Comparisons of the current painful recession to the Great Depression of the 1930s come easily, but they don't hold up. The Depression of the 1930s was its own beast. This recession is unlikely to bring the major changes to American life that the 1930s did, any more than it is likely to produce the depths of despair of the '30s. One effect that cannot be duplicated was the way the Great Depression led to a restructuring of state government throughout the United States.
The Depression 80 years ago fundamentally changed the relationship among federal, state and local governments. It also shifted the way public money is raised and spent to the point that the United States in 2009 is hardly recognizable as the same nation as before the Depression.
After a period of unprecedented prosperity in the late 1920s, the stock market crash of 1929-1930 signaled the beginning of an economic freefall. U.S. gross domestic product fell by 46 percent from 1929 to its low point in 1933. Prices fell sharply to about 72 percent of their 1929 level. Unemployment soared from less than 4 percent in 1929 to 25 percent in 1933 and remained in double-digits until 1941, when defense spending began absorbing the unemployed.
For the first time in American history, the federal government exerted itself to stimulate the economy, beginning in Herbert Hoover's administration and continuing with Franklin D. Roosevelt, who took office in 1933. Roosevelt's sometimes disjointed efforts to address the national agricultural crisis, stimulate economic growth, and relieve the miseries of the destitute are well-known for changing the social and economic landscape of the United States.
What is less well-known is the effect Hoover's and Roosevelt's policies had on how state governments operate and the relationship between states and the federal government. For the first time, substantial federal grants came to the states. The grants stimulated structural changes in state governments and the relationships between state and local governments. The 1930s saw state governments broaden their responsibilities from highway administration and passive government administration to areas of domestic policy that previously had been the realm of the private sector.
Measured by economic activity, the federal government and the state governments were almost unimaginably small before the Great Depression. Federal spending was only 1.6 percent of gross domestic product in 1929, as compared to more than 20 percent in 2006. State and local government spending was much larger than federal spending before the Depression. In 1927, local governments spent about $6.4 billion; states spent $2 billion, and the federal government spent $2.8 billion.
It's difficult to make clear comparisons between pre-Depression and modern government finance because today's numbers are astronomical, and federal taxes fund so much of state and local spending. In this decade, state and local revenues combined are about half what the federal government spends, as opposed to state-local amounts four times as large as federal revenues before the Depression.
State and local revenues had a highly vulnerable tax base before the Great Depression. In 1927, two-thirds of all state and local revenue came from property taxes. For states, the only comparable revenue source was the motor fuel tax. Local governments had no other...