Great Depression Vs. Great Recession Essay

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The great depression and recession were the worst economic downturns in the history of the industrialized world. The causes and impacts of the same remain a major cause for economic studies and nations referencing the two to make economic policies for more robust financial systems. An economic recession is a short-term economic decline where industrial activity and trade experience a downturn, often indicated by a decline in the annual GDP in two successive quarters (Aiginger, 2010). A recession often lasts a few months, of which a lack of correction can lead to the possibility of depression. An economic depression is a severe recession that spans a national economy and abroad, causing more prolonged effects than a recession. The great depression of 1929 to 1939 and the great recession of 2007 to 2009 are the worst economic downturns that compare in causes, effects, and strategies employed to curb them, but also slightly differ in the same.

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Causes

While different reasons caused the great depression and the recession, the primary triggers of their occurrences were a market failure rooted in lax policies. The great depression followed a time of economic bloom in America called the “roaring twenties,” where the stock market made it easy for many people to invest in stocks through margin trading, attracting investors who traded with large loans from the bank (Eichengreen, 2017). This rapid investment pushed prices to unstable levels, and investors began panic trading. The stock market crashed in 1929 due to the massive liquidating of stocks on “Black Thursday” and “Black Tuesday,” later leading to the four annual bank runs from 1930 to 1933 (Aiginger, 2010). These events triggered the great depression that devastated America and the industrialized world. From 2007 to 2009, the great recession had the fall of the American housing market due to lax policies preceding it (Eichengreen, 2017). Lax mortgage acquisition policies drew a pool of sub-prime mortgages whose landslide default in paying the mortgages led to a chain reaction that touched the country’s economy on a national scale.

Although the two economic downturns had lax policies as crucial contributors, they differed in other contributing causes. The great depression had other international factors contributing to its happening, while the recession was solely caused by the sub-prime crisis that caused the fall in the housing market. The Smoot-Hawley Tariff caused a world trade collapse that worsened the great depression, alongside the stock market crash (Wang, 2022). The great recession had the subprime mortgage crisis as a chain reaction that caused an upheaval in the housing market, affecting the national and some international economies.

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Effects

The two economic downturns were similar in their aftermath, which affected the unemployment rate, production, and homelessness. The unemployment rate in both events skyrocketed, with the great depression having a 25% unemployment rate by 1993, when fifteen million Americans lost their jobs (Temin, 2016). This unemployment rate is the highest America has ever hit and the one with the most severe effects on people’s standard of living. The great recession had the unemployment rate increase to 10% by 2009 and reached 5% in 2011 (Temin, 2016). In both, the unemployment rate sharply increased, with the depression hitting unimaginable levels.

The production levels in both economic events plummeted to disturbing levels due to the decline in consumption after many people lost their jobs. During the great depression, production levels nosedived to 47% following the closure of many industries and factories between 1929 and 1933 (Eigner & Umlauft, 2015). The agricultural industry suffered the most from the previous decade’s overproduction, which did not match the demand levels. With the depression, Americans further cut their spending, rendering produce as waste. The recession’s production levels went down due to industries cutting down on production costs and producing other products.

The GDP, the most potent economic indicator, in both events plummeted, but at different rates. The GDP went down 29% by 1933 during the depression due to the fall of other indicators like employment, consumer spending, and production levels (Eigner & Umlauft, 2015). During the recession, the GDP shrunk by 4.3%, indicating a decline in economic activities during the event. The two events feature a noticeable drop in the GDP, sharing a similar effect.

The two events caused homelessness; however, their effect on the same differs. The 1930s depression led to a skyrocket in homeless people, rendering millions of Americans out of the rent-paying system. The loss of jobs trickled into people defaulting on their mortgage payments, many facing foreclosure or eviction. The great recession, on the other side, rendered few people homeless. Homelessness in America declined quickly after its rise due to evictions and foreclosures, unlike during the depression. While the great depression took 25 years to recover, the recession took less than two years.

Strategies

The two events share the strategies used to recover from the downturns differently. The recovery strategies have two main characteristics: intrusive government involvement in policy making and pumping of liquid to salvage Wall Street. In both recovery strategies, the government started by regulating the banks and other financial institutions, playing the role of a policy maker. During the great depression, numerous Acts were under Roosevelt’s New Deal recovery program. Congress passed the New Deal, pumping 41.1 million dollars to fund policies like work relief. Also, programs to buy defaulted mortgages kept families in their homes (Eigner & Umlauft, 2015). During the recession, the government also placed new policies inform of Acts like the Economic Stimulus Act and the American Recovery and Reinvestment Act. The Dodd-Frank Act is the great recession’s legacy, enacted to prevent excessive risk-taking that landed America in a mess in the first place (Buller & James, 2015). Also, the government pushed 700 billion dollars to Wall Street through the Troubled Asset Relief Program (Buller & James, 2015). In both economic events, the recovery fell under these two main strategies.

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Conclusion

The great depression and the great recession will remain the scariest economic downturns that nations are putting stringent policies to avoid. However, after the economic downturns, America and the industrialized world learned important lessons. It would be naivety to say that an economic downturn will never happen. However, countries are now confident about the measures they put in to avoid a devastating event like the great depression. They create financial shock absorbers in the form of policies and insurance in case of an unforeseen similar economic event.

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  1. Aiginger, K. (2010). The Great Recession vs. the Great Depression: Stylized facts on siblings that were given different foster parents. Economics4(1).
  2. Buller, J., & James, T. S. (2015). Integrating structural context into the assessment of political leadership: Philosophical realism, Gordon Brown and the Great Financial Crisis. Parliamentary Affairs68(1), 77-96.
  3. Eichengreen, B. (2017). The Great Depression and the Great Recession in a historical mirror. Confronting Policy Challenges of the Great Recession: Lessons for Macroeconomic Policy, 13-28.
  4. Eigner, P., & Umlauft, T. S. (2015). The great depression (s) of 1929-1933 and 2007-2009? Parallels, differences, and policy lessons. Parallels, Differences and Policy Lessons (July 1, 2015). Hungarian Academy of Science MTA-ELTE Crisis History Working Paper, (2).
  5. Temin, P. (2016). Great depression. In Banking Crises (pp. 144-153). Palgrave Macmillan, London.
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