Tuesday, February 10, 2009
Paul Kasriel, Northern Trust's chief economist and one of the world's few, level-headed practitioners of the dismal science, has a very good article over at SafeHaven about the Great Depression and here's the most important chart.
The biggest misconception about that era was that it was ten years of complete misery, but, when looking past the bread lines and all the black-and-white photos to the economic data from that time, there really was a strong recovery in the middle of the decade.
Contrary to what you might believe, the Great Depression of the 1930s was not a decade-long era of economic decline. Rather, the Great Depression was made up of two distinct economic slumps - August 1929 through March 1933 and May 1937 through June 1938. As Chart 1 shows, the first recessionary period of the Great Depression was not only longer in duration, but more severe in magnitude. Notice, however, that a quite robust economic recovery/expansion occurred between the two recessions. In the four years ended 1937, real GDP grew at a compound annual rate of 9.4%. Lest you think that all of the increase in real GDP growth in the four years ended 1937 was accounted for by federal government spending, Chart 2 should dissuade you of this notion.And here's chart 2:
As might be expected from what appears above, government spending is viewed as the lesser of many evils during periods such as this as codified in the conclusion:
It is not my role to endorse government policies. It is my role to forecast the impact of government policies on the economy. I believe that large increases in federal government spending that are monetized by the Fed and the banking system will result in a recovery in real economic activity. When that recovery sets in depends on how quickly the federal government increases its spending and by the magnitude of that increase. We can debate whether tax rates should be cut or federal spending should be increased. We can debate what kinds of spending should be increased. We can debate whether the federal government should increase any of its spending. But the facts of the 1930s appear to be pretty clear - monetized increased federal government spending does result in increased real economic activity in the short run.Of course, not allowing things to get to this point would have been a much better alternative to our current predicament, but, once you reach this point, there are no good solutions.
The economic data are likely to be abysmal through the first half of this year. The popular media will reinforce the gloom of the data. The same pundits who did not see this downturn coming will not see the recovery coming either. My advice to you is to keep your eye on the index of Leading Economic Indicators. If history is any guide, the LEI will signal a recovery well ahead of the pundits.
Anyone looking for a concise history of those ten years is encouraged to go have a look at the rest of the article as it is very well done.