Saturday 21 Jul 2018 | 04:43 | SYDNEY
Saturday 21 Jul 2018 | 04:43 | SYDNEY

Not the Great Depression


Mark Thirlwell

5 May 2009 11:18

Such is the depth of the current global downturn relative to its postwar predecessors that it’s almost impossible to avoid making comparisons with the economic calamity that was the Great Depression. As Christine Romer, Chair of the US Council of Economic Advisers, noted in a speech delivered at the Brookings Institution in March this year, the phrase ‘worst since the Great Depression’ has been cropping up with depressing regularity. 

Even the description ‘Great Recession’ is an echo of that earlier crisis. Despite the recent frequency of the comparisons, however, the good news is that it’s very unlikely that we are about to stage a re-run of the 1930s. In her speech at Brookings, Romer goes on to note that the severity of the current recession ‘pales in comparison’ to the events of the interwar period, at least as far as the US economy goes.

That said, at the beginning of April, Barry Eichengreen and Kevin O’Rourke in a piece for 'voxeu' showed that in some respects 2009’s Great Recession has been at least as severe as the downturn of 1929-30 when looked at from the perspective of the world economy overall. They present charts showing that decline in world industrial output in the period from April 2008 was broadly similar to that experienced in the nine months following June 1929, while the decline in international trade and world stocks markets looked even steeper.

World Industrial Output

Source: Eichengreen and O’Rourke 

World Trade Volumes

Source: Eichengreen and O’Rourke

Eichengreen and O’Rourke stressed in their April piece that the way in which the global economy was either tracking or doing worse than the Great Depression meant that the ‘Great Recession’ label could turn out to be too optimistic — warning of a ‘Depression-sized event’. 

Importantly, however, they also emphasised that the current policy response looks very different to that applied during the earlier period: this time around central banks cut policy rates more rapidly and from a lower level than in the Great Depression, while the willingness of governments to run fiscal deficits is much greater today. (In her speech, Romer again makes the important point that a major reason fiscal policy failed to effectively combat the Great Depression was because the fiscal stimulus actually applied was very small).

In another column at voxeu, Thomas Helbling also provides a comparison of the current crisis with the Great Recession, summarising work from the IMF’s latest World Economic Outlook that delivers a similar message. Helbling points out some important similarities between the two periods, including the way in which the US economy was the epicentre of the financial contraction in both crises (in contrast to the financial crises of recent decades which have either occurred in emerging markets or been more garden-variety recessions in the major economies), the way in which both crises were preceded by rapid credit expansion and financial innovation (although pointing out that the 1920s credit boom was largely US-specific while the 2004-07 boom was global), and the central role of liquidity and funding problems in both episodes.  

Again however, he stresses that one crucial difference between now and then has been the policy response: while ‘countercyclical policy responses were virtually absent in the early stages of the Great Depression...In the current downturn, there has been strong, swift recourse to macroeconomic policy support’ in the form of massive central bank intervention and much more supportive fiscal policy. 

Provided that policymakers continue to deliver the appropriate stimulus, we should be able to avoid another Great Depression. That said, the fact that we continue to debate the probability of such a grim outcome is a telling indicator of the scale of today’s economic problems.