Economists normally define a recession as two consecutive calendar quarters of economic contraction. In other words, a region or country produces fewer goods in services in one quarter than in the previous quarter. If economic activity declines in one quarter, rebounds in the next, and then declines again that’s not a recession. So a “recession” is just an arbitrary thing that doesn’t describe all situations were economic activity delines.
If economic activity increases by 2% in one quarter, declines by 10% in the next quarter, and climbs again by 2% in the 3rd quarter you still have a net loss of economic activity. Although that’s an extreme example of how economic activity changes over time, it illustrates the principle of net loss in activity.
There have been several worldwide recessions since the early 1900s. The most devastating recession was the Great Depression of 1929 to 1938. Historians and economists have analyzed the Great Depression in thousands of books and essays.
Shopping malls were once the symbol of rapid American economic growth. Now malls stand abandoned as a sign of recession and economic cessation.
There was another recession that lasted from 1920 to 1921. That recession was triggered by the end of World War I and the 1918 Influenza pandemic which killed an estimated 50 million people. In the early 1930s economists estimated that the 1920 recession had been deeper than the Great Depression. It’s hard for people to fathom how that could be, given that the Great Depression lasted five times as long as the earlier one.
When the First World War ended the U.S. government cancelled all future orders for supplies and equipment for the war. Then millions of soldiers were discharged. The factories no longer needed as many workers, and the discharged soldiers were no longer being paid.
To fight the 1918 Influenza cities around the world ordered their citizens to stay home for 1-2 months. Much as people hated doing this it was the only way to slow the spread of the disease. The influenza re-emerged when cities lifted their quarantine orders too soon. Thus the loss of economic activity contributed to the recession.
And there were no unemployment or social security benefits at the time. Governments expected charitable organizations and private industry to take care of all the citizens’ needs. Somehow most people got through the recession.
Here are things you should know about how America has handled recessions in the past.
1. Most Recessions are Declared after the Fact
In other words, when economists decide a recession occurred, they normally do so only after seeing the data for 2 consecutive quarters where economic activity declined. The U.S.. government and other nations’ governments around the world release economic data every month.
These monthly reports are usually gross estimates and may be corrected several times before they are considered final. That means when economists look at quarterly data they must assume that the most recent monthly data may change.
Hence, it’s not unusual to see news stories about economists guessing wrongly about whether a recession or “recessionary forces” were just revealed in government data. They may not reach a final, firm conclusion about what happened in any 2 consecutive quarters for a year or longer.
Thus, when economists almost all agree immediately that the world has entered into a recession – as happened with the 2020 Covid-19 pandemic – all the arbitrary rules are thrown out the window. The declaration of a recession is easily arrived at because millions of people have been thrown out of work and hundreds of thousands of companies have shut down operations.
The only thing that future government reports will reveal is how bad the recession is.
2. Historians Rarely Agree on the Causes and Cures for Recessions
You can always find historians writing from a certain political bias. Those who discuss the Great Depression in detail often blame the Republican administrations of Calvin Coolidge and Herbert Hoover for creating or exasperating the conditions that led to the Great Depression.
But some historians defend the Republican administrations. In fact, Calvin Coolidge was President during the 1920-21 recession and his administration was widely credited with bringing a quick end to the recession. Among other actions his administration took, Coolidge lowered the income tax rate, thus freeing up consumer wages to spend more on goods and services.
Because of Coolidge’s success with tax cuts many Republicans have championed this strategy as a way to fuel economic growth. However, when Calvin Coolidge took office the average federal income tax rate was about 50%. He had a lot of room to cut taxes. Later Presidents had less wiggle room, and that is why various progressive tax structures were introduced.
Some conservative historians argue that the policies of the Frankin D. Roosevelt administration actually prolonged the Great Recession. They also claim that Herbert Hoover enacted or championed some of the policies that Roosevelt took credit for. These types of historical bickering are common throughout the decades. Every incoming administration inherits economic conditions and some policies set into motion by the previous administration.
Thus it is easy for historians to isolate specific events and policies, leaving out or minimizing the contribution of details that other historians view as significant.
3. Most Historians Agree that Andrew Jackson Created the Worst Recession
Andrew Jackson served as President of the United States from 1829 to 1837. His administration thus preceded FDR’s administration by 104 years.
Jackson was from the South, an ultraconservative American, and a fiscal hawk. He blamed many of the nation’s problems on the national debt, which the federal government had incurred by transferring all the states’ Revolutionary War debts to itself when the constitution was adopt in 1787.
Jackson set himself to the task of paying off the national debt. He did this by cutting back on government spending, thus eliminating many vital services, ending the federal government’s involvement in the banking industry, and selling off millions of acres of federal land west of the Mississippi river.
Jackson eliminated the national debt and triggered the Long Recession, which lasted 7 years. The Great Depression didn’t happen at all once. There were 3 years of economic growth in the middle 1930s, but when the Roosevelt administration cut spending and changed how the banking system was regulated in 1937 the country crashed back into deep recession.
Jackson’s legacy of fiscal responsibility coupled with economic failure was a lesson lost on few politicians. Much as conservatives like to talk about eliminating the federal debt, they have only one historical example to look to for inspiration and it’s not inspiring at all.
4. Government Interventions Don’t Always Work as Hoped
Conservative politicians complain that using the federal government to fix an economy is the wrong way to do things. They used the slow growth in real wages and the growing divide between the wealthiest families and the rest of Americans from 2010 to 2016 to argue that the Obama administration’s economic policies were not working.
Since the Trump administration took office nothing has really changed. Real wage growth has stagnated and the Great Divide has grown even larger under conservative fiscal policy. The proof is in the pudding, as they say. It doesn’t matter which political party pulls the strings. There is more to fixing an economy than mere economic policy.
Liberal historians and economists point to the real successes of the Roosevelt administration as proof that government intervention can work. Roosevelt’s New Deal put millions of Americans back to work. These government employees built roads, bridges, dams, schools, museums, national parks, and many other facilities.
All of those construction projects contributed to long-term economic growth and development, from the cheap production of electricity for homes, offices, and factories to spurring domestic tourism and travel.
Some conservative writers argue there was no long-term economic benefit from these programs but it’s impossible to ignore the immense contributions of the dam and highway projects to economic activity from the 1930s to the 2020s. The programs created national assets that have driven economic growth in thousands of communities.
By contrast, the interventions initiated by the George W. Bush administration and completed by the Barack Obama administration consisted mostly of cash infusions. Unemployed workers received benefits for up to 2 years but no new infrastructure was built. The money had at best only a short-term impact on the economy and by 2015 all the bailouts and benefits were done.
The best that can be said about the Bush-Obama interventions is that they saved millions of jobs but created very few.
5. Most People Do Better than Perceived During Recessions
Anyone who has lost their lifetime savings in a stock market crash has felt the pain of recession regardless of what the economists conclude has happened. Everyone lost money during the Great Recession of 2008. Even so, almost 90% of previously employed people continued to work throughout the recession.
By contrast almost 75% of previously employed people kept working throughout the Great Depression.
History focuses on the people who lose their jobs, homes, and even families during hard times. We should pay attention to these heart-breaking losses. Our empathy for each other is one of the greater qualities of humanity. But most people continue to work and meet most of their financial obligations during times of recession.
That is good reason for people to remain optimistic as long as they have a steady income. But it’s also a reason for people who have lost everything to hope they’ll eventually get back into the ranks of the employed.
As hard as it is to face eviction, children who have no food, and uncaring strangers who look down upon you, there are people who have lived through similar circumstances in previous decades. They got through the hard times and are still here.
Every family that suffers economic loss should be given support for as long as necessary. Most of them will receive what they need and they should feel no shame in accepting assistance.
Indeed, your tax dollars support the public assistance you need now. You paid for that help in advance and no one has the right to condemn you for reaching out in a time of need.
Any flood, hurricane, earthquake, or other natural disaster can destroy thousands of homes and businesses. Communities almost always rebuild and recover from the disasters. We do the same for recessions.
Conclusion
The lesson to learn from past recessions is that politicians will argue and point fingers at each other but over time they do make an effort to help as many people as possible. When the help comes, in whatever form, it won’t feel like enough. It takes time for people to recover from economic loss.
We don’t know how severe things will be or for how long. What we do know is that the world has faced similar situations in the past, even within living memory. Those events blazed trails in policy and personal finance that today’s generations can follow.
Be considerate of those less fortunate than you. And support the government programs that ensure people have enough food and a place to live. There is no compelling need for state and national governments to deny their citizens the help they need. If anything, history teaches us that government generosity pays off better in the long run than austerity.