Will we have a recession like in 1920–21?

The steep recession of 1920–1921, which some observers call a depression, was probably brought on by a number of factors.  WWI had just ended in November 1918, and in those days, federal government spending was reduced at the end of wars, if not all the way back to the pre-war level.  The economy needed to absorb a large number of returning troops into employment, and such readjustments can slow an economy.   A new institution, the Fed, made some monetary policy mistakes, tightening policy at the wrong time.  People who believe that government spending stimulates an economy would believe that the post-WWI reduction in spending also contributed to the 1920–1921 economic slowdown.

None of those factors is important to our situation today, but one factor in 1920-1921 is in play currently.  In 1919, there was the Spanish flu pandemic that, according to U.S. CDC estimates, killed 675,000 Americans.  In proportion to current U.S. population that would be a bit over 2.1 million deaths.  Unlike the current pandemic the Spanish flu of 1919–1920 was particularly deadly for young working aged adults, 20 to 40.  A disease that kills producing aged people reduces output even more making the economic slowdown worse.

The 1920–1921 recession was indeed a steep one.  Estimates of the drop in gross domestic product in those 18 months range from a 2.4% decline to a 6.9% plunge.  Since the government mostly got out of the way and in fact had downsized after WWI ended in November 2018, the economy grew back quickly.  The recovery was as rapid as the decline, and 1922 GDP was larger than in 1919.  That is why the 1920–1921 economic slowdown is called a V-shaped recession or depression.  The 1920–1921 economic contraction led into the roaring ’20s, which came to an end as more Fed mistakes combined with a dust bowl, etc., but that is a story for another day.

The response to the 1920–1921 recession by the US federal government was mostly non-intervention.  There was no relief bill.  There was no stimulus bill.  There was certainly nothing like the National Recovery Act of the Great Depression that made it illegal to cut prices or other New Deal program that slowed recovery.  There was no government intrusion in health insurance that increased business uncertainty and slowed the recovery from the recent Great Recession.

So where are we today compared to 1921?  While U.S. troops are potentially leaving Afghanistan, no large war has ended, nor will there be a large demobilization of troops.  The big drop in oil prices may help spur on some of the production lost this spring.  A large-scale bailout bill has been enacted and signed.  Like the National Industrial Recovery and the Affordable Care Act, the bailout bill has some recovery-slowing aspects, such as adding an extra $600 over current amounts to unemployment compensation until the end of July and making unemployment compensation eligibility broader than it is now to cover gig workers and other subcontractors until the end of the year.  Still, the $600 payment is currently scheduled to end in a relatively short time, but the expanded eligibility does last long enough to possibly slow the recovery a bit.  If the bailout bill is not too recovery-killing and whatever phase 4 is it is not festooned with too many recovery, killing aspects like Green New Deal clauses, then the U.S. economy has a chance to bounce back quickly from the illness-fueled slowdown, as happened in 1921–1922.