Re: A question about the great depression
- From: S. Doo <none@xxxxxxxxxxxx>
- Date: Tue, 31 Oct 2006 15:28:48 -0500
On 29 Oct 2006 11:23:51 -0800, "cmj" <council.tax@xxxxxxxxx> wrote:
Before I start, what I know about economics could be written on a
postage stamp so apologies if this is an idiotic question.
The other day I was looking at this site: http://tinyurl.com/ykdad7
which gives the real US GDP and GDP per capita in 2000 dollars. During
the great depression, the lowest point for both GDP and GDP per capita
seem to be in 1933, with GDP having declined by approximately 30% from
the 1929 value. The thing that really struck me though was that the
1933 GDP was approximately the same as the GDP in 1922. Likewise the
1933 GDP per capita roughly matched that of 1915.
It actually also matches 1900-1901 -- GDP growth rates were much more
volatile in those days, lots of ups and downs.
But if you smooth the growth track out, 1901 is when this level was
first reached, so that's probably the best measure of how far the
economy was set back in these terms.
Now as far as I'm aware, the hardship in the great depression was
unparalleled in modern American history and was plainly far worse than
in either 1922 or 1915.
Not necessarily so -- 1915 was right after a recession trough and 1922
was right after a *severe* recession trough in 1921.
Many people at the time thought the fall in 1929-30 was less serious
than the one they'd lived through in 1921 (In fact, the term
"depression" was coined then to distinguish the conditions then from
the worse "recession" conditions of 1921. "Depression" initially meant
"not so severe as a recession" -- one of the little ironies of
language).
Contrary to popular mythology, the original economic fall in the Great
Depression, though very steep, was not shocking for the time. There'd
been many such sharp contractions since the 1870s, some just about as
bad and a couple arguably worse.
The difference about the Great Depression -- the reason why we all
remember it but nobody remembers 1921 -- is that after all the other
falls the economy came roaring back just as quickly, but after 1932 it
just lay like a lump and didn't fully recover for almost decade.
There are at least two reasons for the difference:
1) In 1929 after the initial economic fall the Fed continued
tightening money, suicidally, all the way into 1932. By that time the
economy was seriously structurally damaged.
In contrast, when the 1921 shock hit the Fed effectively was being run
by Ben Strong of the NY Fed, and he pumped out money to provide
liquidity -- just like Greenspan did in 1987, and as any modern
central banker would do.
Alas, Strong dropped dead prematurely in 1928, the Washington Fed then
grabbed back control over money policy and reversed Strong's
prescription by tightening instead of loosening, and the rest is
history.
Milton Freidman has speculated that if Strong had lived another year
he'd have handled 1929 like he did 1921, the Recession of '29 would
have ended quickly and be as forgotten today as the Recession of '21,
and there'd nver have been a Great Depression.
(Here's a fun "what if" to consider: No Great Depression, thus no
Depression in Germany, thus the Nazis can't use economic discontent to
grab power, thus no World War II, thus Stalin can't grab half of
Europe for the communists, thus there is no cold war as we know it and
Communism in Russia falls a generation earlier ... *and* there is no
Social Security as we know it in the US, and Herbert Hoover is
remembered as a great president too -- all because one guy in NYC
lived another year or two. Well, maybe not, but if you have friends
who enjoy "what ifs" throw this one at them!)
2) After 1933 when the collapse was over and the US was finally off
the restrictive gold standard, the recovery from the Depression in
the US was slower than anywhere else in the world.
The consensus among economic historians these days is that this was
largely due to FDR's New Deal recovery policies which were based on
the very mistaken belief that the plunge in prices (deflation) was the
cause of the Depression, rather than a symptom of it -- and which thus
imposed price-increasing measures such as producer cartels, gov't
mandated minimum price rules (still existing today in the form of the
NE milk cartel, federal farm price suuports, etc.), support for
monopolies, etc.
Of course, all this had the very same effect then that it would have
today -- it was good for the people who *had* jobs in the protected
industries, but was really bad for consumers and workers who didn't
have jobs. Mandated above-market prices --> less production --> less
employment --> long-lasting high unemployment.
Here's a paper from the Fed estimating what various causes contributed
to the Depression:
http://research.mpls.frb.fed.us/research/QR/QR2311.pdf
From which:
"... theory predicts a much different recovery from this downturn
[1929-1933] than actually occurred. Given the period?s sharp increases
in total factor productivity and the money supply and the elimination
of deflation and bank failures, theory predicts an extremely rapid
recovery that returns output to trend around 1936.
"In sharp contrast, real output remained between 25 and 30 percent
below trend through the late 1930s.We conclude that a new shock is
needed to account for the Depression?s weak recovery. A likely culprit
is New Deal policies toward monopoly and the distribution of income."
And here's a couple of economists focusing just on the New Deal's
contribution to prolonging the Depression:
http://www.newsroom.ucla.edu/page.asp?RelNum=5409
....the hardship in the great depression was
unparalleled in modern American history and was plainly far worse than
in either 1922 or 1915.
Why is this when the GDP implies the standard
of living should have been the same in both cases?
Again, 1901 was a better comparison, but in any event there are two
factors to consider:
1) Unemployment was way higher. If you were among the 25% unemployed
you were clobbered. 25% is a lot of people, enough to make
shanty-town and Hoovervilles.
OTOH, if you were among the 75% things often really weren't so bad at
all.
E.g. My grandfather was a naval officer, and with his safe government
salary he and his wife and five kids rode through the Depression in
suburban middle-class comfort. In fact, if you kept your salary the
deflation of the period actually made everything cheaper for you to
buy.
2) Part of "hardship" is perceived in relative terms. If you have a
lot of your income taken away from you, you scream in pain -- even if
you still have things a lot better than your parents did, and than you
yourself did when you were younger.
Consider that a comparable 30% cut in per capita GDP would take us
back from today to 1986's level.
http://eh.net/hmit/gdp/gdp_answer.php?CHKrealGDP=on&CHKrealGDP_percap=on&year1=1965&year2=2005
Now back in 1986 people felt themselves enjoying boom times -- but if
people today had their living standards knocked back to those days of
eight-track tapes they'd be howling and gnashing their teeth.
Secondly if the same
amount of wealth was created in 1932
??? Wealth was hardly being "created" in 1932 -- the stock market was
down 85%! Bank failures were as never seen before or since. Business
bankruptcies and property foreclosures were as never seen before or
since...
as in 1922 but in 1932 many people
obviously saw very little of it, where did the extra go? Surely this
implies some people got very rich?
With the melt-down of the stock market, collapse of the banking
system, unprecedented business failures and property foreclosures, you
are imagining the rich were getting very much richer during 1929-32??
Hello???
The Depression collapsed both the wealth and income distributions into
the narrowest spread seen before or since, by bringing the rich way
down.
After 1933 the slow recovery began with the protected and employed
"haves" doing better than the have-not unemployed and unprotected
businesses, as noted above -- but to the extent that this was more
true in the US than elsewhere (and it was) it was due to the
government's policies, as noted above.
In any event the overall wealth and income distribution spreads
remained tight through the Depression, and then also through WWII due
to all the gov't controls on the economy, and didn't start widening
again until the normal economy began appearing again, for the first
time in a generation, after the war.
thanks,.
Chris
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