How Do Current Unemployment Rates Compare with The Great Depression?
“The only true wisdom is in knowing you know nothing.” — Socrates
We do not know how badly the pandemic will impact the economy long term. Predicting what will happen to the economy is not something us humans are known to be great at.
One thing we can do however, is to look at similar historical events and see how the world adapted. This is not our first pandemic.
But this one feels different…
Not only is it airborne and has already debilitated our social contact, it also came at a dangerous point in our economic cycle. See, the economic cycle are two simple words for a simple concept. Our economy cycles between periods of expansion (growth) and contraction (recessions). You know when you’re in an expansion because things are just happening much faster around you. New services with unique concepts keep popping up. All your friends on Instagram have the newest things. Although it seems like everyone is winning, debt is in the background silently climbing. Soon enough, you realize you’ve filled the balloon too tight and a recession happens.
In recessions, our output as a society decreases, consumer spending vanishes, and a lot of people lose their jobs. For that reason, the unemployment rate is an extremely important measure for us to understand “how bad it is”.
So, how bad is it?
As of April 23, 2020, the total number of unemployment claims in the United States reached a scary number: 32 million Americans are now unemployed. This is about 19% of the 164.5 million total “workable” U.S. population. The numbers are growing rapidly. These numbers do not reflect most gig workers, those working reduced hours, and those who have not been filed yet.
To give you an idea, the unemployment rate reached 10% during the great recession in 2009. In the great depression, the unemployment rate jumped from 3.5% to 24.9% in two years. What is happening right now, based strictly on unemployment numbers is likely worse than both. The magnitude of damage to unemployment rates in two months is more comparable to what happened during the great depression, and that took two years.
But this is temporary… or is it?
One of the main arguments is that the losses are temporary and most jobs can be reinstated once we beat the pandemic.
Sure, that’s a position that you can take but how true is it?
Let’s look at small businesses which make up 50% of the jobs in our economy. Many, if not most of those businesses do not carry more than 3–4 weeks worth of cash. If this lock-down lasts a few months, most of those businesses are going to close. In fact, we are already starting to see this happen all across the United States and Canada.
So if the companies that employed people before Coronavirus closed down, who is going to hire those people once we beat the pandemic?
But the government will save small businesses and jobs, right?
Well, they really want to. They have been trying.
Old banking and governmental infrastructure proved itself to be slow and outdated over the last few weeks. Even with loans being granted by the PPP program, money is being directed to the wrong businesses first. Not to mention, not enough money is being allocated. Only 3–5% of small business applications had been approved before the allotted $350 billion dollar benefit ran out of money last week. Although more money is being allotted now, this just shows you how grossly we underestimated this problem.
Even if we break the economy, how long will it take to recover?
The optimistic ones among us want to say soon-ish? but in reality, no one knows.
As much as we would like to believe it, the economy does not have an on/off switch. If we see an entire shift in the economy to the downside over the next few months, things will look different once we go back to work. You and your coworkers may go back to work only to realize your company only has 50% as many customers. Do you think they will need 100% of employees to produce 50% output?
Ten years after the great depression happened we still had an unemployment rate of 15%. These things take time. Sometimes, a long time.
Is social unrest possible?
Long term economic downturns are heavily correlated with social unrest. If you haven’t been living under a rock, then you’ve probably heard of the protests that are currently taking place in the United States.
A group of people think that it is important for us to be locked down until we flatten the curve significantly. Another group thinks that we need to open the economy now to prevent further damage.
Both groups are looking for the least amount of suffering.
Which path is the correct path, we don’t know. The one thing we do know is that there will be suffering either way.
