Nobel Prize winner Robert J. Shiller on what might be the lessons from the Spanish flu and the Great Depression

See Why We Can’t Foresee the Pandemic’s Long-Term Effects: The Great Depression of the 1930s was an economic downturn that became a prolonged malaise. A Nobel laureate asks whether that pattern might be repeated. Excerpts:

"Big events like a pandemic have the potential to leave behind a trail of disruption. They can create social discord, reduce people’s willingness to spend and take risks, destroy business momentum and shake confidence in the value of investments."

"There was a recession in the United States from August 1918 to March 1919, according to the National Bureau of Economic Research, but not a deep one. Searching the newspapers of the time, one finds surprisingly little concern about the possible ill effects of the influenza on the economy, perhaps because the more-dominant narrative concerned the impact of World War I, which ended on November 11, 1918.

Yet a recent study by Robert Barro of Harvard University and his associates suggests that the epidemic along with the decline in production associated with the war led to a protracted decline in G.D.P. growth in affected countries from 1918 through 1920. In short, that period provides little comfort."

"Much as people today have experienced long lines and empty shelves at supermarkets, in the Great Depression people fretted about long lines and empty cash registers at banks.

There are other troubling parallels: Fear of long-term unemployment and a never-ending depression was rampant back then, leading people to restrain spending, thus prolonging the downturn. This may not happen now, but it is a danger.

Much as now, in the Great Depression people were very focused on maintaining a “fair wage” in the face of economic distress. But this led to nationwide resistance to nominal wage cuts for anyone, even when retail prices were falling rapidly.

This appears to have had the unintended result of inducing employers, who could not afford to keep everyone working at their former wages, to lay off many people. The economists Harold L. Cole of the University of Pennsylvania and Lee E. Ohanian, of U.C.L.A., have shown that this may explain some of the extreme duration of Great Depression unemployment.

Another development back then may have resonance today. Faced with widespread poverty, even people with money voluntarily embraced austerity, saying they no longer needed to “keep up with the Joneses.” Their reduction in consumption helps to explain the severity and duration of the Depression. If contemporary culture shifts in a similar way, it could limit the economy’s ability to bounce back."