Worse than the Depression

At VoxEU, economists Barry Eichengreen and Kevin O’Rourke compare the current global recession and the Great Depression — or, more accurately, parse the comparisons. They note that many commentators, like Paul Krugman, include only U.S. stock and economic indicators, in which case, some evidence suggests this downturn may be shorter and milder.

But, they argue, the Great Depression was a global phenomenon; it originated with the U.S. stock crash and soon engulfed the world economy. The current recession, likewise, is one of a globalized world. The U.S. led the fall, but didn’t fall alone.

So, they write: “the global picture provides a very different and, indeed, more disturbing perspective than the U.S. case…which as noted earlier shows a smaller decline in manufacturing production now than then.” And they demonstrate the effect, with a series of compelling and frightening graphs. 

Here’s the global stock market, the blue line representing its value during the Depression and red during the current recession: 

And here is global trade volume, another indicator. They write, “This is highly alarming given the prominence attached in the historical literature to trade destruction as a factor compounding the Great Depression.”

The one bright spot, they note: the policy responses have been far, far better this time around. Central banks have slashed interest rates earlier and lower, and increased the money supply more and faster. And, globally, there is heightened government deficit spending, intended to arrest decline.

Still, Eichengreen and O’Rourke’s analysis demonstrates that the global recession may be worse than people think, even if the U.S. manages a recovery.