One comment: Fig. 11, which compares Budget Balance / GDP from 1929 to that of 2008 for the world, seems to be a crucial storyteller (i.e. that the scale of the fiscal response in the Great Credit Crisis was so much greater than in the Great Depression).
But is this true? GDP doesn’t say the same thing now as it did back then, for the simple reason that a far greater % of human productive activity was unmeasured seventy years ago (grow your own vegetables, childcare, care of elderly parents)
On the other hand, the size of the government sector in today’s economies absolutely dwarfs that of the Depression era. This difference in scale means that a 50% increase in the budget deficit now could equate to a much smaller increase in the budget deficit then, because in ’29 a larger percentage of the economy might have been dissaving in the private sector.
In other words, can we meaningfully compare the scale of the fiscal response now and then? If not, can we say which was better?
The key conclusion is also the most interesting one,
“[Scepticism suggested that] monetary policy is ineffective when the banking sector is in distress. Fiscal policy is ineffective when the need is to reduce the level of indebtedness and when much previous output in the declining sectors is unsustainable; it simply cannot be replaced by replacing demand.
“Our results push back against this scepticism. They suggest that fiscal stimulus made little difference in the 1930s because it was not deployed on the requisite scale, not becasue it was ineffective” (p.25).
The authors go on to add that their VAR estimates for the government spending fiscal multipliers were 2.5 in year 1 and 1.2 thereafter. They also note that Mussolini’s Italy was the one example of big fiscal stimuli in the period, 10% of GDP during the war against Ethiopia in 1936-7, and that Italian GDP grew by 6.8% in 1937, by a marginal amount in 1938 and by 7.3% in 1939.
Mr Lenihan says we are in war situation. If so, can we have some fiscal requisite fiscal stimulus please, rather than warmed-over cornershop budgetkeeping, a la Thatcher?
@Michael
“They also note that Mussolini’s Italy was the one example of big fiscal stimuli in the period, 10% of GDP during the war against Ethiopia in 1936-7, and that Italian GDP grew by 6.8% in 1937, by a marginal amount in 1938 and by 7.3% in 1939.”
Great! Let’s build tanks and planes and bullets and bombs. We’ll be rich in no time. We can use them to blow up all the houses we built with the last unsustainable GDP increases we had…
What seems to be lost in the war as fiscal stimulus is that it is not blowing things up that creates growth, it is rebuilding them better afterwards.
prophetic title for the post.
@ youghanmahew
I had considered entering the Eichengreen et al caveat in their research piece that it was important to engage in productive investment, not armaments, otherwise that can itself lead to war. But I didn’t think anyone on this blog woud be stupid enough to regard the authors research or my repetition of it as an endorsement of Mussolini.
Clearly I was wrong.
For the record, this is an analysis is about the relationship between fiscal stimuli, growth and government debt. There is no endorsement of Mussolini-ism either by the authors or by by me. The opposite is the case.
On the contary, I find the implication wholly objectionable as do the authors of the piece themsleves, as any reading of it would be clear.
The point that they make is that fiscal stimulus works.
The opponents of that idea have a barrel full of red herrings, and it is beginning to smell.
@Liam: at least the French are not being triumphalistic. See here for example:
They are quite right to single out their goalie for special praise.
@ Michael,
Don’t be so hasty to call people stupid, little hobbit. Apart from it being quite rude, you should give them the benefit of the doubt, for there may be nuances to their argument you did not fully appreciate.
To me, at least, the point about what Mussolini spent that extra GDP on is not trivial. Building tanks is not the only way to waste productive capacity and call it GDP, and Mussolini’s war apparatus was – alas! – not an isolated example of govt waste.
@Michael
Where in my post do you see me taking the research as an endorsement of Mussolini?
I am attempting to draw a comparison between different types of unproductive stimulus. On the one hand armaments industries – effective in the short term, but in the medium term the production created is either stored or used – neither of which is productive. On the other hand a property bubble – effective in the short term, but in the medium term production created is, eh, stored…
The German economy in the interwar period had two main stimulus programs – infrastructure and rearmament. The infrastructure program left a lasting legacy. The armaments program needed to ‘use up’ its production as it could not continue to produce ever increasing surpluses. There is some evidence that the German economy was heading for stagnation again in the late ‘thirties hence the move to primat der aussenpolitik, global policies of distraction and all that.
As Graham Stull points out, ‘bad’ stimulus will goose GDP, but to what end? Does anyone believe that the ‘cash for clunkers’ program in the US has done anything other than temporarily bring forward demand? Delayed the adjustement required in the US car industry? You do better having one group on men burying bottles in a mine and another group digging them up. Or, indeed, just paying unemployment payments… at least that way you are not building new excess productive capacity or converting useful resources into useless ones (ploughshares into swords).
As to my second point:
“What seems to be lost in the war as fiscal stimulus is that it is not blowing things up that creates growth, it is rebuilding them better afterwards.”
West Germany and Japan were the main economic beneficiaries of the post war rebuilding. Why was that? Could it be that having been so utterly destroyed they had to rebuild from scratch? The result being not only that there was an excess of productive opportunities, but that the usual impediments were no longer present (houses in the way of infrastructure, poor quality factories, antiquated railways, etc.).
One point in the paper for which I am grateful is that it is clear as to the type of shock for which the response is being modelled – a transient impulse.
Coming to the territory fairly raw, I’ve found it difficult to interpret other material I’ve seen that isn’t explicit about whether shocks described are impulses, step functions or something else. I’d tend to assume a transient impulse if the response appears to decay towards zero, as it does in each case in this paper. But where the response to shocks shows a non-transient impact, it is difficult to interpret this without knowing the rough shape of the shock.
So, thanks for the clarity.
@yoganmahew
“West Germany and Japan were the main economic beneficiaries of the post war rebuilding. Why was that? Could it be that having been so utterly destroyed they had to rebuild from scratch? The result being not only that there was an excess of productive opportunities, but that the usual impediments were no longer present (houses in the way of infrastructure, poor quality factories, antiquated railways, etc.).”
Mancur Olson has a different view of “the usual impediments” in his The Logic of Collective Action. As one author put it, Olson showed that the free rider problem applies to private collective projects no less to government.
If it is not already underway, I suggest that the academics promoting this forum start a multi-disciplinary research project on the application of Olson’s theory to how things have developed in the Republic of Ireland – starting say with WWII.
It was Olson’s travels in Europe during the 1950s that led him to ask why West Germany was booming (the country was split after defeat) while the UK (united and victorious) was suffering from what became known as the British disease.
Lest anyone think that this is more public sector bashing, I suggest that as much attention be paid to the costs and fees of people in the “free” professions (eg. lawyers, architects, vets, medics) in addition to the other intermediaries (eg. motor trade, property investors and “professionals”, advertising agencies, financial services, insurance, pensions industry) as public sector monopolies in transport, energy distribution etc. and the power of unions in certain sectors.
@Donal
Interesting, thank you. I suppose there’s the possibility that opportunity in one area creates opportunities in others? If there is a willingness to rebuild and few obstacles in the way, then the focus on rebuilding gets the best out of people (i.e. they work efficiently at their core competencies rather than getting side-tracked into ‘fighting the system’, whether that is a public or private restrictive system).
Multipliers (or lack thereof) are all the rage now it seems….
I’m surprised no one posted a link already to
“Fiscal Stimulus to the Rescue? Short-Run Benefits and Potential Long-Run Costs of Fiscal Deficits” by Freedman et al http://www.imf.org/external/pubs/cat/longres.cfm?sk=23409.0
Good data, good work.
The IMF paper I find quite troubling, in terms of the implications for longer term fiscal and financial stability. The 2nd part of the title stands out “…Potential Long-Run Costs of Fiscal Deficits”. And that needs to be read in the light of the renewed commitment yesterday by Treasury Secretary Geithner to stimulus.
“why West Germany was booming”
I thought, but cannot remember the source, that one of the so called macro reasons for WWI and WWII were the dissolution of the European Empires. With the collapse of the British and French empires the obvious beneficiaries were the non communist, not Fascist, free market economies previously excluded from trade with the British and French colonies, for example W Germany and Japan. The British and French empires did not cease to exist immediately and remained costly burdens long after WWII.
I vaguely remember reading that Fascist Italy had substantial financial support from fascist Brazil, Argentina and other like minded South Americans. If so that may explain why Italy was able for a time to maintain spending programs and budget deficits even in the face of embargoes due to her African adventures.
“The German economy in the interwar period had two main stimulus programs – infrastructure and rearmament. ”
“what Mussolini spent that extra GDP on is not trivial. ”
Etc.
As I recall, a large chunk of it was ‘spent’ (if you will pardon the obvious pun), by both Italy and Germany, in Spain (their R&D lab) but it didn’t seem to do much for their economy/people.
15 replies on “Depression multipliers”
Very interesting paper.
One comment: Fig. 11, which compares Budget Balance / GDP from 1929 to that of 2008 for the world, seems to be a crucial storyteller (i.e. that the scale of the fiscal response in the Great Credit Crisis was so much greater than in the Great Depression).
But is this true? GDP doesn’t say the same thing now as it did back then, for the simple reason that a far greater % of human productive activity was unmeasured seventy years ago (grow your own vegetables, childcare, care of elderly parents)
On the other hand, the size of the government sector in today’s economies absolutely dwarfs that of the Depression era. This difference in scale means that a 50% increase in the budget deficit now could equate to a much smaller increase in the budget deficit then, because in ’29 a larger percentage of the economy might have been dissaving in the private sector.
In other words, can we meaningfully compare the scale of the fiscal response now and then? If not, can we say which was better?
The key conclusion is also the most interesting one,
“[Scepticism suggested that] monetary policy is ineffective when the banking sector is in distress. Fiscal policy is ineffective when the need is to reduce the level of indebtedness and when much previous output in the declining sectors is unsustainable; it simply cannot be replaced by replacing demand.
“Our results push back against this scepticism. They suggest that fiscal stimulus made little difference in the 1930s because it was not deployed on the requisite scale, not becasue it was ineffective” (p.25).
The authors go on to add that their VAR estimates for the government spending fiscal multipliers were 2.5 in year 1 and 1.2 thereafter. They also note that Mussolini’s Italy was the one example of big fiscal stimuli in the period, 10% of GDP during the war against Ethiopia in 1936-7, and that Italian GDP grew by 6.8% in 1937, by a marginal amount in 1938 and by 7.3% in 1939.
Mr Lenihan says we are in war situation. If so, can we have some fiscal requisite fiscal stimulus please, rather than warmed-over cornershop budgetkeeping, a la Thatcher?
@Michael
“They also note that Mussolini’s Italy was the one example of big fiscal stimuli in the period, 10% of GDP during the war against Ethiopia in 1936-7, and that Italian GDP grew by 6.8% in 1937, by a marginal amount in 1938 and by 7.3% in 1939.”
Great! Let’s build tanks and planes and bullets and bombs. We’ll be rich in no time. We can use them to blow up all the houses we built with the last unsustainable GDP increases we had…
What seems to be lost in the war as fiscal stimulus is that it is not blowing things up that creates growth, it is rebuilding them better afterwards.
prophetic title for the post.
@ youghanmahew
I had considered entering the Eichengreen et al caveat in their research piece that it was important to engage in productive investment, not armaments, otherwise that can itself lead to war. But I didn’t think anyone on this blog woud be stupid enough to regard the authors research or my repetition of it as an endorsement of Mussolini.
Clearly I was wrong.
For the record, this is an analysis is about the relationship between fiscal stimuli, growth and government debt. There is no endorsement of Mussolini-ism either by the authors or by by me. The opposite is the case.
On the contary, I find the implication wholly objectionable as do the authors of the piece themsleves, as any reading of it would be clear.
The point that they make is that fiscal stimulus works.
The opponents of that idea have a barrel full of red herrings, and it is beginning to smell.
@Liam: at least the French are not being triumphalistic. See here for example:
http://www.lequipe.fr/Football/breves2009/20091118_235635_liberes-apres-le-supplice.html
They are quite right to single out their goalie for special praise.
@ Michael,
Don’t be so hasty to call people stupid, little hobbit. Apart from it being quite rude, you should give them the benefit of the doubt, for there may be nuances to their argument you did not fully appreciate.
To me, at least, the point about what Mussolini spent that extra GDP on is not trivial. Building tanks is not the only way to waste productive capacity and call it GDP, and Mussolini’s war apparatus was – alas! – not an isolated example of govt waste.
@Michael
Where in my post do you see me taking the research as an endorsement of Mussolini?
I am attempting to draw a comparison between different types of unproductive stimulus. On the one hand armaments industries – effective in the short term, but in the medium term the production created is either stored or used – neither of which is productive. On the other hand a property bubble – effective in the short term, but in the medium term production created is, eh, stored…
The German economy in the interwar period had two main stimulus programs – infrastructure and rearmament. The infrastructure program left a lasting legacy. The armaments program needed to ‘use up’ its production as it could not continue to produce ever increasing surpluses. There is some evidence that the German economy was heading for stagnation again in the late ‘thirties hence the move to primat der aussenpolitik, global policies of distraction and all that.
As Graham Stull points out, ‘bad’ stimulus will goose GDP, but to what end? Does anyone believe that the ‘cash for clunkers’ program in the US has done anything other than temporarily bring forward demand? Delayed the adjustement required in the US car industry? You do better having one group on men burying bottles in a mine and another group digging them up. Or, indeed, just paying unemployment payments… at least that way you are not building new excess productive capacity or converting useful resources into useless ones (ploughshares into swords).
As to my second point:
“What seems to be lost in the war as fiscal stimulus is that it is not blowing things up that creates growth, it is rebuilding them better afterwards.”
West Germany and Japan were the main economic beneficiaries of the post war rebuilding. Why was that? Could it be that having been so utterly destroyed they had to rebuild from scratch? The result being not only that there was an excess of productive opportunities, but that the usual impediments were no longer present (houses in the way of infrastructure, poor quality factories, antiquated railways, etc.).
One point in the paper for which I am grateful is that it is clear as to the type of shock for which the response is being modelled – a transient impulse.
Coming to the territory fairly raw, I’ve found it difficult to interpret other material I’ve seen that isn’t explicit about whether shocks described are impulses, step functions or something else. I’d tend to assume a transient impulse if the response appears to decay towards zero, as it does in each case in this paper. But where the response to shocks shows a non-transient impact, it is difficult to interpret this without knowing the rough shape of the shock.
So, thanks for the clarity.
@yoganmahew
“West Germany and Japan were the main economic beneficiaries of the post war rebuilding. Why was that? Could it be that having been so utterly destroyed they had to rebuild from scratch? The result being not only that there was an excess of productive opportunities, but that the usual impediments were no longer present (houses in the way of infrastructure, poor quality factories, antiquated railways, etc.).”
Mancur Olson has a different view of “the usual impediments” in his The Logic of Collective Action. As one author put it, Olson showed that the free rider problem applies to private collective projects no less to government.
If it is not already underway, I suggest that the academics promoting this forum start a multi-disciplinary research project on the application of Olson’s theory to how things have developed in the Republic of Ireland – starting say with WWII.
It was Olson’s travels in Europe during the 1950s that led him to ask why West Germany was booming (the country was split after defeat) while the UK (united and victorious) was suffering from what became known as the British disease.
Lest anyone think that this is more public sector bashing, I suggest that as much attention be paid to the costs and fees of people in the “free” professions (eg. lawyers, architects, vets, medics) in addition to the other intermediaries (eg. motor trade, property investors and “professionals”, advertising agencies, financial services, insurance, pensions industry) as public sector monopolies in transport, energy distribution etc. and the power of unions in certain sectors.
@Donal
Interesting, thank you. I suppose there’s the possibility that opportunity in one area creates opportunities in others? If there is a willingness to rebuild and few obstacles in the way, then the focus on rebuilding gets the best out of people (i.e. they work efficiently at their core competencies rather than getting side-tracked into ‘fighting the system’, whether that is a public or private restrictive system).
Multipliers (or lack thereof) are all the rage now it seems….
I’m surprised no one posted a link already to
“Fiscal Stimulus to the Rescue? Short-Run Benefits and Potential Long-Run Costs of Fiscal Deficits” by Freedman et al
http://www.imf.org/external/pubs/cat/longres.cfm?sk=23409.0
Good data, good work.
And , as I noted in the previous posting of this paper (I see there are some improvements in the latest version)
http://www.irisheconomy.ie/index.php/2009/11/11/how-effective-in-principle-was-fiscal-policy-during-the-1930s/
the CEPR have an interesting paper – with an historical perspective – with
How big are fiscal multipliers? Oct 2009 CEPR Policy Insight 39
by Ilzetzki et al
http://www.cepr.org/pubs/PolicyInsights/PolicyInsight39.pdf
The IMF paper I find quite troubling, in terms of the implications for longer term fiscal and financial stability. The 2nd part of the title stands out “…Potential Long-Run Costs of Fiscal Deficits”. And that needs to be read in the light of the renewed commitment yesterday by Treasury Secretary Geithner to stimulus.
“why West Germany was booming”
I thought, but cannot remember the source, that one of the so called macro reasons for WWI and WWII were the dissolution of the European Empires. With the collapse of the British and French empires the obvious beneficiaries were the non communist, not Fascist, free market economies previously excluded from trade with the British and French colonies, for example W Germany and Japan. The British and French empires did not cease to exist immediately and remained costly burdens long after WWII.
I vaguely remember reading that Fascist Italy had substantial financial support from fascist Brazil, Argentina and other like minded South Americans. If so that may explain why Italy was able for a time to maintain spending programs and budget deficits even in the face of embargoes due to her African adventures.
“The German economy in the interwar period had two main stimulus programs – infrastructure and rearmament. ”
“what Mussolini spent that extra GDP on is not trivial. ”
Etc.
As I recall, a large chunk of it was ‘spent’ (if you will pardon the obvious pun), by both Italy and Germany, in Spain (their R&D lab) but it didn’t seem to do much for their economy/people.