It’s Hard Being a Bear (Part Three): Good Economic History

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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% to 9.7%, after falling 0.1% 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 Sep­tem­ber 1st, 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 2% (com­pared to peak out­put in April 2008) in the last four months from its low of 88%. This now puts it sub­stan­tial­ly above the com­pa­ra­ble peri­od in the 1930s, when by this stage indus­tri­al out­put had fall­en to 81% 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 8% below its peak lev­el; 3 months lat­er had fall­en a fur­ther 2%.

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

The recent 1% 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%, up from 16.3% last month—versus the offi­cial rate of 9.7%. 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%—and their sur­vey also dis­putes the ABS’s mea­sure of for­mal unem­ploy­ment rate, which they put at 7.8%, 2% 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 Sep­tem­ber 4th 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.”

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