It has finally happened

It was way back in April 2009 that Barry Eichengreen and I first compared the world industrial output collapses of 1929 and 2008. The situation looked pretty alarming at that stage, but it turned out that we were a good leading indicator of recovery: the world economy started turning around almost immediately afterwards, thanks to a coordinated reflationary macroeconomic policy response. Then 2010 happened, reflation turned to austerity in Europe, and the global recovery slowed, to the point where at times it seemed to be petering out almost altogether.

And in August of this year, the inevitable happened: measured in terms of industrial output, our current recovery was overtaken by that of the interwar period. Pretty dismal stuff. Let’s hope that we can at least avoid the famous 1937-38 double dip, visible at the end of the interwar series.



23 replies on “It has finally happened”

Ireland’s 2015 growth rate (presumably GDP) could be as high as 10% this year (per reports in the SBP this weekend). Other than Greece no country implemented a more severe austerity programme.


Only another 985 years to go before the Y3K nightmare begins.

Irish Nominal GDP could well rise by 10-12% this year, not real GDP.

On global growth the big difference between now and the 1930’s is the developing world, which on the IMF weights (using PPP) now accounts for just over 50% of world GDP. China and India account for 23%, double the euro area weight, and against 16% for the US.,

In terms of the 1030s graph, was widespread ramp-up in military spending (financed by government deficits) having an impact near the end of this period? The big increase in approx 1936 on the graph — is that military spending in Germany and potential combatants of Germany?

If only they had lowered interest rates to zero seafóid! To Greg: the story varies by country. In the US it was loose monetary policy (with fiscal policy really kicking in from 1940); in the UK it was housebuilding; in Germany they are obviously building other things..

But, it doesn’t follow that pursuing sound financial policies designed to lower government debt (which its detractors refer to as ‘austerity’) is the reason why growth in the developed world is currently low. Other factors are at play as well. One that I have frequently referred to is the disastrous demographics that many developed countries are now experiencing. A shortage of young people resulting from the collapse in birth rates post 1970 is in turn resulting in median population age soaring to levels never before seen. Germany, southern European and eastern European countries are worst affected. Countries in which the median population age is getting on for 50 will simply never be dynamic.

And what was the post 1940 US fiscal stimulus spent on -Shermans, aircraft carriers and wages for armed forces inter alia. The reality is that absent WW2, The new deal would probably be a failed experiment never to be repeated. Keynes would probably be a figure of fun.

@ Kevin

Sure if they had gone to zero maybe they wouldn’t have been able to go back up. I wonder can Janet.

But there are two confounding factors that may make this a less-than-useful analogy:

-Are services included in the latter-day series? Negligible in the 1930s but an important part of the global economic landscape today
-Elasticity of global trade to GDP growth was >1 pre-crisis and has fallen since. Was this sustainable or just part of a one-off integration of Asia into the global economy?

As to your point about “and the global recovery slowed, to the point where at times it seemed to be petering out almost altogether.” methinks a touch of orientalism is at work here!

Latest estimates show annual global growth >2.5% for every year since 2010. The world is on a secular upward trend in living standards, with Europe the only region consistently showing an exception to this observation.

@Tull McAdoo — I do not think that the New Deal was specifically (or at least not intentionally) Keynesian. The Keynesian consensus only emerged in the very late 1940’s and after; the New Deal was FDR attempting to build a social safety net in the face of Great Depression hardship in the USA. It was not specifically intended as a Keynesian stimulus. But you are correct that WWII was a massive Keynesian stimulus in the USA and ended the Great Depression definitively.

The Great depression was ended by destroying a lot of capital.
Wars are great for economics

*Capital must be destroyed in order for liquidity to be usefully deployed once again — especially if it is to deliver investment returns.Hence, why wars are so hugely useful for dealing with economic depressions. They permanently and effectively destroy capacity. Not just the surplus capacity that plagues the system, but core capacity, which serves a genuine economic need. Indeed, it’s the need for the capacity to be reinstalled that in many ways justifies a return on investment again.”

QE with its fake liquidity tries to be the opposite of war, preserving capital even if it deserves to be written off. But we don’t know if it works long term.

The chart is very interesting. Bernanke ensured that the dip was far less severe than that of the 30s. It will be fascinating to see how the 2 lines compare going forward.

If the 1920s/30s are the analogue, we are currently in 1928.
The big one being yet to come and the Roosevelt “recovery” still nearly 6 years away. What we’ve experienced so far is mainly foreshadowing
and the beginnings of a currency war. In the US the late 1920s and first 4 years
of the 1930s were marked by severe deflation which up to this point
we have not had. Once that’s begun, one may begin to mark the calendar.

So absent WWII has Keynesianism ever worked. It certainly failed miserably here in the late 70s both here and abroad. Its chequered track record (again absent war) does not stop academic economists, on the public payroll
from teaching it as gospel. I wonder why?


According to the Economist “Although world industrial output dropped by 13% from peak to trough in what was definitely a deep recession, it fell by nearly 40% in the 1930s” — I would myself give the source of information like this but the Economist doesn’t.

“The United States accounted for nearly half of the world’s industrial output.”

Martin Sandbu of the FT referred yesterday to this post:

Kevin O’Rourke observes that the current global recovery has now been overtaken by that of the 1930s. That’s right: the world economy’s recovery from the Great Depression had by this point overtaken the current one (though from a much deeper fall).

I’m wondering about the reliability or lack of data in the 1930s in respect of much of the world outside the US in particular China, India, the rest of Asia, Russia, and South America — despite internal upheaval and emigration China’s population was at 300m by 1800, 450m by the late nineteenth century and 500m by the 1930s. China had an industrial revolution long before England’s — estimates from Angus Maddison may have been available but still small scale non-reported manufacturing in many parts of the world could be significant.

In recent years, China has become the world’s top manufacturer while the US has been able to maintain output with a much reduced workforce.

” A shortage of young people resulting from the collapse in birth rates post 1970 is in turn resulting in median population age soaring to levels never before seen. ”

Right, a “shortage of young people” which is exactly why youth unemployment rates in the EU are so much lower than unemployment rates for those born between 1945-1965? Except they are not.

What “shortage” can be said to exist when the unemployment rates for younger workers 15-24 in every EU country, save Germany and Malta, are higher now than in 2007?


Keynesianism worked growth Wise From 1945,to the oil crisis. Great numbers. It does not work now due to a surfeit of debt. DGSE with no equilibrium.

“The world is on a secular upward trend in living standards, with Europe the only region consistently showing an exception to this observation.”

The US is also stagnating. The Middle Classes haven’t seen a real pay rise in a very long time. Median dollars earned is where it was mid 70s.

The Krugmeister had a fascinating article recently on suicides and middle age , especially amongst less well educated whites

“There has been a lot of comment, and rightly so, over a new paper by the economists Angus Deaton (who just won a Nobel) and Anne Case, showing that mortality among middle-aged white Americans has been rising since 1999. This deterioration took place while death rates were falling steadily both in other countries and among other groups in our own nation. …
. Basically, white Americans are, in increasing numbers, killing themselves, directly or indirectly. Suicide is way up, and so are deaths from drug poisoning and the chronic liver disease that excessive drinking can cause. We’ve seen this kind of thing in other times and places – for example, in the plunging life expectancy that afflicted Russia after the fall of Communism. But it’s a shock to see it, even in an attenuated form, in America.
Yet the Deaton-Case findings fit into a well-established pattern. There have been a number of studies showing that life expectancy for less-educated whites is falling across much of the nation…
In a recent interview Mr. Deaton suggested that middle-aged whites have “lost the narrative of their lives.” That is, their economic setbacks have hit hard because they expected better. Or to put it a bit differently, we’re looking at people who were raised to believe in the American Dream, and are coping badly with its failure to come true.”

Link to paper :


If quoting from FT articles and providing a link it is better to cut the letters following # unless you want to receive an email from them.

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