Wednesday, November 12, 2008

How About We Wait Until We Have Double-Digit Jobless Rates Before Comparing Today to 1930s?

We still hear daily commentary about "the worst economy since the Great Depression." The chart above shows the monthly unemployment rate in the U.S. back to January of 1930 and eight different peaks in the jobless rate. Before we make alarming and fantastic comparisons of today's economic conditions to the 1930s, we should probably start by comparing today's economy to more recent economic contractions, and more recent peaks in the jobless rate.

The current October jobless rate of 6.5% will likely rise further, but according to the most recent October WSJ survey of 56 forecasters, the consensus forecast for the unemployment rate in December 2009 is 6.8%. So let's assume that the forecasters are too optimistic and the jobless rate goes to 7% by the end of next year, how bad would that be?

It still would not be as serious as the 7.8% peak in the jobless rate in 1992, the 10.8% peak in 1982-83, or the 9% peak in 1975. So before we make exaggerated comparisons to the 1930s when the unemployment rate peaked at 25.6%, maybe we should more realistically be making comparisons to the more recent double-digit jobless rates of the 1980s and the 7.8% rate in 1992. And we're not even close to those rates yet.

Proposal: Once we have the double-digit jobless rates of the 1980s, which seems very, very unlikely, then we can start making comparisons to the 1930s. Until then, let's use the 1970s, 1980s or the 1990s as the benchmark comparison decade for the "the worst economy since...."


At 11/12/2008 11:25 AM, Anonymous Anonymous said...

Very rational, but it doesn't serve the interests of the liberal media and their masters in the Democrat party.

During Republican administrations, economic problems need to be invented if they don't exist and exaggerated if they do. Maybe you should brush up on your Alinsky.

At 11/12/2008 11:37 AM, Anonymous Anonymous said...

The Bloomberg survey has upped the ante to 7.7% U-3 unemployment rate by year end 2009.

The U-6 alternative unemployment rate is at 11.8%.

I'm wondering whether the U-6 rate might be a more appropriate metric to compare today with the great depression?

At 11/12/2008 11:55 AM, Blogger Happilyeverafter said...

Our outstanding trade balance deficit was not considered a factor in the Great Depression in the 1930's. Yes,the volatility of money was lower then,collapsed in fact. But, those differences are no reason for optimism. The net effect on the economy (our lack of leverage to solve any problem long term) has created the new depression because of our overleveraged position. This cannot be addressed in the short term. Hence, the effects on our economy, dragging it down are overwhelming. The credit card bill for the overspending since the 1980's has finally come due. We are approaching our credit limits with our creditors and our options for quick fixes are all but gone. So, we don't need double digit unemployment to fell the same drag on the economy as was experienced in the 1930's.

At 11/12/2008 11:58 AM, Anonymous Anonymous said...

The U-6 alternative isn't a measure of unemployed people. It includes some people who are employed, even if they don't get as many hours as they want. That might be "underemployed", but it isn't unemployed.

Also if you use the U-6 alternative, than to be consistent you would have to use it for previous time periods as well. The unemployment rates in the recent decades, and also back in the great depression would all be higher. You can't reasonably compare the 11.6% U-6 rate for today, with the low double digit unemployment rates at the peak for the last few decades, it would probably be over 20% instead. And instead of 25% in the great depression it would be over 30%, maybe over 40%, and possibly even over 50%.

- Tim

At 11/12/2008 12:27 PM, Anonymous Anonymous said...

Tim, the reason I propose an alternative metric is that U-3 rate today is not necessarily directly comparable to the unemployment rate of the 1930s.

For some flavor, visit Marginal Revolution and Edge of the American West.

At 11/12/2008 1:11 PM, Anonymous Anonymous said...

If you look at U6 of the report it's already over 10%. In the 30's government figures were a little more in tune with reality and they had never dreamed up the deception of the birth death model. Nice try frat boy.

At 11/12/2008 4:02 PM, Blogger Marko said...

Don't worry, Saint Obama will make it all better. Once he is sworn in, unemployment will drop. The press is already starting to back off the alarmist descriptions of the present situation. Of course, the alarmist view will help with corporate welfare, oops sorry, union bailouts, oops; sorry again, Job Creation by Helping GM.

At 11/12/2008 4:25 PM, Anonymous Anonymous said...

We may soon see double-digit jobless rates.

Jobless rates will rise, how much not sure, but as consumers continue to cut back, layoffs will be higher by early 2009.

The housing credit bubble has nearly taken down banking and the credit card bubble is about to bust as millions are expected to default on CC debt. With no other available source of funding/credit many, many consumers will stop buying all but essentials. This will leave empty stores (Except Wal-Mart and groceries) with inevitable layoffs to grow.

Giving more bailouts to banks and auto companies will not help those people who have no way to borrow and spend.

This downward spiral was preventable, IMO, but leadership to sound the alarm early enough was not there.

Now, we can only hope for a rescue by far smarter people than me.

At 11/12/2008 9:10 PM, Anonymous Anonymous said...

The measure of unemployment isn't an apples to apples comparison because the manner in which unemployment is calculated has change.

At 11/12/2008 10:45 PM, Anonymous Anonymous said...


One think of interest might also be to chart some of the draconian measures during the Depression. Livestock was destroyed (not given to hungry and starving people, of which there were many.) Milk was literally dumped on the ground to provide price support for farmers. Also, gold was confiscated from people and it was illegal to hold any at all in private hands, except for a rare coin exception and even that I believe was limited. Indeed we are not nearly at those levels.

At 11/13/2008 12:47 AM, Anonymous Anonymous said...

2 words:

U6 & foodstamps

At 11/13/2008 1:22 AM, Anonymous Anonymous said...

How about some HONESTY and TRANSPARENCY in reporting unemployment numbers?

I'm unemployed but not counted in the official statistics, and I know others similarly situated.

At 11/13/2008 2:36 AM, Anonymous Anonymous said...

anonymous said:

During Republican administrations, economic problems need to be invented if they don't exist and exaggerated if they do. Maybe you should brush up on your Alinsky.

As an unskilled worker, I have generally become worse off during Republican administrations, and especially during Reagan's two terms.

I have been unable to identify ANY type of economy which is "good" for unskilled workers, and have personally found economic boom to be bad for unskilled workers. So it's easy for me to recognize - no need to invent - economic problems under Republican administrations.

Reagan and Clinton were both bad for unskilled workers, but under Reagan I faced five rent increases in five years, while under Clinton I had stable, below-market housing. (In my case, this reflected a combination of hard work and luck.)

The difference between a liberal and a conservative is: A liberal will tax you in order to warehouse the poor in subsidized housing in someone else's neighborhood...a conservative won't tax you and will just offer a NIMBY shrug when the poor can't find affordable housing.

At 11/13/2008 4:19 AM, Anonymous Anonymous said...

You seem to waving the flag of recovery a bit early friend. Unemployment peaked four years after the stock market crash of 1929 reaching 25.9% in 1933. In 1930, the year folowing the crash, unemployment was about where it is now.

Current economic data is running several parallels to 1929-1933. But in 1930 the US was a net creditor, major oil and goods exporter, and a manufacturing giant - none of which is true today.

At 11/13/2008 6:09 PM, Anonymous Anonymous said...

Looks like you'll get your wish for double digit jobless rates. All around the country I see stuff like this from the second city cop blog at

"Thursday, November 13, 2008
Disaster Looms
It isn't going to get much better for a bit:


Mayor Daley said Wednesday he’s been warned by a parade of corporate CEOs that a blizzard of job cuts are about to bury the souring Chicago economy.

“Huge layoffs are coming in November and December. And next year, there’s going to be [even more] huge layoffs. All the corporation CEOs have come in to tell me. That’s just the beginning. It’s not their end result,” Daley told reporters after a City Council meeting.

So Daley's "head tax" is going to take a massive hit. Anyone who has the City Budget and can look up what the "projected" take was supposed to be for this line item. Seems that projection is going to be more than a little over-estimated at this point."

At 11/13/2008 7:45 PM, Blogger the buggy professor said...

“1) Markets tend to return to the mean over time.” ---Bob Farrell's 10 Market Rules To Remember. Posted by Professor Mark Perry, click here

1)Another good post, Mark, in a series that you started two or three months ago on comparisons between the 1930's Great Depression and our current financial crisis and its fall-out on the real economy --- growth in GDP and in employment . . . whether positive or negative. And on the whole, so far anyway, your posts on this subject have been commendably on target.

In the meantime, please note that I’ve begun this commentary with quote from another one of your posts today (November 13, 2008) and will return to it in a few moments.


2) Back to the exaggerated worries about our economic troubles today and what happened in the Great Depression. Tersely put, those who are looking for a parallel between the large-scale economic collapse and misery in the 1930s and today’s recessionary start continue, despite lots of evidence, to ignore all the major changes that make our current economic prospects far less bleak . . . by a long shot. In particular,

* You've mentioned the enormous increase in American living standards since 1945 . . . including a massive increase in housing ownership (despite the recent real estate troubles . . . large, really, in certain regions only of the national economy, but with a macro-fallout on declining consumer spending.

* A far more service-oriented economy has emerged, whether high-tech or low-tech, and hence with far fewer dislocations in inventory control. The latter's ups and downs, related to overall business investment with multiplier effects (on the downside in a recession or entrance into it) are less likely to be disruptive these days.

* Even in manufacturing industry, the Internet and business-to-business transactions should help blunt some of the plunge in inventories and hence excess production on the part of supplier-firms that contributed to the price-deflation of the 1929-1933 period.


3) Note though. Several other differences lie in a combination of government programs --- derided frequently in free-market circles --- that make a free-fall in GDP and a huge surge in unemployment of the early 1930s sort unlikely.

*Start with far more knowledgeable monetary policymaking, which should prevent the kind of spiraling deflation that accompanied and aggravated the fall in GDP during the 1929-33 period (a decline in national product of 33%, a huge decline in consumer prices (25%), and a dangerous surge in unemployment from under 4.0% in 1929 to over 20% in 1933. [The fall-out in Central, South, and Eastern Europe was devastating politically. The Nazi party, for instance, rose from a small 4.0% or so of the German electorate in 1928 to well over 40% when it was brought to power by the established political and military elites in the semi-dicatorial stage at the end of the Weimar Republic in 1933. In Asia, Japan’s mass-murdering imperialism was launched in Manchuria in 1931 --- expanded later to China in 1936 --- in part because of growing right-wing extremism prompted by the economic downturn in that country.)

* Then consider FDIC insurance, now extended to (I believe) $250,000 . . . plus money market accounts.

* And remember our ongoing bank rescue, variants of which have been implemented in Europe and Japan and elsewhere . . . all intended to unclog credit loans, the lifeblood of contemporary economies.

* Think too of the effort now underway to directly help consumers and their credit-lines . . . crucial for retail business.

* Then there’s Social Security --- which does two things since its adoption in the New Deal era (1936): 1) sustain or boost the income and health of an increasingly older population; and 2) create unemployment insurance that can be, as in the past, extended in duration and increased in amount.

* Enter a positive fall-out on on aggregate demand in these latter two programs: tax revenue falls in regions of recession, and unemployment benefits flow in and may rise.

--- Thus, about 40% of the much more severe and prolonged recession in California in the early 1990s (caused by an abrupt decline in defense spending and a real estate collapse) was blunted this way.

* Then, too, there’s an acceptance of deficit spending as essential in a recessionary period to try blunting the severity of the downturn . . . in contrast to the structural deficits run at high levels by the Reagan, Bush Sr. and Bush Jr. eras.

* And, not least --- in marked contrast to the 1930s free-for-all in international trade and finance (which led to the Nazi economic hegemony over Central and Eastern Europe even before WWII, Japan’s invasion of Manchuria and China in that decade, and the British defection from free trade in favor of the Imperial-and-Commonwealth System, not to mention the disastrous Hoover-period Smoot-Hawley high tariff policy --- think of the noticeable ongoing efforts to coordinate various recovery programs on a global basis.


4) A key question prompts itself here, nudging toward the claim of Bob Fuller quoted at the start of this fast, top-skimming analysis. To wit: have these governmental programs --- leaving aside those improvised recently by the Federal Reserve and the US Treasury in the last two months --- helped stabilize or destabilize the US economy?

Well, ere's a pretty good factual answer: a list of all the recessions --- including severe ones that qualify for Depressions --- in US history. Note two things:

(i.) The severity and duration of recessions has noticeably declined since there has emerged a “mixed economy” in our country since 1945, as opposed to a free-market one (more or less), that prevailed in the 143 years between 1789 and the end of 1932.

(ii.) And the worst recessions were precipitated by systemic financial crises. (Let us hope that we can continue to use the past-tense for the “verb” here in the next year or two.)


5) All of which brings us directly back to Fuller’s “10 Market Rules to Remember”

Rule 1 states: “Markets tend to return to the mean over time.” Which is probably true, except, to put it bluntly, without any guide for us as to the duration of the “return” to trend-growth . . . the latter, of course, referring to potential GDP, which is determined by the inputs of labor growth, capital investment, and technological progress.

To judge by the historical record of US recessions in the 19th and early 20th centuries --- before a mixed economy with a positive government role in macroeconomic management emerged --- recessions could be deep and prolonged before a return to trend-growth would occur. Often, moreover, with major havoc and misery . . . not to mention the political enmities and aggressive political systems that the Great Depression helped bring about in Europe and Japan during the 1930s.


6) The main lesson here?

In clear, down-to-earth terms, it seems to be this: if there’s any lesson to be drawn from the 1930’s Great Depression period, it’s that a severe economic downturn --- caused initially by a systemic financial crisis of the sort we face today --- can set off devastating damage to the determinants of short- and mid-term GDP growth: to the price-level, to the job market, to GDP, to industrial production, to agriculture, and to residential and non-residential business investment. Fortunately, we will not have to rely on automatic or self-adjusting market mechanisms to stave off a large recession --- coupled with a system-wide financial meltdown ---to work their influence fully . . . which was the case, as the list of recessions historically shows, in US history between 1789 and 1933.

At 11/13/2008 10:31 PM, Blogger Adam said...

Buggy professor,

Man, I do appreciate the material you write, but I feel I should tell you that post was way, way too long.

Again, good material, but I'll guarantee you, no one, or at least almost no one read the entire thing. Of course, I could be wrong.

At 11/16/2008 11:50 PM, Anonymous Anonymous said...

Buggy Prof - I enjoyed your post. It is nice to come across a blogger who is knowledgeable and who takes the time to post a blog that is lengthy enough to provide evidentiary support for opinion and theory. Too often blogs entries are simply exclamatory statements of prejudice (see, eg.g "Very rational, but it doesn't serve the interests of the liberal media and their masters in the Democrat party" -- Opinion without reasoning is a waste of time. Thank you for taking the time and effort to provide your reasoning. I will try in a later post to respond in a like fashion, but for now, please accept my gratitude.


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