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Wednesday, November 12, 2008

MORE ON THE RELEVANCE OF THE GREAT DEPRESSION OF THE 1930S FOR TODAY'S POLICYMAKERS

Today's Buggy Topic

Small wonder that economists and others, on the web and elsewhere, continue to debate the causes of the Great Depression of the 1930s and what may or may not have contributed to its strange recovery.  What started out in 1929, you see, was an abrupt plunge in the US stock market . . . with a fall-out on the stock markets world-wide.  And, more seriously, a general financial meltdown in the US and elsewhere that entailed, along with other causal influences, a huge decline in GDP --- here and abroad.

By the start of 1933, when FDR came to office (March of that year), US GDP had fallen nearly 33%.  Unemployment had soared to over 20%.  And private business investment had collapsed to 25% of its 1929 level.

Recovery: Why Strange

Well, on the one side, GDP recovery was impressive overall in the 1933-40 era . . . 1940 marking a mild start in rearmament, especially in naval shipping and aircraft, even before we entered WWII in December 1941.  It rose 58% in those 8 years of the New Deal --- this, despite a major if short-lived recession in late 1937 and early 1938 that reduced GDP by 13%  

Please note: the Bureau of Econmic Research, which is in the Commerce Department and manages our national accounts, has updated figures that show only a drop of 3.2% in GDP --- the historical series in the 1930s relatively primitive by comparison with recent calculations.  (These newer calculations use a different, more updated way of transforming nominal GDP into real GDP --- which reduces the former's growth with a GDP-deflator to eliminate inflation.)  And it shows a 49% rise overall in GDP since the start of 1933, as opposed to 58%, through 1940 . . . our last peace-time year.   Click here for the updated BEA Estimates, Table 2 (p. 6)

No matter.  The key point lies elsewhere.

Despite an impressive rise in both GDP and labor productivity, there was still fairly high unemployment in the US --- 11-12%, as opposed to slightly over 20% in early 1930.  And, simultaneously, overall private business investment was only about 50% of its percentage of GDP in 1929. 

It Is These Two Main Problems That Prof Bug Commented On

The two lengthy comments --- fleshed out with the (possibly misleading) older data --- were unpacked by the buggy prof at the Marginal Revolution, the impressive economic blog run by Professor Tyler Cowen of George Mason University . . . a talented fellow, with a flexible view (for a libertarian) of the government's role in our economy.  Also, as an added benefit for regular visitors to Prof. Cowen's site, with a wide-ranging interest in both fiction and non-fiction works to which he regularly links . . . many of which have led the buggy prof to buy those books (or borrow them from the UCSB library.)

Click here for the thread that was started by a colleague of Prof. Cowen --- Prof. Alex Tabarrock.  Note that there are two different sets of bugged-out comments in that thread.