Often cited comparisons – which look only at the US – find that today’s crisis is milder than the Great Depression. In this column, two leading economic historians show that the world economy is now plummeting in a Great-Depression-like manner. Indeed, world industrial production, trade, and stock markets are diving faster now than during 1929-30. Fortunately, the policy response to date is much better.
This describes the broad similarity of the current global downturn with that of 1929 – 1932, which is slowly being recognized (after a long period of denial). There are two important aspects of this which are less often mentioned.
First, the damage to the global economy is — so far — far less than during the corresponding period of the Great Depression. Employment and GDP have remained more stable, with a few worrisome exceptions (e.g., Japan). The reason is obvious. We have learned from the Great Depression, and nobody is following Andrew Mellon “liquidationist” advice. The public policy response has been fast, large, and (so far) successful — it’s a palliative, not a cure.
Second, mainstream economists are confident that the public policy response will mitigate the damage and slow the downturn. Hence we can expect a recovery sometime during the next year. We are doing what should have been done after 1929.
Are they fighting the last war? Consider Europe. Wars have been fought for centuries there, between the same nations on the same terrain. Generals planned wars on this strong historical foundation, yet repeatedly found that human dynamics had changed — rendering their plans obsolete.
Economists are re-fighting the Great Depression. But the world has changed since then. Our global economy and financial system would be unrecognizable to Andrew Mellon. This is just speculation, but perhaps events will evolve in a way very unlike the predictions of economists’ models.
About the authors
Barry Eichengreen is Professor of Economics and Political Science at the University of California at Berkeley and CEPR Research Fellow. He was formerly Senior Policy Advisor at the International Monetary Fund.
Kevin H. O’Rourke is Professor of Economics at Trinity College Dublin and CEPR Research Fellow
For information about the FM see the About page.
Of esp interest these days:
Posts providing analysis of this crisis:
- Can you see the signs of spring in the coming of winter? A note about the recession., 10 September 2008
- The economy is in shock. The effects of this will soon become visible, 11 October 2008
- The coming collapse in business spending – made visible today, 15 October 2008
- More reasons why the government will be taking over allocation of America’s capital, 27 October 2008
- The US economy must go to Defcon 1, 13 November 2008
- A certain casualty of the recession: the US Government’s solvency, 25 November 2008
- A warning from Paul Krugman of what should be blindingly obvious (but is not obvious to many experts), 7 January 2009
- “We are likely enduring a depression today”, 27 January 2009
- IMF official says the world’s advanced nations are already in a depression, 9 February 2009
- Locked into the bailout state, 4 March 2009 — Similarities between now and 1929.
- A look at America’s future – grim unless we get smart and pull together, 12 March 2009
- Fetters of the mind blind us so that we cannot see a solution to this crisis, 1 April 2009
Originally published at Fabius Maximus and reproduced here with the author’s permission.