27 November 2020
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It's hard being a bear (part three): good economic history

It's hard being a bear (part three): good economic history

Steve Keen
10 September 2009

“Green shoots” are appearing everywhere—just read the newspapers, and you can be assured that we’ve turned the corner. Bar the latest rise in US unemployment—up 0.3 per cent to 9.7 per cent, after falling 0.1 per cent the previous month—there’s nothing but good news as far as the eye can see.

Unless, that is, you take a look at a wider range of data, as economic historians Barry Eichengreen and Kevin O’Rourke have been doing in their series A Tale of Two Depressions.

They have now published three installments of this study, which collates data from a number of countries and compares it to the same information in the 1930s—taking June 1929 as the starting point for the Great Depression, and April 2008 as the same for our current “Great Recession”.

Their latest installment was published on 1 September, and it does indeed show some signs of a turnaround—“green shoots” perhaps. But their comparison of today with the 1930s still reaches the conclusion that “today’s crisis remains dramatic by the standards of the Great Depression”.

The key improvement they see in the current data over that for the 1930s is an uptick in world industrial production, which has risen by about two per cent (compared to peak output in April 2008) in the last four months from its low of 88 per cent. This now puts it substantially above the comparable period in the 1930s, when by this stage industrial output had fallen to 81 per cent of its peak.

However, they express the concern that this turnaround reflects the gigantic government stimuli that have been applied in the last year, and the continuance of a positive trend now relies upon the private sector taking over:

“The question now is whether final demand for this increased production will materialise or whether consumer spending, especially in the US, will remain weak, causing the increase in production to go into inventories, leading firms to cut back subsequently, and resulting in a double dip recession.”

There are signs of good news elsewhere too—notably in stock markets and world trade. However, these aren’t as robust as a focus solely on the US indices and Japan’s exports might imply. Though world stock markets have rebounded, they are still slightly below their comparable levels in the 1930s.

The world trade figure is more telling. Neoclassical economists have often pointed at restrictions to world trade as one reason the Great Depression was as bad as it was—citing in particular the Smoot-Hawley Tariff Act in the United States. In fact, this Act was signed into law in June 1930, one year after Eichengreen & O’Rourke’s reference date for the start of the Great Depression. By that time, world trade had already fallen about eight per cent below its peak level; three months later had fallen a further two per cent.

15 months into our modern-day crisis, and with no such protectionist legislation even being contemplated, world trade had fallen 20 per cent below its peak.

The recent one per cent uptick in world trade volumes is welcome, but it still puts us well below the 1930s.

This in itself is a reflection of how much world industrial output has been globalised in the last thirty years, which is in part why the crisis spread very rapidly from the USA to the rest of the world. In the 1930s, the vast majority of the USA’s industrial needs were met by its own factories, so the downturn hit its own industries and workers first and hardest. Today, the heavy blows also fell on the world’s industrial exporters—notably Japan and Germany.

One obvious statistic that Eichengreen and O’Rourke don’t use is the unemployment rate. I suspect this might reflect justified skepticism about the comparability of the modern measure to the old; the current ILO definition is so tight that recorded unemployment today is far lower than it would be were the 1930s standard applied (conversely, there were many swagmen in the 1930s who would be classified as fully employed on the current standard).

A more comparable statistic for the USA is the U-6 measure, which includes most (but not all) discouraged workers. That now stands at 16.8 per cent, up from 16.3 per cent last month—versus the official rate of 9.7 per cent. And though recorded unemployment is worsening much more slowly than in the 1930s, the U-6 measure is deteriorating more quickly now than it did in the 1930s, and it started at a far worse position.

A similar pattern applies in Australia. Roy Morgan Research prepares a U-6 like-measure that now stands at 16.6 per cent—and their survey also disputes the ABS’s measure of formal unemployment rate, which they put at 7.8 per cent, two per cent higher than the ABS.

So “green shoots”, or selective reporting? There is no doubt that the immense government stimulus packages across the world have slowed the rush into Depression. But the force that caused the crisis in the first place—excessive private debt accumulated in a Ponzi Scheme laundered through share and house-price bubbles—is still with us. Until that debt is addressed, the downward rush of deleveraging is likely to resume as soon as governments wind back their spending in the false hope that the crisis is over.

I’ll finish with an extract from what has become one of my favourite daily reads—the News from 1930 blog. On Thursday 4 September 1930, the Wall Street Journal reported that the Harvard Economic Society said there is “every prospect that the [business] recovery … will not long be delayed.”

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.


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