” Trump said in an interview with Fox Business last week. “I said we shouldn’t have supply chains. We should all have them 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 by adopting steep tariffs in an attempt to support their depressed economies. It caused feedback.
“And that, economists believe, has contributed to how long the Great Depression has lasted,” said Chad Bone of the Peterson Institute for International Economics. “This has made it very, very difficult for countries to re-grow their economies and use trade to help them get there.”
Bone admits that protectionism is a natural reflex at a time like this, but warns that it is counterproductive. The coronavirus should not touch another Great Depression, but with the wrong policy it could.