The early part of the current recession, dating from April 2008, had much in common with the Great Depression dating from June 1929. But the Great Depression lasted three years. So does this grim prospect await the world this time round? Or have we learned the lessons of the past and will the policies of giving economies a large fiscal stimulus, combined with bank rescues and quantitative easing, help to pull the world out of recession this year? The following articles look at the issues.
The recession tracks the Great Depression Martin Wolf, Financial Times (16/6/09)
A Tale of Two Depressions Barry Eichengreen, Kevin H. O’Rourke, Vox (4/6/09)
Economics: How the world economy might recover its poise Financial Times (15/6/09)
Weak recovery in sight but damage from crisis likely to be long-lasting, says OECD OECD (24/6/09)
OECD sees strongest outlook since 2007 Financial Times (24/6/09)
Press Release Board of Governors of the US Federal Reserve System (24/6/09)
You might also like to watch the following two videos. The first uses historical footage to examine the Wall Street Crash of 1929 and the Great Depression that followed. The second is an interview with Joseph Stiglitz about whether the recession of 2008/9 is heading for another Great Depression.
The 1929 Crash (1 of 6) Nibelungensohn, YouTube (27/2/09). Note that you can link to the other five parts of this from this link.
Joseph Stiglitz: ‘This is worse than the Great Depression’ NBC Nightly News (10/2/09)
Questions
- Why may the past be a poor guide to the present and future?
- What dangers are there from the policies of expanding aggregate demand through fiscal and monetary policies?
- Explain why the ‘race to full recovery is likely to be long, hard and uncertain.
Recent evidence from the Institute of Economic and Social Research shows that the UK economy grew in April and May and that 2009 Quarter 2 figures will also show a rise in output. Although annual growth in GDP will still be negative, as the previous three quarters were all negative, recent growth suggests that the recession might have ‘bottomed out’ and that recovery is beginning.
Of course, it’s early days to tell whether these are real ‘green shoots’ or whether the economy will slide back into negative growth once more, but confidence is returning. One sign of this is the recent appreciation of sterling (see). The following articles look the rise of the pound, why it is occurring and whether the green shoots will flourish or wither.
Pound hits 2009 high against euro BBC News (11/6/09)
Sterling: what’s the outlook now? Telegraph (11/6/09)
Sterling hits year’s high versus euro ThisIsMoney (11/6/09)
Sterling leaves euro in its wake on hopes of UK recovery The Herald (11/6/09)
Jeremy Warner: Recession may be over but not the pain Independent (11/6/09)
Taking stock of the different economic signals Times Online (11/6/09)
Questions
- Why has the pound been appreciating?
- What are the implications of an appreciation of the pound for the UK economy?
- Why is the dollar likely to fall as the prospects for the world economy brighten?
- What evidence is there that the UK economy is now beginning to recover? What will determine whether or not the recovery will be sustained?
The following articles look at a recently published book by George Akerlof of the University of California, Berkeley, and Robert Shiller of Yale. They examine the role of what Keynes called ‘animal spirits’ and is the title of the book.
The motivation to make economic decisions (to buy, to sell, to invest, etc) may not be ‘rational’ in the sense of carefully weighing up marginal costs and marginal benefits. Rather it can be one of over-optimism in good times or over-pessimism in bad times. Just as individuals have ‘mood swings’, so there can be collective mood swings too. After all, confidence, or lack of it, is contagious. This motivation that drives people to action is what is meant by animal spirits.
But are animal spirits a blessing to be nurtured or a curse to be reined in? Should governments seek to constrain them?
An economic bestiary The Economist (26/3/09)
Good Government and Animal Spirits Wall Street Journal (23/4/09)
Irrational Exuberance New York Times (17/4/09)
Animal Spirits: A Q&A With George Akerlof Freakonomics: New York Times blog (30/4/09)
Questions
- Describe what is meant by ‘animal spirits’ and their effects on human behaviour.
- Why may animal spirits make economies less stable?
- How may animal spirits help to explain exchange rate overshooting?
- Discuss whether governments should seek to constrain animal spirits and make people more ‘rational’? Also consider what methods governments could/should use to do this?
Forecasting the future state of economies is difficult at the best of times. Forecasters frequently get it wrong. To see this, just look at forecasts for the current point in time made two or three years ago – or even six months ago, given the current dire circumstances. They were often way-off mark.
But why are forecasts often so inaccurate? The problem is that in the short run the state of the economy depends on the level of aggregate demand; and that, in turn, depends crucially on confidence – both of consumers and business. But confidence is a ‘will-o’-the-wisp’ thing. Confidence can evaporate with bad news, making the situation much worse. Likewise, good news can lead to rapidly growing optimism, which in turn stimulates consumption, investment and growth. Humans are fickle creatures – and the media do not help here, playing on fears or hyping-up good news.
The following articles look at forecasts made in April 2009, when economies around the world were deep in recession. Was this recession the start of something much worse? Or were economies soon to bounce back, taking up the slack created by the recession? Forecasters were being sorely tested. It will be interesting to see in a year’s time just how accurate, or inaccurate, they were.
Are there any signs of recovery? BBC News (16/4/09)
Merkel debates economic woes amid grim forecasts Guardian (22/4/09)
IMF is being unduly alarmist: Jeremy Warner Independent (24/4/09)
What the experts say: the shrinking economy Guardian (24/4/09)
Economic surveys signal that worst could be behind Europe EarthTimes (24/4/09)
Darling’s economic forecast “unrealistic” Moneywise (23/4/09)
Crisis deepens in Europe, Japan AsiaOne News (24/4/09)
IMF warns that worldwide slump will be deeper than thought Times Online (23/4/09)
World Economic Outlook: April 2009 IMF (24/4/09). See also webcast.
Questions
- Why do forecasters differ so markedly from each other?
- Other than an unexpected rise or fall in confidence, what else could make forecasts turn out to be wrong?
- To what extent is economic forecasting similar to and different from weather forecasting?
On 7 April, Brian Lenihan, Ireland’s Finance Minister, introduced an emergency Budget. He forecast that Irish real GDP would decline by some 8 per cent in 2009, that consumer prices would fall by 4 per cent (i.e. substantial negative inflation) and that unemployment, already at 11 per cent, would rise further. So what was his solution? Was it a massive fiscal stimulus to boost aggregate demand and turn the economy around? No: it was precisely the opposite. He announced substantial tax increases and cuts in government expenditure? Was this economic madness, or was there economic sense in the measures? The following articles explore the arguments.
Ireland’s shock therapy has got its merits Independent (9/4/09)
Ireland Faces ‘Challenge of Its Life’ BusinessWeek (8/4/09)
Few crumbs of comfort as incomes take severe hammering Irishtimes.com (10/4/09)
Republic’s Budget cuts ‘for the common good’ Belfast Telegraph (8/4/09)
Ireland unveils budget ‘challenge’ Financial Times (8/4/09)
Ireland unveils emergency budget BBC News (7/4/09)
When fiscal stimulus isn’t stimulating: Stephanie Flanders blog BBC News (7/4/09)
Ireland imposes emergency cuts Telegraph (8/4/09)
Questions
- Consider the arguments for and against the fiscal tightening measures adopted by the Irish government.
- Should the UK government also adopt a tighter fiscal stance?
- How important is investor confidence in determining the success of a Budget?