The dire health and economic consequences of COVID-19 are undeniable, especially in the United States, the country hardest hit by the virus. There are many who look at past crises and wonder if the United States will return to exercise its economic leadership, at a time when China threatens to gain greater prominence.
On many occasions, it is inevitable to go back to times past and make comparisons between the different recessions that have occurred in the world over the course of history. Experience, and the way in which major economic crises were approached, provide important lessons for, in the future, preventing such situations from recurring, or if they do, addressing them with the precedents applied previously. However, the causes, as well as the ways to overcome recessions, are very different from each other.
In a crisis like the current one, the rapid expansion of COVID-19 has been an unexpected and uncontrollable event, while, in contrast, in the Great Depression, the outbreak took place in the New York Stock Exchange, with speculation, overproduction and excess credit as causes.
In the same way, we find differences between this crisis and the Great Recession of 2008. In this sense, in 2008, the root of the problem was found in a large number of unpaid mortgages, which had been integrated into debt packages, which were sold between banks and investors.
For all this, from Economipedia we propose to compare the current economic crisis caused by COVID-19, with two other major recessions: the crash of 29 and the preceding crisis of 2008.
The crack of 29
One of the worst crises that the United States, and the capitalist system, has gone through, was the Great Depression, whose origin dates back to 1929. The so-called crash of 29 began with Black Friday on Wall Street, while the value of shares fell by chopped. Investors saw the value of their shares disappear completely, while the impact on the economy was catastrophic. The United States was plunged into misery, with much of the population losing their jobs and numerous factories facing closure.
The acute recession that plagued the United States transcended beyond North American territory and spread to Europe. States fell back on themselves, Americans repatriated investments, and trade suffered; as European exports to the United States sank. Tensions rocked the London Stock Exchange, in addition to bank failures that hit countries like Austria and Germany.
The different responses by countries to the Great Depression were very different from each other. In totalitarian regimes, such as Germany in the 1930s, they opted for autarky. Meanwhile, in other economies such as the United States, the performance was based on Keynesian theses. In this sense, they opted for state intervention in the economy to stimulate aggregate demand.
The US economic response focused primarily on what was happening within its borders. To lift the country out of depression, President Roosevelt opted for the so-called New Deal. Meanwhile, the dollar was devalued, while the accumulation and sale of gold abroad was prohibited.
As measures to stimulate the economy, agricultural exports were subsidized and agricultural prices were re-launched. Incidentally, labor improvements were also implemented in terms of wages and working hours, to which had to be added an extensive public works program.
However, the great display shown by the New Deal, although it boosted the North American economy, did not have immediate or sufficient effects. The decisive boost to the US economy would come from World War II, when the United States mobilized all its industrial power. These circumstances – already after the Great Depression – allowed the United States to achieve world leadership at the political and economic level.
Therefore, if we analyze this crisis, it can be said that there was no multilateral way out of the Great Depression, nor clear leadership in the greatest crisis that the capitalist system has suffered.
If in 1929, the consequences of the crash of 29 moved from the United States to Europe, in a globalized world –like the one we find ourselves in today–, the ravages of the crisis could be even greater. However, in the same way and unlike what happened in 1929, both the United States and Europe have acted quickly, launching large economic stimulus programs that are expected to take effect sooner rather than later.
The Great Recession of 2008
As we discussed previously, the origin of the Great Recession of 2008 was subprime mortgages, integrated into debt packages, which were later sold at an exorbitant price, if we take into account that these mortgages were linked to debtors who did not meet their obligations. All this, immersed the planet in a speculative bubble, caused the collapse of the financial system throughout the world.
Faced with such a dire situation for the financial sector, governments had to come to the rescue of numerous banks. A decision that was very controversial for citizens, since many citizens saw how the banks were saved, while they were going through harsh situations of unemployment and deterioration in their income levels, in cases in which said unemployment was not gave.
However, financial support to the banking sector prevented the bankruptcy of the financial system and an even greater catastrophe. All of this, in addition to greater supervision by the various agencies, has contributed to making the financial system more efficient.
Companies and individuals who had not been involved in the real estate business saw their savings melt away. As in any crisis situation, it was necessary to launch a stimulus package in 2008 and 2009. In terms of monetary policy, the Federal Reserve opted to leave interest rates very close to zero.
A very different situation from the one we live in today. Well, on this occasion, neither the United States nor the world faces a risk of bankruptcy of the financial system. While it is true that, in the recession caused by COVID-19, as in many previous crises, President Trump decided to implement stimulus programs for the national economy.
The measures applied for the Great Recession of 2008 are not valid for the crisis caused by the pandemic. If the subprime crisis progressively caused severe damage to the US and global economy, the pandemic has caused an immediate destructive economic effect.
Is America’s world leadership in question?
Clearly, both the United States and the world can learn lessons from past recessions. But with the United States more focused on its national interests, doubts seem to remain about its leading role in the world economy.
Prior to the blazing spread of COVID-19, the United States was mired in a trade war with the Asian dragon, China. Both powers were immersed in an exchange of blows, establishing barriers to trade and weakening each other, fighting for economic hegemony.
The increase in protectionism went beyond the struggle with China, and reached a traditional ally of the United States such as the European Union. Many European products were taxed with tariffs from the United States. World trade was suffering and the global economy was beginning to show signs of deterioration. And, as our colleague and analyst Francisco Coll has pointed out, when trade wars are settled, in his analysis there are only losers.
In this context, immediately before the pandemic, there were already those who wondered if China would take the baton from the United States as the great world economic power. Of course, Trump, with his “America first”, has prioritized the national interests of the United States over the traditional political and economic leadership that North America has exercised in recent history.
There is no doubt that the liberal economic order has suffered from so many commercial and economic tensions. However, with the imminent arrival of Biden to the White House, there are those who believe that the United States can return to its traditional role.
However, in this new scenario, anecdotal situations such as the fact that the Chinese economy has exceeded, in GDP level, the combined GDP of the euro area. Or trade agreements that, like the RCEP, seek to seize the bulk of merchandise trade worldwide, put a country in trouble that, like the United States, could occupy another chair in that fictitious hemicycle from which all matters are resolved. related to geopolitics. A hemicycle in which the United States has historically occupied a relevant place, now being able to rival that role with the Asian giant.
Thus, everything seems to indicate that the idea of the next US Administration is committed to a boost to national companies, without the need to act on the defensive, by implementing tariff barriers. In any case, as soon as Biden takes office, he will have to decide what to do about the tariffs.
Ultimately, the question is this: Will we see a United States committed to multilateralism? Will the United States continue to retreat into the national economy or will the Americans regain their leadership in the global economy? Well, considering the current situation and the management of the pandemic by the world’s leading economic power, doubts are on the table.