Strong recommendation to read: “A Tale of Two Depressions”

I strongly recommend reading this:  “A Tale of Two Depressions“, Barry Eichengreen and Kevin H. O’Rourke, 6 April 2009


Often cited comparisons – which look only at the US – find that today’s crisis is milder than the Great Depression. In this column, two leading economic historians show that the world economy is now plummeting in a Great-Depression-like manner. Indeed, world industrial production, trade, and stock markets are diving faster now than during 1929-30. Fortunately, the policy response to date is much better.


This describes the broad similarity of the current global downturn with that of 1929 – 1932, which is slowly being recognized (after a long period of denial).  There are two important aspects of this which are less often mentioned.

First, the damage to the global economy is — so far — far less than during the corresponding period of the Great Depression.  Employment and GDP have remained more stable, with a few worrisome exceptions (e.g., Japan).  The reason is obvious.  We have learned from the Great Depression, and nobody is following Andrew Mellon “liquidationist” advice.  The public policy response has been fast, large, and (so far) successful — it’s a palliative, not a cure.

Second, mainstream economists are confident that the public policy response will mitigate the damage and slow the downturn.  Hence we can expect a recovery sometime during the next year.  We are doing what should have been done after 1929.

Are they fighting the last war?  Consider Europe.  Wars have been fought for centuries there, between the same nations on the same terrain.  Generals planned wars on this strong historical foundation, yet repeatedly found that human dynamics had changed — rendering their plans obsolete.

Economists are re-fighting the Great Depression.  But the world has changed since then.  Our global economy and financial system would be unrecognizable to Andrew Mellon.   This is just speculation, but perhaps events will evolve in a way very unlike the predictions of economists’ models.

About the authors

Barry Eichengreen is Professor of Economics and Political Science at the University of California at Berkeley and CEPR Research Fellow.  He was formerly Senior Policy Advisor at the International Monetary Fund.

Kevin H. O’Rourke is Professor of Economics at Trinity College Dublin and CEPR Research Fellow


Please share your comments by posting below.  Per the FM site’s Comment Policy, please make them brief (250 words max), civil, and relevant to this post.  Or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).

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For more information from the FM site

To read other articles about these things, see the FM reference page on the right side menu bar.  Of esp interest these days:

Posts providing analysis of this crisis:

  1. Can you see the signs of spring in the coming of winter? A note about the recession., 10 September 2008
  2. The economy is in shock. The effects of this will soon become visible, 11 October 2008
  3. The coming collapse in business spending – made visible today, 15 October 2008
  4. More reasons why the government will be taking over allocation of America’s capital, 27 October 2008
  5. The US economy must go to Defcon 1, 13 November 2008
  6. A certain casualty of the recession: the US Government’s solvency, 25 November 2008
  7. A warning from Paul Krugman of what should be blindingly obvious (but is not obvious to many experts), 7 January 2009
  8. “We are likely enduring a depression today”, 27 January 2009
  9. IMF official says the world’s advanced nations are already in a depression, 9 February 2009
  10. Locked into the bailout state, 4 March 2009 — Similarities between now and 1929.
  11. A look at America’s future – grim unless we get smart and pull together, 12 March 2009
  12. Fetters of the mind blind us so that we cannot see a solution to this crisis, 1 April 2009

4 thoughts on “Strong recommendation to read: “A Tale of Two Depressions””

  1. These superficial readings show that the patient is certainly in crisis, but don’t show the inner dynamics of whether it can recover. For example, the presentation begs the question whether the government is doing the right thing in increasing the money supply? William Buiter’s article in yesterdays FT (Mavrecron blog) gives a fuller picture on the multiple factors of over-capacity, cost-cutting, idled plants and laid off workers, the long timelines of re-toolinbg and rehiring, not to mention the broken credit system, which indicate the recession/depression will be deep and long.

    A “left” blog yesterday made the suggestion that a better approach to a stimulus plan would be to raise the limit on unemployment compensation to $50,000. This would actually do something to restoring demand, which is the key to re-starting the whole engine.

  2. Why’re the authors choosing April 2008 as the starting point? Why and how’re certain averages taken up for 4 countries, and then certain other comparisons are for 9 countries, whatever? The Eichengreen essay is a good example of unscientific work. Today’s Macroeconomists are like the Western Quack doctors in history who used to apply leeches to their ailing kings.Not that today’s doctors are any better than quacks, they systematically claim that simple illnesses like diabetes are virtually incurable, only to fleece the population of millions and billions.
    Fabius Maximus replies: You note something about which I’ve often wondered — the primative state of economic analysis. We have powerful tools for econometric analysis, which are seldom used in an imaginative way. They are locked away with limited access. I’ve tried to use them, using some high level contacts — with zero success.

  3. “…raise the limit on unemployment compensation to $50,000. This would actually do something to restoring demand, which is the key to re-starting the whole engine.”

    For a long time this has essentially been the IMF approach to the poorer parts of the world e.g. Biafra, Bangladesh, and most of Africa. It still is. Why doesn’t it work?

  4. See recent post by Robert Reich: “It’s a Depression“, 3 April 2009.
    Fabius Maximus replies: More folks are coming to that conclusions. Of course, depressions are relatively common events. The US had them frequently in the 19th century, others have had them since. And, as Reich says, “This is still not the Great Depression of the 1930s…”

    For more on this:
    * “We are likely enduring a depression today”, 27 January 2009 — Economist David Rosenberg explains the definitions of a depression, and why we’re likely in one.

    * IMF official says the world’s advanced nations are already in a depression, 9 February 2009

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