Academic journal article Canadian Social Science

Differences between the Early Stages of the Unemployment Rates: The Great Recession vs. the Great Depression

Academic journal article Canadian Social Science

Differences between the Early Stages of the Unemployment Rates: The Great Recession vs. the Great Depression

Article excerpt

Abstract

We test for differences between the Great Recession and the Great Depression in the US, using unemployment rates. The test used is ANOVA. The hypothesis advanced is that the early phases of the recession and depression are non-different. At first we reject the hypothesis. But by incorporating government involvement for the two periods, we obtain moderate arguments for the acceptance of the hypothesis. The paper starts out with background ideas of the two periods, then proceeds to the testing based on actual data, deviation of actual from normal or NAIRU rates, and adjusted data for government capital injection and subsidies.

Key words: Depression; Recession; ANOVA; Capital injection; Subsidies

INTRODUCTION

Testifying before the House Committee on Financial Services, HP-1279, on November 18, 2008, Treasury Secretary Henry M. Paulson, Jr. said "There is no playbook for responding to turmoil we have never faced." In the same vein, writing in the op-ed column of the New York Times, Jan 4, 2009, the Nobel Laureate Paul Krugman wrote "This looks an awful lot like the beginning of a second Great Depression."

In the Great Recession, "... long-term unemployment soared to levels not seen since the 1930s" and "the share of long-term unemployment (spells over 26 weeks) in total unemployment rose to over 45 percent, having never before topped 26 percent in postwar history" says Alan Blinder (2012, pp.136-137). From the statistical perspective, the analogy that the Nobel Laureate Christopher Sims's made with fire in the kitchen puts our task at hand into perspective. He wrote:

On a typical day, the temperature rises while dinner is cooking and then falls. Suppose one day a fire started while dinner was being prepared and a fire extinguisher was used to put the fire out. The time path of temperature in the kitchen would look relatively normal, but it would be incorrect to say nothing unusual had happened, because had the fire extinguisher not been used, the temperature in the kitchen would have developed very differently that evening. (Sims, in Stock and Watson, 2012, pp. 134-135)

Following Sims's perspective, we may liken the use of the fire extinguisher to the early efforts of policy makers to extinguish the current financial crisis. The purpose of this paper is to compare the attempts of Presidents Hoover and Roosevelt administrations to extinguish the liquidity crises of the early phase of the Great Depression with that of Presidents Bush and Obama administrations to extinguish the problems of the Great Recession.

The crisis of stagflation in the 1970s bequeathed to us three kinds of macroeconomic windows to look at the two periods. President Nixon was accommodating inflation when he increased the money supply to counteract OPEC supply shock in the early 1970's. His successor, President Ford, adopted a neutral policy when the second round of OPEC occurred in the mid-1970s. President Carter followed President Nixon's policy at the end of the 1970s, accommodating another round of OPEC shocks. It was the bold monetary policy of President Reagan in the early 1980s that induced a recession to extinguish the double digit inflation rate, and his bipartisan fiscal policy package of cutting both business and personal income tax rates to induce the economy growth afterwards, which dominated macroeconomic policies in subsequent crises. We shall have occasions to use the extinguishing, accommodating and neutral policy views to characterize the different policies between the recession and depression sample periods in this study.

1. SYNOPSIS OF THE GREAT DEPRESSION POLICIES

The October 29, 1929 stock market crash had occurred seven months after President Hebert Clark Hoover took office (Hoover, 1952, p.19). The president squarely sourced the cause of the depression to "finance-which has failed and produced by far the largest part of the demoralization of our systems of production and distribution" (ibid. …

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