Monday, June 22, 2009

More On The Economic Crisis (Eichengreen and O'Rourke on Industrial Output, Wolf on Eichengreen and O'Rourke, Austerity?)

Not precisely new anymore, but interesting: economic historians' Barry Eichengreen and Kevin H. O'Rourke update of their April 6 column regarding the present economic situation (apparently part of their work toward a full paper to run in Economic Policy). What they conclude is that "world industrial production continues to track closely the 1930s fall," with German, Britain and the U.S. and Canada tracking the fall of the '30s closely, and France, Italy and Japan actually doing worse. Additionally, despite the rebound of world stock market since March and the stabilization of world trade these were "still following paths far below the ones they followed in the Great Depression."

In short, the situation is not just as bad as it was in 1929-1930, but in some important ways worse. However, they are hopeful the worst can be averted, in part because of the more aggressive response in the form of monetary growth and stimulus.

Martin Wolf, commenting on their column in the Financial Times notes that "the combination of strong monetary growth with deep recession raises doubts about the monetarist explanation for the Great Depression," and accordingly he focuses on stimulus. He raises the concern, however, that governments might not be able to sustain the necessary levels of stimulus.

I think Wolf is right on both counts, and find myself turning to the U.S. economy's performance during the years of the New Deal. Following the sharp contraction of 1929-1932, the massive expansion of U.S. government spending restored the 1929 level of America's GDP by 1936, and by 1940 produced a figure 20 percent higher than that. The price, however, was the quadrupling of the once small federal debt in the space of those years. (Those curious about the numbers can check out my stats and calculations here.) And they still did not effect a long-term revival, however, the rapid global growth of the 1940s, 1950s, 1960s and early 1970s being driven by much more than that (World War II and the rebuilding that followed, the Cold War, "the welfare state"-things that might be said to have built stimulus into the system on a routinized, sustainable basis) in a situation that may not repeatable.

Indeed, we seem set to go in the opposite direction, given the talk of austerity in Europe and elsewhere, likely only to deepen the hole-as Nicolas Sarkozy himself has said, pointing out that "an austerity policy . . . has always failed in the past" in one of his rare moments of lucidity. (Whether the actions of the man who has so often struck onlookers as a "French Thatcher" will reflect this rather sound thinking remains to be seen.)

And we can expect the resulting troubles to extend far beyond the merely economic. As Greece demonstrated (those who don't remember the troubles there can refresh their memory here), even Western Europe is not immune to the kind of unrest we tend to associate with Latin America, and as this round-up from Reuters shows, the talk already has people in the streets. As the results of the EU elections earlier this month show, a radicalization of public opinion (so far, trending far-right) may already be underway.

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