It is in the area of global economics that the statement about America sneezing and the whole world catching a cold is most manifest. A comparison of the Great Depression (depression) and the Great Recession (recession) will, however, show that the impact of America to the global economy has reduced exponentially within the course of the 20 th century. Both GD and GR originated in the USA and had a global impact (Skousen, 2016). The impact of the depression was, however, more universal than that of the recession. Indeed countries such as China and India as well as many developing nations showed rises in GDP during the worst segments of the recession. Further, the causes of the great depression are still the subject of debate, since it happened in the advent of the global economy. The causes of the recession are, however, universally agreed upon since it happened at a time when economic stabilization had already been developed into a science. Finally, an extenuation of the depression was elongated and less effective than that of the recession. The difference between the Great Depression and Great Recession is evidence of the positive development of the global understanding of the economics as this research paper will clearly reveal.
Comparison of Events
A careful comparison of the depression and recession creates the question on why the depression was not a mere recession and why the recession did not end up being a disastrous depression. Both events have their advent in the USA. The depression was caused by a simple loss of confidence by investors, mainly in the fledgling American stock market (Richardson & Laqueur, 2014). After a massive bull run, the market seemed to have reached its zenith and preparing for an adjustment downward. Most investors lost confidence in it and decided to hold on to liquid cash instead of stock. This caused a stagnation, then a sudden crash called ‘Black Tuesday” (Watkins, 2017). A massive free-fall ensued after that leading to the absolute collapse of the market with massive repercussions to the general economy. The recession, on the other hand, was caused by what can only be defined as criminal acts by the American financial institutions. These created an artificial bull run that rose to a zenith by 2007. Being artificial, this was untenable and crushed in 2008 leading to the actual collapse of most major banks and direct repercussions to most mainstream industries. Yet, the former had an exponentially larger impact than the latter.
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The greatest economies in 1929 when the depression took place include the USA, UK, France, and Germany. Among the hardest hit was the USA who suffered a massive 607% increase in unemployment as opposed to Germany, the UK, and France who suffered a 230%, 214% and 129% respectively (Richardson & Laqueur, 2014). In industrial production, the USA and Germany were most hit with a reduction of over 40% while the UK and France had reductions slightly over 20%. Wholesale prices went down by approximately 30% in all four global powers with foreign trade being hit hardest in the USA at 70% down and least in France at 54% (Richardson & Laqueur, 2014). From the vocational perspective, the most affected individuals were farmers and factory workers. The farmers lacked a market for their goods and the factory workers lost their jobs as most manufacturing firms closed down. Towns established around industrial plants were, therefore, severely affected. Further, a severe drought in 1930 also has a devastating impact due to lack of food for the already impoverished masses.
Most of the effects of the recession were measured premised on the impact on trade and kindred activities. For example, the Baltic Dry Index reflected a drop of 50% in shipments within a week in October 2008 as no banking institution was capable of providing a letter of credit (Fernald, 2015). Another impact was the collapse of several major financial institutions in the USA which had a global reach, such as the Lehman Brothers. This led to the lack of financing, thus exponentially reduced trade. In the USA, the federal disability rolls got 5.4 new additions due to loss of confidence in getting meaningful employment. The national debt rose by over 50% by 2011 due to efforts to extenuate the situation. Between 2007 and 2009, stock markets fell from 1,565 to a nadir of 676. Unemployment also rose to a high of 10% by 2009 up from 5% in 2007 (Fernald, 2015).
Government Reactions
As indicated above, the cause of the recession was much worse than the cause of the depression, hence the impact of the recession should have been much worse. The main extenuating factor was the governmental reaction in 2008 as opposed to the same in 1929 and after at the advent of the depression. This is perhaps because, at the beginning of the depression, the world hoped that it was a passing cloud, which would pass with little damage done. The bitter lesson learned at the time was put to practice in 2008 to avoid a repeat of the same. Indeed, at the advent of the recession, the government of the day took a wait and see approach to the entire situation (Watkins, 2017). After all, it was a stock market problem ab initio and the government may have hoped that the private sector may resolve its own issues in line with the dictates of capitalism. Modern researchers believe that even the little intervention that was undertaken by governments only made the situation worse. For example, the move by President Hoover for compelling higher prices for workers only exacerbated the problem because it made recovery of a corporation more difficult (Watkins, 2017). Hoover’s Revenue Act of 1932 meant to create a balance in the economy through taxation was ill-timed and ill-advised and also made the situation worse. Introduction of the gold standard also led to a great deflation, also considered adverse to the economy.
The government intervention in 2008 after the recession has, however, been hailed for its efficacy and effectiveness of encouraging the recovery of the American and global economy. From a political perspective, the intervention has been the subject of criticism for seemingly rewarding those who had contributed to the advent of the recession. However, most if not all researchers agree that the recovery made from such a devastating meltdown was monumental hence the extenuation steps taken really worked (Fernald, 2015). The three main global economic centers of China, the USA, and the European Union all establish economic stimulus plans to stem the tide as well as commence recovery. The US Treasury made available US$50 billion for insuring investment as a way of rejuvenating economic confidence and spur activity. The Securities and Exchange Commission (SSC) provided several guidelines and regulations to eliminate the kind of trade that had caused the recession in the first place (Fernald, 2015). Finally, governments in leading economies provided trillions of dollars in bailouts to leading companies most affected by the recession. This bailout saved several global corporations, thus extenuating on the effect of the recession.
Effects on Business Decision-Making
Two things happened during the depression that affected the way entrepreneurs handled decision-making. For a start, the decision to intervene in the great depression was made very late in the day. Indeed, it was after over 20 months since the advent of the depression that the Hoover administration began to act. In the meantime, the USA had been dealt another blow in the form of a devastating drought. By the time of intervention, the depression had already degenerated into a crisis. The lesson learned from this was not to wait too late to intervene in a problem. Secondly, the interventions made by the government had a mostly adverse rather than positive impact on the situation. The gold standard led to a massive inflation and the introduced taxation had an adverse effect on the situation. This created the impression that albeit prompt intervention at the moment of crisis is critical, finding out the right intervention is also crucial as the activity does not necessarily result in achievement.
Many lessons on decision-making were also made after the recession. Among the most important lessons was kindred to business ethics. Adhering to ethics in decision-making was not just seen as a right for humanity but also right for commerce. The billions that the American financial institutions had made through ignoring ethics ended up in flames. It also caused the introduction of critical laws that crippled several aspects of the American financial industry. The bailing outdone by the New Obama administration was extremely unpopular when made but quite effective in its outcome. This contributed another decision-making stratagem in that the right decision does not have to be the popular decision.
Economic Models
This is a crucial area of similarity between the causation of the depression and recession. At the advent of the two epic economic events, America was seeking to exercise an extremely free market premised on extreme capitalism. At the end of both the depression and recession, the government had sought to, through laws establish a form of superintendence over economic activities. Ironically, an attempt to remove superintendence that had been placed after the depression is among the grounds blamed for the recession. The depression came a decade after the US had established itself as a superpower , during the Great War (Watkins, 2017). Among the presumed causes of the superpower status of the US was a free economy driven b y market dynamics. These dynamics got augmented by policies that came during the course on the 1920s. By late 1920s, the American economy was mainly free and market-driven , so was the financing industry (Watkins, 2017). Indeed, buying stocks with loaned funds seems one of the causes of the depression.
As an aftermath of the depression, several laws and institutions were put in place to establish an active control of economic dynamics more so through the raising and lowering of interest rates. Most of these controls exist to date under the superintendence of the Central Bank and the Federal Reserve Bank. In the 1990s, however, an increasing amount of independence was allowed to the American Financial industry, more so in the investment sector. By the advent of the 21 st century, investment banks were operating almost primarily on internal regulation. This led to the series of wrong decisions that culminated in the recession. However, as the general economy was still under control for inflation and deflation, the overall effect of the recession was mitigated upon. The aftermath of the recession was levels of oversight and control over the American Corporate sector in general and the financial sector in particular that had been unheard of in American history.
Forecasting
It is only after the fact that it was realized that the depression had been correctly forecasted by Ludwig von Mises and Jesse Livermore in many ways, except an indication on when it would take place. Indeed, based on the said forecast, Mises is claimed to have declined a senior job in one of the leading Austrian banks since as he claimed a clash was coming. It is also claimed that this forecast was made as early as 1924, five years before the advent of the depression. Mises and Livermore argued that it was impossible for central banks to allow for easy-credit, yet under an international gold standard without heralding disaster (Skousen, 2016). From a general perspective, however, the depression was never predicted and came as a surprise to many players in the economic industry. Even after its advent, it was considered as being only mild, until it wasn’t.
The real evidence that the Great Depression lesson was lost to the world of economics came through the Great Recession. From as early as 2001, many great economists gave warnings that a great recession was coming. Some of these predictors such as Warren Buffett still went ahead to lose billions of dollars in the recession. So persistent was Professor Nouriel Roubini about the oncoming recession that by 2006 he was dubbed as Dr. Doom (Ferrara et al, 2015). Unfortunately, the predictions were not an accurate forecast on what the recession would entail but only that the financing market would crash . This means that very few lessons had been learned about economic dimension assessment. This is critical, seeing that another recession is anticipated.
Economic Thinking in the Nature of Business Organization
Unlike the depression, the recession has been directly attributed to the acts and omissions of individuals in corporate leadership and the decisions they made for and on behalf of the society. In the depression, the concept of investment agency was not very developed and the decision to invest or not to invest was mainly made by individual investors. However, investment became a complex area and the need for corporate agency arose. As more and more trust was awarded to investment agents yet in the absence of any formal superintendence, the problem of principle-agency problem arose. This problem entailed the ability of investment agents taking absolute control of the investments made. The agents could speculate, buy and sell without any reference to the principles with abandon. This capability to handle bulky amounts of money unilaterally is one of the causes of the recession of 2008. To resolve this problem, the SSC established several laws and rules were passed in the aftermath of the recession. Unfortunately, these rules went a long way in limiting the maneuvering capabilities in investment agents.
References
Fernald, J. G. (2015). Productivity and Potential Output before, during, and after the Great Recession. NBER Macroeconomics Annual , 29 (1), 1-51
Ferrara, L., Marcellino, M., & Mogliani, M. (2015). Macroeconomic forecasting during the Great Recession: The return of non-linearity?. International Journal of Forecasting , 31 (3), 664-679
Richardson, H. W., & Laqueur, W. (2014). The great depression . New York: Weidenfeld and Nicolson
Skousen, M. (2016). The making of modern economics: The lives and ideas of the great thinkers . New York: Routledge
Watkins, D. (2017, February). The great depression and the role of government intervention. Retrieved September 25, 2017, from https://ari.aynrand.org/blog/2017/02/01/the-great-depression-and-the-role-of-government-intervention
