Wikinvest Wire

Kasriel on the Great Depression

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.
IMAGE 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.

Kasriel explains:

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:
IMAGE 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.

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.
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.

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.


Orlando said...

The scary thing is that the 7 and 10 year ARMs have not come due yet!! =oO

Anonymous said...

I may be mistaken, but isn't that chart year over year changes?

That would mean that if you have 100 units of something and it drops 20%, you now have 80. But if you rise 20% the next year you don't have 100 again, you have only 96.

So the "recovery" mid decade was a relative improvement from the years before but things were still worse off than before the depression started. One could do the math and see when per capita gnp reached 1929 levels again. But it likely was near the end of the decade if not into the next one.

Tim said...

In 1936, GNP recovered to the level of late-1929 and never went back down below that level.

Anonymous said...

In 1936, GNP recovered to the level of late-1929 and never went back down below that level.

Yeah, that's called "inflation", not "purchasing power".

Anonymous said...

Actually Anon, I assume the gnp figures were inflation/deflation adjusted. It doesn't, however, equate to per capita gnp, and I assume the population grew at least a little during this period.

So Tim, are you saying things were as good in 1936 as in 1929? What were unemployment numbers doing during this second half of the 30's?

Anonymous said...

Yeah, I did a little math based on the chart numbers and it does look like a return to 1929 baseline by late '36. That was some recovery. Still you're talking 7 long years. And I'm curious why the impression persists that the late 30's were not exactly happy days either if things were as good as the peak of the boom of the 20's.

Tim said...

My mouth is quite full with words that I didn't put there...
A "strong recovery in the middle of the decade" is a relative term, not an absolute one and now, like then, why do people think that the economy is supposed to return to the "bubble" highs?
In 1935 and 1936, I'm sure that people were feeling pretty good about things when looking back at what they'd been through over the previous four or five years.

Anonymous said...

I think the unemployment was still in the range of 17% and increased with the 1937 recession, and went upto 19%. so, it may have been down, but, misery index was still up IMHO. I think the recovery must have felt good only for a select few (almost 80% still) who had jobs. And, usually it is ultra rich or rich who mostly benefitted from the recovery.

Of course, you have to make an assumption that how unemployment was measured (statistics or sample) was not significantly different from today - which is never the case. If have hedonistic adjustments like inflation in those unemployment numbers, you can never do a comparison.

But, I would suggest looking at the books of the era to find out more about the misery than looking at Dow Jones and GNP. But, it is interesting if GNP was rising fo much, why were the jobs not created at that pace. One explanation could be during the bubble years, companies relax and hire indiscriminately thinking good times would continue, and because the recovery was only few years old, and coming after the worst period, it may have been subdued from jobs perspective. The companies were making money, but, they were still stingy, and making more out of their employees than hiring more.

Alex said...

I figure you saw this interview in Barron's. It seems complementary to this piece.

My only point to add is that we may not get to that recovery for another year...or two. Hoping things will be all better in a couple of quarters is not in keeping with the relative trends in the chart of the great depression.

But I do agree that we have to remain aware, and not be put to sleep by all the negativity. In the foreseeable future, we will have a buying opportunity. Maybe one of a lifetime.

Anonymous said...

Tim, I think people expect it to return to the "bubble highs" because that's when they had jobs and a sense of security. If the economy is structured for a boom, and that boom no longer exists, then unemployment will be high until the economy is restructured to the reality that exists.

I agree with the other post that if you are part of the unemployed, it's not a recovery at all!

My household made more last year than ever before, but that doesn't mean times are good out there, or even for us personally, as the risks of income falling are high.

Similarly, GNP on the aggregate can recover but if you still have 17% unemployment you've still got yourself a doozy of a depression going on, not a "recovery" in the usual sense that most people think of when that word is used.

Those who remain employed don't suffer much "misery" at all. But the effects of high unemployment and underemployment on us in a socialist environment merely defer our own disasters. Someone who saves $50K a year only to see it evaporate in a hyperinflation 10 years from now is just as bad off as the person who never saved a dime.

Anonymous said...

There's a chart of unemployment in the Kasriel article --- it fell from 25 percent in early 1933 to 11 percent in early 1937.

dearieme said...

"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." Wrong: not "does", but "did". Whether it would do it again depends on all the ways that now differs from the 30s.

Adam said...

More proof. The American electorate.

60.8% 36.5% - The 1936 presidential election. 3rd most lopsided election ever.

Anonymous said...

Yes, the original article does mention unemployment data. The unemployment seems to have gone down signficantly (25% to 11%). so to that extent there was recovery or at least it must have felt good for many people who got employed or were still working.

However, I believe it was still high because of the reasons that I had mentioned before.

But, come to think about spending, it seems like the spending did seem to make a difference between 1933-1937. And, that is the argument that Paul Krugman, and others liberals have made for massive spending. Their argument is essentially that only government can get us out of this hole. The private parties or companies won't have the capital or resources to invest or would be risk averse.

Also, if you notice, because of balanced budget and deficit concerns, FDR reduced spending, and it shows up in recession. I am not sure that it could be a coincidence.

VicktorCapitalist said...

I believe the return to growth from 1933 to 1937 was mainly due to the devaluation of USD against gold, when FDR repegged the gold to USD at a price 69% higher and confiscated gold which kick start asset reflation.

Similarly, for the crisis we are facing right now, I believe the end game would be "hyper gold inflation", as the US needs to inflate out of the debt mess. However, once hyperinflation, the US needs to restore confidence, therefore possibly by "hyper gold standard".

It is also important to undestand how "Deflation could lead to hyperinflation". See below 3 links for details:

1. Hyper gold inflation

2. Hyper gold standard

3. How Deflation Creates Hyperinflation

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