Two American economists, Olivier Blanchard (a former chief economist at the IMF) and Lawrence H. Summers (a former Treasury Secretary of the US Govt) have recently produced a paper showing the relative differences between the Great Depression (GD) of the 1930s and the Great Recession (GR) of the 2008. The diagram shown above is just mind boggling. The parameter in question here is the Gross Domestic Product (GDP) in America, which measures the products and services produced by an average working age adult per year. The higher the GDP, the higher is the national wealth and hence higher is the standard of living. The reverse is that the lower GDP leads to lower living standards.
The diagram shows that the GD (shown in gray line) was very deep, as much as 25% or so drop in the GDP, leading to nearly 25% drop in employment in the 1930s. However, within eleven years the depression ended and the economy started to recover. Within four years, the economy flourished so much that nearly 60% of pre-depression GDP was recovered and although it then dipped quite a bit in the next three to four years, but still the GDP was bumping along nicely 25% or so higher.
On the other hand, the GR (shown in yellow line) of 2008 was very much shallow – the GDP fell by a couple of percentage points – but then the recovery was also shallow. Even after eleven years from the start of GR, the GDP was well below that of the GD, although GD was far more prolonged and deeper.
What does it indicate? Does it indicate that the GD is inherently better in the longer run for the economy than the GR? For the uninitiated it may seem so. But it is definitely not the case. It may, however, be so particularly for the American economy at that time, but it is not universally true. The British, French and other continental European countries’ economies, even on the winning side of the Allied Forces, were in the doldrums not only for 20 years or so but well into 1950s and 1960s. The Russian and East European economies did not recover until well into 1970s. But that had another associated factor in it – socialist economy did not prompt the economy to bounce back like the capitalist economy. Germany’s economy was also not flourishing until the early 1970s even after large cash flow following the Marshall Plan.
So why did American economy defied the world-wide trend and bounced back even at the start of WWII? The reason is simple. America increased its production at the start of the world war, raging mainly in Europe, and were selling arms and ammunition, agricultural products, medical products, textiles, machineries, ships etc. to both sides of the protagonists. In fact, anything America could produce could be sold and they were producing items at the full capacity in the safety of four thousand miles of separation from the war zone. Competitiveness was not an issue at that time, anything that could be produced could be sold to grateful customers.
So, American economy was going from strength to strength as war progressed from the beginning of that great war. War was a blessing in disguise for America, at least for the first three or four years. Even after America got sucked into the war following Pearl Harbour bombing by Japan, American production facilities had not suffered at all and the economy was strong enough to sustain the war efforts. In fact, American economic fluidity was strong enough to offer loans to Britain and other Allied countries to continue with the war. Britain paid back the capital and the interests from those war years until well into the 1980s. So, no wonder, America looks at the last world war with some amount of self-satisfied attachment and composure.
So, to say that the depression is economically favourable to the recession is totally unfounded and misleading. The WWII effects had distorted that comparison so badly that no meaningful economic comparison can be made from it. The only conclusion that can be drawn is that America probably thinks that only way out of America’s present economic awes is through war situations where America can again be the engine room of the war efforts.
– The contributor, Dr A Rahman, is an author and a columnist