In America we’re not (yet) reliving the Great Depression. In other parts of the world, people are.
So it’s plausible that the crash of ‘08 (really 2006-?) might, whatever its fundamental cause, be comparable to the great crash of ‘29 (really 1928 to 1932?).
Paul Krugman is digging deeper into this comparison. For example, if the crash of ‘08 was indeed comparable to the crash of ‘29, then Americans should be in much worse shape than we are. Our stimulus package wasn’t nearly big enough to stave off that sort of financial tsunami.
Today Professor Krugman points to a much bigger stabilizer – the size of the public sector and the national deficits that have kept it going …
Jan Hatzius of Goldman Sachs has a new note (no link) responding to claims that government support for the economy is postponing the necessary adjustment. He doesn’t think much of that argument; neither do I. But one passage in particular caught my eye:
“The private sector financial balance—defined as the difference between private saving and private investment, or equivalently between private income and private spending—has risen from -3.6% of GDP in the 2006Q3 to +5.6% in 2009Q1. This 8.2% of GDP adjustment is already by far the biggest in postwar history and is in fact bigger than the increase seen in the early 1930s.”
That’s an interesting way to think about what has happened — and it also suggests a startling conclusion: namely, government deficits, mainly the result of automatic stabilizers rather than discretionary policy, are the only thing that has saved us from a second Great Depression….
… In the 1930s the public sector was very small. As a result, GDP basically had to shrink enough to keep the private-sector surplus equal to zero; hence the fall in GDP labeled “Great Depression”.
This time around, the fall in GDP didn’t have to be as large, because falling GDP led to rising deficits, which absorbed some of the rise in the private surplus. Hence the smaller fall in GDP labeled “Great Recession.”
What Hatzius is saying is that the initial shock — the surge in desired private surplus — was if anything larger this time than it was in the 1930s. This says that absent the absorbing role of budget deficits, we would have had a full Great Depression experience. What we’re actually having is awful, but not that awful — and it’s all because of the rise in deficits. Deficits, in other words, saved the world.
I’m looking forward to reading the economic history books on the period from 1994 to 2014. They should be quite informative.
Incidentally, today’s comments on Krugman’s post are pretty low quality. He certainly has a eclectic readership.