Global Economic Watch


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  • Mark Thoma on Lessons from the Great Recession

    At the Fiscal Times , Mark Thoma points to Milton Friedman and Anna Schwartz's seminal work, A Monetary History of the United States , for making the Federal Reserve's responsibility for the severity of the Great Depression clear. As for the Great Recession, Thoma notes the following lessons: However, while the Fed’s actions were certainly important and necessary – I would not have wanted to experience a repeat of the Fed’s failures during the Great Depression – the improved policy response from the Fed is not the only reason we avoided Great Depression type problems. First, when the recession hit this time around, we had a much, much higher level of societal wealth, and hence a much larger cushion to absorb the shocks than we had during the Great Recession Depression. Second, and importantly, the presence of automatic stabilizers, particularly those that come in the form of social insurance programs, made a big difference to people hit by the recession. Programs such as unemployment compensation and food stamps that did not exist during the Great Depression played a large role in cushioning the blow for the millions and millions of people who lost jobs or were otherwise affected by the severe downturn in the economy. Third, it’s not as though the Fed created a miracle recovery. Even with the improved monetary policy during the recent downturn, the recession has still been very deep and very prolonged, and the end of our troubles, while perhaps in sight, is still far, far away. So while it’s true that things could have been much worse, it does not appear to be the case that improved monetary policy avoids the severe problems associated with financial panics. The improved response of monetary authorities and the existence of automatic stabilizers certainly made the downturn far less severe than it might have been, but a big lesson from our recent experience is that these policies alone are not enough to turn the economy around. Help from fiscal policy is needed. Read The Great Lesson from the Great Recession here .
  • HBR: Comparing Jobless Recoveries--Great Recession and Great Depression

    Justin Fox , editorial director of the Harvard Business Review Group , offers up a little perspective at the HBR blog. As bad as the post-Great-Recession jobless recovery has been--and Fox is not suggesting it been anything other than terrible--take a look at it in comparison to the Great Depression years: Fox writes: What lessons can one draw from this? Basically, if you think this downturn was comparable in origin and inherent severity to the other recessions since World War II, then we've been the victims of economic-policy bungling of epic proportions. If, on the other hand, you think the proper comparison is the Great Depression, the last U.S. downturn brought on by a severe financial crisis, you'd have to say the White House, Congress, and most of all the Federal Reserve have done an absolutely brilliant job relative to their early-1930s counterparts. I'd lean toward explanation No. 2 — we did actually learn something from the Great Depression, although probably not enough. Read One Difference Between a Great Recession and a Great Depression: Jobs here .
  • SF Fed Economic Letter: 'Crises Before and After the Creation of the Fed'

    With the Federal Reserve turning 100, San Francisco Fed economists Early Elias and Òscar Jordà take a moment to look at the impact of their parent institution on crisis mitigation. They point to fewer crises over the last 100 years than in the previous century, and the less severe results of the Great Recession compared to the Panic of 1907 as evidence of the Fed's relative success. Here is an excerpt from their Economic Letter: Recessions originating from a financial event were common in the late 19th and early 20th centuries. Many stemmed from banking panics. Figure 1 provides a global historical perspective. We calculate by decade the number of countries that experienced financial crises among a sample of 17 industrialized economies representing more than half of global GDP during the past 140 years (for details, see Jordà, Schularick, and Taylor 2012). Figure 1 shows a notable downward global trend in the incidence of these highly disruptive events, with the conspicuous exceptions of the Great Depression and the Great Recession of 2007–09. In the United States, the rate of banking crises declined markedly after the 1913 creation of the Federal Reserve System. Other than the Great Depression and Great Recession, the only significant banking crisis of the past century was the savings and loan crisis. By contrast, ten significant banking crises occurred in the 19th century. The panic of 1907 and the resulting recession are generally credited with providing the catalyst for the creation of the Federal Reserve System. When the Federal Reserve was chartered, the United States had been without a central bank for about 70 years. Congress chartered The First Bank of the United States in 1791 during the Washington presidency, under the guiding hand of Secretary of Treasury Alexander Hamilton. However, its 20-year charter was allowed to expire in 1811. Then, under President Madison, the Second Bank of the United States was created in 1817 for another 20-year period. Once again, the charter was allowed to expire amid President Jackson’s strong opposition to the central bank. Read the full letter here .
  • Federico Fubini Sees Ominous Signs in Europe's Imbalanced Markets

    As Italy's newly named president leads a public shift away from hardline austerity policies , noted Italian financial columnist Federico Fubini raises a provocative question: "Is Europe in depression?" At Project Syndicate , Fubini cites economic historian Charles Kindleberger in pointing to a "failure to 'maintain a market for distressed goods'" as a major reason the Great Depression was so severe. Fubini: Surely history is not repeating itself – at least not in the literal sense. European creditor countries today are not tempted by anything like America’s Smoot-Hawley Tariff Act, which crippled world trade in 1930. Germany, the Netherlands, Austria, and Finland remain committed to the European Union’s single market for goods and services (though their national regulators hinder intra-European capital flows). Still, one cannot help but notice similarities with the 1930’s. At the time of the Great Crash, the United States and France were piling up gold as fast as the Weimar Republic was piling up unemployment. Today’s northern European countries are running up record current-account surpluses, just as some southern European countries are experiencing Weimar-level unemployment. For Italy, Europe’s fourth-largest economy, the current slump is proving to be deeper than the one 80 years ago. Meanwhile, huge savings and potential demand for consumer and capital goods remain locked up next door. How did this happen? As Kemal Derviş has pointed out, the cumulated current-account surplus of the Scandinavian countries, the Netherlands, Austria, Switzerland, and Germany is now around $500 billion. This dwarfs China’s surplus at its mercantilist peak of the mid-2000’s, when the G-7 (including Germany) regularly scolded the Chinese for fueling global imbalances. Read Europe in Depression? here .
  • A Tale of Two Central Banks and Two Economic Histories

    At Project Syndicate , Barry Eichengreen argues that the Federal Reserve and the European Central Bank are guilty of too much analogical reasoning. Or at least of focusing their reasoning too much on a particular analogy. In evaluating potential economic dangers, the Fed focuses too much on the Great Depression and is "hyperactive" in its response. The ECB, meanwhile, remembers the hyperinflation of the post WWI period, and "is unflappable." Eichengreen: The Fed might also consider policy in 1924-1927, when low interest rates fueled stock-market and real-estate bubbles, or 2003-2005, when interest rates were held down in the face of serious financial imbalances. At a minimum, the Fed might develop a “portfolio” of analogies, test them for fitness, and distill their lessons, as President John F. Kennedy famously did when weighing his options during the Cuban missile crisis in 1962. Similarly, the ECB might consider not only how monetary accommodation allowed governments to run large budget deficits in the 1920’s, but also how central bankers’ failure to respond to the financial crisis of the 1930’s fed political extremism and undermined support for responsible government. Again, rigorous analysis requires testing these historical analogies for fitness with current circumstances. Anyone who does so will find it hard to defend the ECB and its stubborn inaction in the face of events. There is exactly zero evidence in Europe today that inflation is just around the corner. And, if current European governments are not committed to austerity and fiscal consolidation, then which governments are? When I consider the European economy, the ECB’s failure to provide more monetary support for economic growth appears to be directly analogous to Europe’s disastrous monetary policies in the 1930’s. The political consequences could be similarly devastating. Europeans should ponder why the inflationary 1920’s, rather than the politically catastrophic 1930’s, have become the historical lodestar for current monetary policy. On the other hand, when I contemplate the US economy, I conclude that recovery from the Great Depression, and not 1924-1927 or 2003-2005, is the episode that most closely resembles current circumstances. Only in the 1930’s were interest rates near zero. Only in the 1930’s was the economy digging itself out from a major financial crisis. Read The Use an Abuse of Monetary History here .
  • Ben Bernanke on Monetary Policy and the Gold Standard

    In a speech at the London School of Economics yesterday, Fed Chair Ben Bernanke discussed lessons from the financial crisis. Bernanke said the recent crisis was a "classic financial panic," and he gave a brief history lesson on exchange rates and developed economies moving away from the gold standard. The uncoordinated abandonment of the gold standard in the early 1930s gave rise to the idea of "beggar-thy-neighbor" policies. According to this analysis, as put forth by important contemporary economists like Joan Robinson, exchange rate depreciations helped the economy whose currency had weakened by making the country more competitive internationally.5 Indeed, the decline in the value of the pound after 1931 was associated with a relatively early recovery from the Depression by the United Kingdom, in part because of some rebound in exports. However, according to this view, the gains to the depreciating country were equaled or exceeded by the losses to its trading partners, which became less internationally competitive--hence, "beggar thy neighbor." Over time, so-called competitive depreciations became associated in the minds of historians with the tariff wars that followed the passage of the Smoot-Hawley tariff in the United States. Both types of policies were decried--and in some textbooks, still are--as having prolonged the Depression by disrupting trade patterns while leading to an ultimately fruitless and destructive battle over shrinking international markets. Economists still agree that Smoot-Hawley and the ensuing tariff wars were highly counterproductive and contributed to the depth and length of the global Depression. However, modern research on the Depression, beginning with the seminal 1985 paper by Barry Eichengreen and Jeffrey Sachs, has changed our view of the effects of the abandonment of the gold standard.6 Although it is true that leaving the gold standard and the resulting currency depreciation conferred a temporary competitive advantage in some cases, modern research shows that the primary benefit of leaving gold was that it freed countries to use appropriately expansionary monetary policies. By 1935 or 1936, when essentially all major countries had left the gold standard and exchange rates were market-determined, the net trade effects of the changes in currency values were certainly small. Yet the global economy as a whole was much stronger than it had been in 1931. The reason was that, in shedding the strait jacket of the gold standard, each country became free to use monetary policy in a way that was more commensurate with achieving full employment at home. Moreover, and critically, countries also benefited from stronger growth in trading partners that purchased their exports. In sharp contrast to the tariff wars, monetary reflation in the 1930s was a positive-sum exercise, whose benefits came mainly from higher domestic demand in all countries, not from trade diversion arising from changes in exchange rates. The lessons for the present are clear. Today most advanced industrial economies remain, to varying extents, in the grip of slow recoveries from the Great Recession. With inflation generally contained, central banks in these countries are providing accommodative monetary policies to support growth. Do these policies constitute competitive devaluations? To the contrary, because monetary policy is accommodative in the great majority of advanced industrial economies, one would not expect large and persistent changes in the configuration of exchange rates among these countries. The benefits of monetary accommodation in the advanced economies are not created in any significant way by changes in exchange rates; they come instead from the support for domestic aggregate demand in each country or region. Moreover, because stronger growth in each economy confers beneficial spillovers to trading partners, these policies are not "beggar-thy-neighbor" but rather are positive-sum, "enrich-thy-neighbor" actions. Read the full speech here .
  • Amartya Sen: "History of economic thought has been woefully neglected"

    Via Mark Thoma , Kasey Dufresne , writing at the Open Economics blog, alerted us to an interesting interview that we missed--an interview that is sure to be a good conversation-starter. Ahead of the Institute for New Economic Thinking conference, Handelsblatt reporters Olaf Storbeck and Dorit Heß interviewed Amartya Sen and asked the Nobel Laureate for his views on the state of economics in academia and among policy makers. Sen said that he is "disappointed by the nature of economic thinking." From the interview: Handelsblatt: In which ways do you think new economic thinking is necessary and how should it look like? Sen: I think we need a bigger, more integrated view that economists tended to look for, in the past. We have to see the totality of the concerns that make human beings want a good economy. The kind of economic thinking that I would like to see pays a lot more attention to issues of human freedom. What I have in mind is real freedom, not just formal liberties but also what kind of lives people manage to achieve, what they can do with their lives, and what help of the state they need for more substantive freedom. The basic question economists should ask themselves is: What can we do to have a decent society where people get much more freedom to live the kind of lives of which they would have reason to be proud and happy. You make a lot of references to old economic thinkers like Smith, Keynes and so on. However, if you look at the current economic research that is published in the journals and taught at universities, the history of economic thought does not play a big role anymore… Yes, absolutely. The history of economic thought has been woefully neglected by the profession in the last decades. This has been one of the major mistakes of the profession. One of the earliest reminders that we are going in the wrong direction has come from Kenneth Arrow about 30 years ago when he said: These days, I get surprised when I find the students don’t seem to know any economics that was written 25 or 30 years ago. Is there any hope that this trend can be reversed? Yes, I’m quite optimistic in this regard. I get the impression that this seems to be getting corrected right now. I’m particularly delighted that the corrective has come to a great extent from student interest. I’m very struck by the fact that at the university where I teach – Harvard – the demand for more history of economic thought has mostly come from students. As a result there is a lot more attempt by the department of economics as well as history and government to look for the history of political economy. Last year, along with my wife Emma Rothschild, I offered a course on Adam Smith’s philosophy and political economy. It drew a lot of interest and we got some of the finest students at Harvard. Read the full interview here .
  • Eichengreen and O'Rourke: World Trade Recovery Then and Now

    Two years ago Barry Eichengreen and Kevin O'Rourke compared the Great Recession to the Great Depression, examining the rate of recovery for global output, trade, and the equity markets. They gave us this view of world trade: Now they have an update at VoxEU . The charts today show continued progress, but still the outlook is not clearly positive: Eichengreen and O'Rourke write: What is well known is that while global trade fell even faster in the recent crisis than during the Great Depression, it also recovered more quickly. But trade is now also fluctuating without direction, at levels barely higher than those of April 2008. Read A tale of two depressions redux here .
  • Stiglitz's 'Alternative Theory of the Depression'

    In a thought-provoking piece for the January issue of Vanity Fair , Joseph Stiglitz urges us to consider an important element of the Great Depression that has not received as much attention in the media as monetary policy, a troubled banking system, or political battling. Stiglitz points us to the shift away from agriculture in the late 1920s through the early 1930s as cause of the Depression. If we are to look more closely at that piece of history, then we may be able to extract important lessons for today, as we see so many Americans going through revolutionary changes in their work and in their workplaces. Citing resebarch that he has been doing with Bruce Greenwald , Stiglitz writes: The parallels between the story of the origin of the Great Depression and that of our Long Slump are strong. Back then we were moving from agriculture to manufacturing. Today we are moving from manufacturing to a service economy. The decline in manufacturing jobs has been dramatic—from about a third of the workforce 60 years ago to less than a tenth of it today. The pace has quickened markedly during the past decade. There are two reasons for the decline. One is greater productivity—the same dynamic that revolutionized agriculture and forced a majority of American farmers to look for work elsewhere. The other is globalization, which has sent millions of jobs overseas, to low-wage countries or those that have been investing more in infrastructure or technology. (As Greenwald has pointed out, most of the job loss in the 1990s was related to productivity increases, not to globalization.) Whatever the specific cause, the inevitable result is precisely the same as it was 80 years ago: a decline in income and jobs. The millions of jobless former factory workers once employed in cities such as Youngstown and Birmingham and Gary and Detroit are the modern-day equivalent of the Depression’s doomed farmers. The consequences for consumer spending, and for the fundamental health of the economy—not to mention the appalling human cost—are obvious, though we were able to ignore them for a while. For a time, the bubbles in the housing and lending markets concealed the problem by creating artificial demand, which in turn created jobs in the financial sector and in construction and elsewhere. The bubble even made workers forget that their incomes were declining. They savored the possibility of wealth beyond their dreams, as the value of their houses soared and the value of their pensions, invested in the stock market, seemed to be doing likewise. But the jobs were temporary, fueled on vapor. Mainstream macro-economists argue that the true bogeyman in a downturn is not falling wages but rigid wages—if only wages were more flexible (that is, lower), downturns would correct themselves! But this wasn’t true during the Depression, and it isn’t true now. On the contrary, lower wages and incomes would simply reduce demand, weakening the economy further. Of four major service sectors—finance, real estate, health, and education—the first two were bloated before the current crisis set in. The other two, health and education, have traditionally received heavy government support. But government austerity at every level—that is, the slashing of budgets in the face of recession—has hit education especially hard, just as it has decimated the government sector as a whole. Nearly 700,000 state- and local-government jobs have disappeared during the past four years, mirroring what happened in the Depression. As in 1937, deficit hawks today call for balanced budgets and more and more cutbacks. Instead of pushing forward a structural transition that is inevitable—instead of investing in the right kinds of human capital, technology, and infrastructure, which will eventually pull us where we need to be—the government is holding back. Current strategies can have only one outcome: they will ensure that the Long Slump will be longer and deeper than it ever needed to be. Read The Book of Jobs here .
  • Tech Advancement in the 30s, Economic Growth in the 40s

    In A Great Leap Forward , Alexander Field looks at the Great Depression as an important learning moment for the US. An economist at Santa Clara University and and executive director of the Economic History Association , Field points to the 1930s as an unparalleled period of technological advancement in the US. And it was technological advancement, he argues, that brought about a remarkable growth in output by the early 1940s. Field discusses the 1930s in this interview with The Economist:
  • Innovation and Unintended Consequences

    Historian Edward Tenner wants us to take a positive view of unintended consequences. In a speech just made available by TedTalks , Tenner runs through all the remarkable innovation that came about somewhat accidentally. We've made a point here at The Watch to note all the successful companies that were born during economic downturns, and Tenner makes sure to highlight some of these examples as well. But this is a much longer view of important shifts in culture, development, and business.
  • Darden's Robert Bruner on Comparing Great Recession with Great Depression

    Robert Bruner , Dean of the Darden School of Buiness at the University of Virginia, believes that big financial crises share some basic criteria. He co-wrote a book about The Panic of 1907 , and is highly skilled at explaining what that crisis and our global economic crisis a century later have in common. But he still cautions us not to draw too fine a point between our current slow economic recovery and the Great Depression: Watch the full interview with Bruner at Big Think, here .
  • A Call to Bring Depression Economics Into the Curriculum

    We've just been through the worst recession since the Great Depression, so one thought is that these are rare events and and don't need a lot of attention in core classes. But Mark Thoma argues that depression economics needs to become a standard part of macro courses: Since large contractions of the type we’ve recently experienced are relatively rare, it’s easy to understand why research and teaching about this topic wanes over time. There are generally pressing contemporary issues that crowd out older questions. But not fully understanding how these events occur, and not knowing what the best response is when they do happen, makes it difficult for us to prevent large downturns in the first place, and to respond to them effectively when they happen anyway despite our attempts to prevent them. We need to have research and teaching about depression economics continue even as the recent downturn fades from our memory. This type of classroom instruction from Brad DeLong and others is a start, and there have been many academic papers recently trying to understand how economies work when they are far from full employment, interest rates are at zero, etc. The question is whether people like Brad will continue to teach this topic ten years from now — will we begin to see separate chapter in the textbooks on “depression economics”? — and whether research into these questions will continue to find a place in the best journals. Read Thoma's full CBS Money Watch column here .
  • Short History of Quantitative Easing in the 1930s

    Quantitative easing became a hot topic last year, as the Federal Reserve dropped the target for federal funds rate to near zero. But Richard Anderson of the St. Louis Fed reminds us that this was the second time in US history that the "monetary authorities" tried quantitative easing: During 1932, with congressional support, the Fed purchased approximately $1 billion in Treasury securities (half, however, was offset by a decrease in Treasury bills discounted at the Reserve Banks). At the end of 1932, short-term market rates hovered at 50 basis points or less. Quantitative easing continued during 1933-36. In early April 1933, Congress sought to prod the Fed into further action by passing legislation that (i) permitted the Fed to purchase up to $3 billion in securities directly from the Treasury (direct purchases were not typically permitted) and, if the Fed did not, (ii) also authorized President Roosevelt to issue up to $3 billion in currency.2 The Fed began to purchase securities in the open market in April at the modest pace of $50 million per week. Read the rest of Anderson's short history of quantitative easing in the Thirties in the latest Monetary Trends , here .
  • Liaquat Ahamed Wins Pulitzer for 'Lords of Finance'

    The 2010 Pulitzer Prize winners were announced yesterday, and an investment manager won in the History category. Liaquat Ahamed , director of Aspen Insurance Holdings, won for his book Lords of Finance , a compelling look back at the economics of World War I and the Great Depression that Janet Maslinm in a New York Times review, said "easily connects the dots between the economic crises that rocked the world during the years his book covers and the fiscal emergencies that beset us today." Ahamed made some of those connections in an interview last year in an interview with David Kurtz of Talking Points Memo: You can also watch a longer talk from Ahamed at Johns Hopkins here .