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Comment thread prediction:

- DK writes the first comment, expressing confusion about the post, defends Krugman
- DK writes the second comment, elaborating on a thought expressed in the first comment
- DK writes the third comment, correcting an error in the second comment
- TC writes a comment suggesting that DK doesn't understand what he's talking about, links to an essay he wrote earlier for one of his PhDs
- DK responds, expressing confusion about what TC has said
- TC suggests DK doesn't understand what he's talking about, links to poem, complains about unemployment
- DK responds again, expressing confusion and admonishing TC for rudeness
- PB writes a long comment, politely explaining where DK went wrong
- SH writes a short comment, less politely explaining where DK went wrong
- DK responds, expressing confusion about PB and SH's comments
- RE writes an essay about the last 400 years of economic history, loosely linked to the original post
- RK and BS write about things too technical for me to understand
- J O'D complains about DK derailing the thread
- BR says something about how Austrians are wrong, Keynes was right
- Nkj suggests everyone on this site is a Keynesian and thus are wrong
- GR writes multiple comments about how nobody understands Hayek, top-posts

Pretty sure GR needs to say something about Wittgenstein, too.

I would really love an activist do-nothing President. By that I mean a President who responds aggressively to financial and economic crises by identifying the government regulations, laws, and bureaucracies that created the perverse incentives, moral hazards, anti-competitive practices, etc, and eliminating them.

For example, an activist do-nothing President would have shut down FNM and FMC, then introduced a bill eliminating the Fed's dual mandate. He would have ended the government charter of ratings agencies. In response to bad news about student loans, he would have ended the program entirely.

I would like that. Ain't never gonna happen.

Very thoughtful piece of writing Peter. I ordered your book and can't wait to read it.


Best comment ever. But I love Professor Ebeling's posts since I am a sucker for history. And Nkj is right most of the time :).

Kudos Greego!!

Hoover's bads included hosting conferences with business leaders to urge them to THINK recovery to CREATE recovery, as if it was a psychological issue rather than an economic reality of malinvestment.

The utility magnate Samuel Insull attended and, indeed, bragged to one and all that his spending plans would not change from the prior year. He built and ... found himself with idle capacity as the demand for electricity sagged.

This was certainly not Hoover's fault but that of the large egoed Insull, but it is an example of how even 'soft' 'intervention' can make things worse, not better.

Source: Bradley, Edison to Enron, pp. 12-14, 183-88.

A busted Insull later near the end of his life:

"I often wonder how much of my failure can be traced to following the policies of Herbert Hoover. Understand, I am not blaming him. His policies happened to be my policies and so I acted upon them. If he advocated something different I would have been likely to have followed my own judgment. My troubles came from overestimating the capacity of the United States to come back after the first blow of the depression. When in 1931 the tide seemed to have turned, I thought recovery had set in. In that I was fooled—and so was the President. I—my companies—spent money as though things were all right. We believed that they were becoming all right. We increased our floating debt and this eventually brought about our bankruptcy. That was the penalty that I paid for helping with recovery and following the advice of the President, but, as I said before, the policies that I followed were my policies."

@Josh S

A bit off topic, but if you were going to get rid of the Fed's dual mandate, what, if anything would you replace it with? Should the fed be targeting a stable inflation rate?

Pierre Lemieux in Somebody in Charge: A Solution to Recessions? provides a detailed and enlightening discussion of how the issues Peter raises in his post played out in the recent crisis. Policy failure, not market failure generated the malinvestments and crisis. The rush to do something slowed recovery.

From my review essay (pdf available on request), in The Independent Review “A Crisis of Authority: Pierre Lemieux’s Somebody in Charge: A Solution to Recessions?, the SUMMARY”

“The roots of the recent financial crisis, according to economist Pierre Lemieux, lay not in greed and self-interest running amuck in unhampered markets, but in the policy and regulatory structure that created and enabled excessive leverage and risk taking. If Lemieux’s latest book were widely read, more people would believe that financial regulators and central banks are not needed to avoid financial crises and economic recessions.

And the conclusion:

“Lemieux’s conclusion that “The causes and legacy of the economic crisis of 2007-2009 reveal a deeper underlying crisis, which is a crisis of authority” (p. 162). If this book was widely read and widely used in classrooms, it could be very useful in awaking more of the public that we do not need somebody in charge. What we need is ‘Wicksteed’s car of collectivism’ to ‘be stored on a sidetrack” (p. 163).”

Yes, Colin, I should have made that explicit. Although I think pretty much any kind of explicitly monetary stability target would be preferable to any mandate that the Fed target things outside its direct sphere of influence.

I'd like a President who would end the Fed, to be honest, but far too many people cannot imagine how money or capitalism could possibly work without it. That's the tragedy of any bureaucracy--once it's been around for a generation, the vast majority of people believe that whatever it's in charge of wouldn't exist without it. See the Department of Education for a more recent example.

Yesterday Chris Dillow (Stumbling and Mumbling) provided an argument in defence of austerity touching on a similar idea:
"The focus of policy should be upon long-term prosperity, not the here and now."

Those pushing for greater stimulus seem to believe that the benefits from relieving current economic strains (namely unemployment) greatly exceed any costs from the “stupidity of government policies.” Dillow argues the reverse, noting that:
"in the long-run, social norms matter. The persistence of big government threatens to create a norm in which young people to look for safe public sector jobs in sclerotic hierarchies, which would divert talent away from the private sector towards low-productivity-growth work. This could choke off future growth."

I recognize that others may think differently and hold different values but understanding this distinction between the two sides seems critical to coming to one’s own conclusions.

Separately, @ Josh S - That type of do-nothing President would be wonderful.

Not going to say anything about Keynesians or Austrians. Just going to give Pete a poke on comparing Obama to Hoover.

According to Randy Holcombe in a Cato Journal paper, real federal spending in 1990 $ rose under Hoover from $195 million in 1929 to $367 million in 1933, approximately a 17% annual rate of increase.

According to a recent calculation by Mark Thoma, the annual real per capita rates of increase in federal spending under recent presidents have been the following (subject to some debating over measurements of years, etc.):

Nixon-Ford: 2.8%
Carter: 2.2%
Reagan: 2.7%
Fush I: 2.1%
Clinton: 0.8%
Bush II: 2.7%
Obama: 1.3%

Clearly all of these are way less than Hoover, with Obama less than any of these other than Clinton. Another source on aggregate increases has Obama less even than Clinton with others much higher.

Also under Obama state and local government spending (not under his control) has been falling at about 3% per year, leading to total government spending declining, and also the share of government spending as % GDP doing so as well.

Do you really want to make Obama out as some evil socialist government increaser of the worst order, Pete? How about his pushing that health care plan first proposed by the Heritage Foundation and pushed for years by many GOP politicians (including one M. Romney as governor of MA), only to turn around and have zero of them supporting it when the evil one decided to support it? Quite a spectacle, given that Hayek supported universal national health insurance, which the evil Obamneycare does not even achieve (US still the only OECD nation not fulfilling Hayek's desideratum on this matter).

Uh oh, Greego will be mad at me. I said something nice about an Austrian economist without saying anything good about any Keynesian ones. Me bad.

Barkley Rosser: I didn't see anything in Pete's post about Obama specifically, except by analogy to drive home the point that Hoover was no follower of laissez faire. In fact, you seem to be making the same point while picking a fight that is irrelevant to the thread. Yes, Romney is a lousy presidential candidate, though probably not as bad as Obama. Yes, Reagan talked the talk on small government but did not deliver, same with Bush I & II. Clinton was restrained by gridlock, which is generally the best we can hope for. But - so what? Pete points to a myth: "Laissez faire Hoover is replaced by activist FDR and the nation is saved." He wonders if a similar myth is being constructed by people like Krugman, with Hoover and FDR replaced respectively by Bush II and Obama. Do you actually have something to say about that, or are you just making a troll stop?

Then why did not Pete mention Bush II, who clearly increased government spending far more than Obama? I do not disagree that a myth about Hoover has been created. Curiously, FDR did not increase federal spending by all that much prior to WW II (when it zoomed upwards, of course), despite starting social security. Most of his changes in the 1930s were in areas of regulation and so forth, rather than in increased spending, although obviously in the long run social security has become a very big deal spendingwise.

BTW, a lot of Hoover's increased spending was on infrastructure, such as that large dam in NV that is named for him. He particularly liked funding the building of airports, which he did extensively, arguably not such a bad thing to do, if not fitting in with the myth about him.

OTOH, I have never been much impressed by the arguments about wages that many here make regarding both Hoover and FDR. That stuff has always looked pretty secondary to me, despite the Ohanian arguments.

Maybe I should not have mentioned the health care issue, which Pete certainly did not. However, I often see people here referring to it as evidence of Obama's "socialist" tendencies, despite the famous position of Hayek. Maybe I brought it up because of the wave of discussion of Hayek's views on the welfare state going on all over the econoblogosphere right now. If doing so is trollish, well, so be it. I'll go sit under a bridge and try to frighten small children with my growling.

Fair enough, no growling needed.

Pete posted about Hoover and mythology.

I recently had the opportunity to have a most enjoyable dinner with Barkley, but his comments were off the mark.

DK is absolved this round.

Rothbard and Ohanian were right. Propping up wages and prices were what turned a standard depression into a Great Depression. The Friedman/Schwartz story doesn't do it.

Barkley, all spending bills originate in the House. Obama has proposed much, much larger spending increase than the GOP-dominated House has been willing to give him. Any discussion of government fiscal policy needs to be cognizant of the fact that the United States is a republic, not a monarchy.

Further, one of Obama's largest spending programs doesn't take effect until 2014. Simply ignoring that *and* his proposed budgets to declare the President some kind of budget hawk is not very informative.

Well, I am not going to attempt to resolve the wages and prices issue here now, other than to note that while downwardly flexible wages and prices may have coincided with the shortness of the 1920-21 events, they did not help much in those of the 1870s, which many think look like those of today (Rogoff and Reinhart).

On the matter of the House and Obama, well, the Dems controlled the House for the first two years of O's presidency, and if 2014 refers to when Obamneycare kicks in, the CBO continues to hold to line that if fully implemented it will restrain growth of medical care costs, although I can certainly agree that there alternatives that may do that much better than it, with such costs clearly wildly out of control compared to virtually the entire rest of the world.

Oh, and Jerry is a most enjoyable dinner companion, :-).


"CBO continues to hold to line that if fully implemented it will restrain growth of medical care costs"

I feel much better now. I was worried that they could change their mind.

"other than to note that while downwardly flexible wages and prices may have coincided with the shortness of the 1920-21 events, they did not help much in those of the 1870s"

There are wages and there are a hole lot of other prices. I think the idea of price flexibility across the entire economy, not only wages, escaped some economists. Rothbard talked not only about wages, but prices as a hole and what measures where taken to keep them high. And if you read Rotbard again, he is careful to emphasize that unions represented a small part of the worker's force, that the Smoot–Hawley tariff affected a small part of the economy and doesn't account for the whole depression etc.

What I want to say: it's not just wages.

Jerry -
re: "DK is absolved this round."

Oh good - I was waiting for your absolution. If only I had it all the other times I did nothing to merit your abuse.

I may have mentioned this before, but Jonathan Rose had a great article in the JEH casting serious doubts on the claims about high-wage policies and whether Hoover even was able to achieve what he was shooting for. I've been involved in an exchange with Doug MacKenzie and Vedder and Gallaway in QJAE on the issue too, and I should have another reply coming out in the next QJAE.

Barkley -
re: "while downwardly flexible wages and prices may have coincided with the shortness of the 1920-21 events, they did not help much in those of the 1870s"

It's not particularly clear they helped in 1920-21 either. I find it interesting that people like to describe the 1920-21 recession as "short". I think that's an optical illusion due to how steep the drop was. It was actually the second longest recession during the Federal Reserve period (tied with the current one), after the Great Depression. It was, of course, a nice V-shaped recession, but that's a clue in to the fact that its origins were more akin to '80 than '31 (which is essentially the position I take in the RAE on it).

Greego wins the Internet today and maybe all month.

I make no apologies for writing Austrian economics-influenced poetry. How many other schools of economics get their own poet?

I'm feeling pwned!

"Those steps were anything but "do nothing", and they were taken first by a Republican President and then pursued further by a Democratic President. We have never given "nothing" a chance."

An approximation* of the liquidationist "do nothing" approach was taken by Chancellor Bruning in Weimar Germany. The results were not encouraging:

* note I say "approximation" because Austrians are like Marxists: when approximate empirical evidence of real world examples of their policy prescriptions are cited, showing that they don't work, the response is usually "it wasn't really pure Marxism/liquidationism"!

(2) Anyway as free bankers, aren't you committed to Hayek's later belief that MV should be kept stable in severe recessions? Does this not require some intervention?


The issue is not CBO changing its mind but Congress itself, where many want to undo the cost-restraining elements of Obamneycare, with those most eager to do so also ironically being those who are most loudly whining about how much it will cost down the road, maybe.

I suppose "Rotbard" was for a "hole" that all prices could fall into, :-).


Regarding V-shaped recessions, I think you mean the one in 82 that had a higher unemployment rate than this most recent one, not 80. I would compare the 1920-21 one more to the brief late 1945 one, both end-of-war adjustment ones, although given that there were still fixed wages and prices in 1945, that does not help the crowd that focuses on their flexibility as paramount very much in their arguments (they usually like to focus on how shallow it was in spite of the major spending cutbacks going on).

As it is, I am more inclined to Uncle Miltie's view than Rothbard's (although I think Smoot-Hawley played a role). It was 1931 when a bad recession turned into the Great Depression in the wake of the wave of bank failures associated with the greatest international financial collapse of all time, which followed the very unwise monetary policy of 1930. Monetary policy had a lot to do with both the collapse in 1920 and the subsequent rebound, although I shall not deny any role of price-wage flexibility.

As it is, I await somebody explaining the 1870s to us, still the second worst depression in US history, and one where there was pretty much complete wage and price flexibility as well as no Fed, although as Steve Horwitz points out, there was a lot of state regulation of banks.

I am not accusing Barkley Rosser of dishonesty, but people need to be careful with taking that list of growth rates at face value. I just looked up the White House's numbers for real federal spending (so I didn't adjust for population growth). If you do it from FY 08 - FY 11, the annual growth rate is 5.0%. If you do it from FY 09 - FY 11, the annual growth rate is -0.7%.

Recall that Fiscal Year 2009 (which is decisive here) ran from October 1, 2008 through September 30, 2009. So it included TARP and the opening stages of the Obama stimulus package. We can blame TARP on Bush, but I think we have to attribute the Obama stimulus package to Obama. (Either that, or to Mr. Package.)

I am not going to bother looking at a monthly breakdown, because even there it would be debatable as to how much of federal spending in, say April 2009 should be attributed to Bush vs. Obama.

My only point is, don't file away "Obama has the lowest growth rate in federal spending of all those presidents, subject to some quibbles about timing."

Rather you should file away, "Depending on the timing, Obama either has the lowest or possibly the highest rate of spending growth of all those modern presidents."

And I enjoyed Barkley's company at dinner at the Cosmos Club. I also have recently met Bill Woolsey and his wife.

We should also look to Obama's proposed budgets for what he wanted to spend. It is not just the Republican House (since 2010), but also the Democrat Senate that has nixed his budgets.

Are we talking about actual federal spending or budgeted spending? That makes a big difference, because the wars are off-budget.


And people say English is easy ... Sorry, not my first language. Still the argument stands, your replay probably points out Keynes argument that prices could fall to oblivion, another nonsense of his.

Bob M.,

I used Thoma's numbers, which attempted to do the month-by-month accounting and lie between the two extremes you mention. People need to keep in mind that 1/3 of the Obama stim was tax cuts, even though Prescott and Mulligan argued that the reason for the recession was workings quitting their jobs in anticipation of the tax increases Obama was rationally expected to enact. I thank you for not suggesting that I was engaging in deception.


Point taken about the Senate. I am uncertain about the war spending, although presumably adding that would push Bush II up with less effect on Obama. He had the surge into Afghanistan, but has cut things back in Iraq. Not sure how all that washes out in terms of increases/decreases. I am not going to go back to dig around on it, but as I mentioned above, I saw another source that had Obama as the lowest increaser behind Clinton, with all the others much higher, but I was suspicious of the source.


You did not see the ":-)" I put on my wisecrack about "Rotbard" and "hole"? I was teasing. And are you trying to put me in the box that Greego did by insisting that somehow I must be parroting Keynes? Sorry, no go.

To return to the serious point, so what you were saying was that it is wages and prices across the economy, and that some of the rigidities and price increases (from Smoot-Hawley and unions) were not all across the economy. Well, so what? That seems to undercut the significance of these effects in the Great Depression.

Again, the argument made here by many is that it was these effects that drove the GD, particularly compared to 1920-21, when indeed we saw some sharp declines in wages and prices. To which I repeat my previous request. If having flexibility of those is so important, then why did we not have a nice V-shaped recovery from the 1873 crash, when there was no Fed messing things up and a small federal budget so no fiscal policy to over or under stimulate? I note that some observers (Reinhart and Rogoff especially) have argued that it is the 1870s events that most resemble what has gone on recently, and the trajectories (and global reach) fit pretty well, as a matter of fact.


I don't know much about 1873. I know Friedman, Fisher and Rothbard did studied it, but I didn't have the time to read their work on it. I do not know what do you mean by V shaped and what is it you measure in order to reach the "V." Prices, unemployment?

GDP and employment, which are closely correlated.


Thank you. I'll have to look into it when I have the time.

Oh, that should be real GDP.

Going back to the origin of the thread, yes, Kruggie has misrepresented Hoover, but it is far from clear that he is misrepresenting what is going on in Europe right now.

According to estimates done at Cato, there simply have been no spending cuts in most of major EU economies. At most, spending growth is flattening. Taxes have been going up, however.

I logged on to the Daily Telegraph last night, and it cited a report that spending is at an unsustainably high level in the UK. So much for the deep cuts announced by the government.

Speaking of numbers not matching up, Fox News today ran a comparison of daily spending in Obama's administration versus prior administrations. Obama was runnings something like 50% higher than for Bush. It was sourced to Treasury.

I just discovered that Dan Mitchell posted on the issue of how much different presidents spent relative to their peers. It turns out that assumptions about what to include matter and really different results come out of different caluclations.

I think most of the trouble on this austerity issue is a language thing.

See I would have thought flat spending (i.e. - a decline relative to trend) and increased taxes would unambiguously be "austerity". To repeat a refrain I hear a lot on my side: "how much austerity do you guys need before you'll actually agree to call it austerity?"

It is a language issue and I think the discussion here illustrates that the word has no well-defined meaning. Most critics of "austerity," however treat is as referencing spending cuts. And the data evidence no cuts in spending.

Make a cut in actual spending rather than cuts in the growth of spending, and I'll call that austerity. If I spend $500/week every week, and then spend $500 this week, I haven't cut spending. I am spending the same. Even if I anticipate spending $600 next week, but only spend $500, I didn't cut spending -- it remained the same. This is the same error people make when they buy a product with a coupon then announce they saved money. No, you spent money. And if you only bought the product because you had a coupon, then you didn't save any money, but spent more than you would have. Only if you would have bought the product with or without the coupon did you save money by using the coupon. Government spending is the same way. A cut in the projected increase in spending is not a spending cut. It is not saving money. If you want to save money, make a real cut. Spend less this year than you did last year in actual dollars (or Eurodollars).

Troy -
re: "If I spend $500/week every week, and then spend $500 this week, I haven't cut spending. I am spending the same."

If you spend $500/week, then:
(1.) Have another kid
(2.) Watch the price of food and rent go up
(3.) Get a pay raise

And you still spend $500/week you are not spending the same. You're being more austere with your family and your budget. If you also:

(4.) Have the chance to refinance your home at an extremely low rate
(5.) Get a notice that the interest you pay on your credit card is being reduced, and
(6.) Can't send your other kid to college because you refuse to spend more than $500 a month

Then you're making a very bad decision.

If you're doing it because your credit is being tightly restricted and you didn't get that raise I mentioned in (3.), you're Greece and that sucks.

I think your point is very wrong before we even get into the reasons why the government is not like a family.

Anyway, this is just further demonstrating that it's a language thing, not dishonesty or ideology or anything like that.

Let me put it this way - we all agree that if GDP is well below trend that we can note that as an issue, right?

Why not government spending?

I wonder if DK spends his money according to his economic views ...

I notice this: when things stop making sense, economists call it macroeconomics.

Anyway: Krugman says the austerity in EU doesn't work, now we define austerity as flat goverment spending (not really, it actually grew) and higher taxes, in conclusion higher taxes and flat(growing) government spending doesn't work. Wow, Krugman makes sense!!!

Also, note the definition of flat: declining relative to trend, meaning growing not as fast as it should be, which, of course, everybody has problems to put a number on it, but definitively not what it is now.

Re the comment, “As it is, I await somebody explaining the 1870s to us, still the second worst depression in US history, and one where there was pretty much complete wage and price flexibility as well as no Fed, although as Steve Horwitz points out, there was a lot of state regulation of banks.” 1870s have been presented as a counter example of giving “doing nothing”
It might be useful to quote Rothbard in depth on the “myth of the ‘great depression’ of the 1870s.
“Orthodox economic historians have long complained about the ‘great depression’ that is supposed to have struck the United States in the panic of 1873 and lasted for an unprecedented six years, until 1879. Much of the stagnation is supposed to have been caused by a monetary contraction leading to the resumption of specie payments in 1879. Yet what sort of ‘depression’ is it which saw an extraordinarily large expansion of industry, of railroads, of physical output, of net national product, or real per capita income [emphasis mine]? As Friedman and Schwartz admit, the decade from 1869 to 1879 saw a 3-percent –per-annum increase in money national product, an outstanding real national product growth of 6.8 percent per year in this period, and a phenomenal rise of 4.5 percent per year in real product per capita.”
And he continues:
“It should be clear, then, that the ‘great depression’ of the 1870s is merely a myth – a myth brought about by misinterpretation of the fact that prices in general fell sharply during the entire period. Indeed they fell from the end of the Civil War until 1879. … Unfortunately most historians and economists are conditioned to believe that steadily fall prices must [emphasis original] result in depression: hence amazement at the obvious prosperity and economic growth during this era.”
Rothbard. 2002. A History of Money and Banking in the United States: The Colonial Era to World War II. Pp. 154-55
Appears to be a very complete explanation.

John P. Cochran@May 27, 2012 at 12:39 PM

Rothbard's interpretation of the 1870s is not convincing.

Unemployment was a serious problem in the 1870s and kept rising, according to Vernon (1994):

Year | Unemployment Rate
1869 | 3.97%
1870 | 3.52%
1871 | 3.66%
1872 | 4.00%
1873 | 3.99%
1874 | 5.53%
1875 | 5.83%
1876 | 7.00%
1877 | 7.77%
1878 | 8.25%
1879 | 6.59%
1880 | 4.48%

Vernon, J. R. 1994. “Unemployment Rates in Post-Bellum America: 1869–1899,” Journal of Macroeconomics 16: 701–714.

More data here:

What kind of boom or "obvious prosperity and economic growth" resulted in soaring unemployment for 5 years?

Anyway, as everyone knows, all the real GNP/GDP estimates for this period are questionable.

Romer (1989: 22) shows no recession in the 1870s, but Balke and Gordon (1989: 84) do show a recession in 1874.

Balke, N. S., and R. J. Gordon, 1989. “The Estimation of Prewar Gross National Product: Methodology and New Evidence,” Journal of Political Economy 97.1: 38–92.


I suspect that Fox News counted fiscal 2009, which began Oct. 1, 2008, for Obama. There was a rapid rate of government spending increase during that fiscal year, a portion of which Obama can be blamed for.

While most here may only count cutting spending as austerity, I think most people would view tax increases as being "austerity" as well. Heck, it reduces their disposable income leaving them with less to spend. Certainly seems austere to them.


Data for the 1870s are indeed somewhat messy with different sources saying different things. Railroad expansion occurred, although it accelerated dramatically at the end of the 1870s, marking the end of what observers at the time considered to be a "depression," indeed a "long" one. As with our recent one it was indeed an international one, starting in Europe in 1871 and only getting to the US in 1873 with a major financial crash centered on the railroad industry.

The NBER lists the period of 1873-1879 as one of economic contraction, indeed, the longest on record in US history. However, indeed, prices were falling throughout that period, so that real GDP may have only fallen in 1874. OTOH, population was also rising rapidly, so that real per capita GDP almost certainly fell throughout, with this also showing up in the unemployment figures that LK cited, while real wages were probably about constant during the 1870s.

Also double checking, while many argue that the sources of the problems initially came out of Europe, it was 1873 that the global financial crisis hit, leading to a subsequent period of troubles, whatever the actual numbers were. There were some post-Franco-Prussian War difficulties in those two countries, but they did not amount to all that much.

Barkley Rosser@May 27, 2012 at 03:42 PM

Barkley Rosser,

Even if the US had some real GNP growth in the 1870s, that is not incompatible with the view that the economy was mired in a bad state of low business confidence, debt deflation, and deficient aggregate demand.

I think the unemployment estimates (for what they are worth) illustrate exactly what Keynes said when he argued that the natural state of capitalism is an unemployment "equilibrium":

“our actual experience … [sc. is] that we oscillate, avoiding the gravest extremes of fluctuation in employment and in prices in both directions, round an intermediate position appreciably below full employment and appreciably above the minimum employment a decline below which would endanger life.” (Keynes, J. M. 2008 [1936]. The General Theory of Employment, Interest, and Money, p. 229).

1870s and 1890s America appear to be perfect examples of this phenomenon - and in the 1890s America had a bad double-dip recession according to Balke and Gordon.


You brought up a list of things entirely beside the point I was making. The assumption, as any scientist knows, is "all other things being held constant," when one discusses a single variable.

If I don't get a raise next year, they didn't cut my pay. And if I don't spend that money I had anticipated getting, but instead spend the same, then I haven't cut my spending.

Lord Keynes,

Perhaps we should add my comments on the link you posted on your blog?

"Lord Keynes,

A couple things I noticed when reading Vernon's paper.

From my understanding of his econometric methods, his unemployment rates are calculated by measuring deviations from potential GNP with real GNP (given by Balke and Gordon)/using benchmark years and Okun's Law. "In effect, deviations of the unemployment rate from the natural rate of unemployment were estimated as a function of percentage deviations of real GNP from potential output, as in Okun's Law." (p. 705).

1)I couldn't fit his exact "calculation" for the quantitative estimated deviation with unemployment and real GNP, but might question its veracity due to its value being computed when prices could have been more sticky.

2)He uses the Balke and Gordon estimates, which are more volatile than Romers. Balke and Gordon's estimates, due to the fact that they include transportation (railroads), construction, and services, would almost be a prior more volatile (to the Austrians) because of their movements during the boom and busts, etc etc (Austrians would say railroads and construction are more volatile due to their sensitivity with the interest rate and their status as "long term" projects). So, with Balke and Gordon's additional computations, the Panic of 1873, especially the period after, might be overstated, because it was well known that railroads were particularly hit bad in these areas.

However, there were certainly other measures of production improving in the 1870s, that I'm not sure are incorporated in Balke and Gordon's estimates. To take a passage from Charles Morris' "Tycoons"

"Tonnage measures of food production and consumption grew spectacularly. The volume of grains and cotton consumed at home increased by 50 percent, while exports of wheat were up threefold, corn fourfold, and cotton by 60 percent. Per capita beef consumption increased by 20 percent, while exports shot up ninefold." (p.102-103).

However, in later pages after painting this rosy picture, Morris writes how the railroads struggled during this time. So, if certain output sectors that are naturally more volatile (railroad and construction) are included while others are not (perhaps due to poor data collection or something), then naturally the GNP series will appear more volatile and the depressions more protracted.

And it is important to note that if, say Romer's estimates were used, then GNP fell much less during these years, and thus unemployment (which Vernon estimates as a function of declines in GNP) would be much less too.

This is all based on my reading of the paper and my recollection of reading my past papers."

Also important to remember is that Kuznet and Kendritch, whom all of the above (Romer/Balke & Gordon) series are based on, only intended for their estimates to be used for 5 to 10 year averages. I'm not sure if Balke & Gordon and Romer have changed their statistics to allow economists to use their yearly changes as accurate estimates for business cycle fluctuations, but if we take some "long term averages"

Balke and Gordon
1875-1880:7.3% average

1875-1880: 8.6%
1874-1878: 5.8%

Oh the horror!

I am researching the Panic of 1873 for a fellowship, so (hopefully) I will have a full fledged report on this. But to call the 1870s a time of high depression, similar to the 1930s, is flatly incorrect.

Breaking up the period into 1875-1880 or 1874-1880 is unjustified. Even under the old data, a recovery was underway in 1879.

The relevant period is 1873-1878.

The average from Balke and Gordon for 1873-1878 is 3.04% - well below the average from 1869-1900 of 4.08%.

Romer's average is 4.85%, quite high, above her average for 1869-1900 of 4.17%, but all this just shows how the estimates are widely divergent - you can have no certainty here.

And unemployment, for what it is worth, is very telling.

What kind of boom or "obvious prosperity and economic growth" resulted in soaring unemployment for 5 years?

"Breaking up the period into 1875-1880 or 1874-1880 is unjustified. Even under the old data, a recovery was underway in 1879.

The relevant period is 1873-1878. "

Uh, yeah, I did that because the KK estimates are more reliable as longer averages. Meaning that the sharp increases in growth in 79 and 80 would not just be confined to the end of the decade. And I did also provide estimates from 1874 to 1878. 73 was excluded because it was the only year where GNP actually declined (.623%). Either way, as written above, Balke and Gordon may not have the best GNP series.

As I posted on your blog, which you also ignored, I did provide a response to the "soaring" unemployment rates right above, which you also ignored.

With a HT to Peter Klein:

Chalres Morris had an relevant NT Times editorial (2006 where he argues, "Historians long attributed the turmoil [in the 1870s] to a 'great depression of the 1870's." But recent detailed reconstructions of 19th century data by economic historians show there was no 1870's depression aside from a short recession in 1873, in fact, the decade saw possiby the fastest sustained growth in American history."

"Employment grew strongly, faster tahn the rate of immigration; consumption of foods and other goods rose across the board. On a per capita basis , almost all output measures were up spectacularly. By the end of the decade people were better housed, better clothed and lived on bigger farms."

Per Rothbard, S. B. Saul makes a similar argument relative to England in this period. The Myth of the Great Depression, 1873-1896 (London: Macmillan, 1969)

"was no 1870's depression aside from a short recession in 1873, in fact, the decade saw possiby the fastest sustained growth in American history."

That is debatable: anyway we are talking about 1873-1878, not the whole decade.

The estimates of industrial production that Joseph Davis published in QJE in 2004 are probably the best means currently available for evaluating business cycles in the 19th century. They suggest that the 1870s was not a Great Depression or a period of almost uninterupted prosperity. Output grew rapidly up to 1873 (as much as 8 and 9 percent a year); it fell in 1874 and 1875 and grew at slow pace for the next two years. Industrial production did not reach its 1873 peak again until 1878. In '79 and '80 it rose at rates of around 12 and 13 percent. The period 1869 to 1879 was a period of rapid growth but there were four years of relative stagnation, during which unemployment would most likely have been significantly higher than the the years around it. Both Rothbard and the historians he criticized overstated their cases.

I am not completely familiar with Davis' estimates, or their ability to be directly used as GNP indicators, but using his figures provided there certainly was an absolute decline in industrial production from 1873-1875. However, by 1878 (not even including 1879 or 1880), the index increased about 10.5% over 3 years (roughly 2.6% per annum). This is not even including the possibility that industrial production may be overestimated in 79/80 due to poor statistics, or the complete reliability to use Davis' figures for explicit annual purposes (I have not completely read the paper yet). Even using some of the information I posted above, which does not include the high years of 79/80, average growth during 74-78 was 3.6% to 5.8% per year. Again, from above, 75-80 was 7.3% to 8.6% growth per year. The fact that some of the middle years were not as high as the end years, especially with great growth rates as above, can really only be called "stagnation" with a pessimistic attitude. Regardless as how one defines growth rates in the 70s, it is clear that they slow down in the 80s only to pick back up again in the 90s. The fall in growth rates are noticable, but they are still good growth rates. With the complex multitude of factors affecting growth, some of them government and other voluntary actions of the marketplace (e.g, technological change plays a huge role), one must be careful in labeling periods.


"The fact that some of the middle years were not as high as the end years, especially with great growth rates as above, can really only be called "stagnation" with a pessimistic attitude."

I don't think it has anything to do with one attitude. Stagnation usually refers to a period of low or no economic growth.

Output fell after 1873 and took about four years to return to its previous peak.

You may not think this is an economic puzzle or that it even matters, but some people regard it as a puzzle and it almost certinly mattered for many people at the time.

What is the research question for which you hope to get a fellowship.

P.S. I posted on my webpage graphs of Real GDP, Real GDP per capita and industrial production from Historical Statistics of the United states Millenial Edition

"I don't think it has anything to do with one attitude. Stagnation usually refers to a period of low or no economic growth.

Output fell after 1873 and took about four years to return to its previous peak.

You may not think this is an economic puzzle or that it even matters, but some people regard it as a puzzle and it almost certinly mattered for many people at the time."

Again, I find it hard to believe that a period which had average growth of 3.6%-5.8% is a period of low economic growth or stagnation. Bear in mind that since the paucity of economic statistics in both absolute and relative to modern economic data, it is better to use K-K, Gallman, Romer, and Balke & Gordon for slighly longer averages 5 or 10, but you can get away with 3 or 4, with careful analysis in analyzing "trends". Using Davis' figures for industrial production as an indicator to say real GNP didn't recover back to 73 for 5 years is inappropriate, because while they tell a similiar story of Balke & Gordon/Romer in longer terms (fast growth pre panic, contraction for two years, recovering economy, rapid growth end of decade), smaller yearly estimates show different figures. For example, in Balke and Gordon 74-75 was actually a period of very strong growth (over 5%), while for Davis the industrial production dropped around 5%! Not to mention that for Balke and Gordon (and Romer as well), GNP returned to 73 levels by 75.

I am researching the Panic of 1873 for the Mises Institute this summer.

There is no question that the GDP estimates for the 19th century are primarily intended for analysis of long term trends rather than short run fluctuations. So if you want to use them to argue that what happened after the Panic of 1873 didn't matter in the long run they seem perfectly suitable; however, if you want to know what happpened in the short run I think you need to look at other series. In addition to estimates of industrial production, I would suggest you look at business failure rates.

I appreciate your help.

I have gathered some statistics on business failure rates, in Samuel Reznack's "Distress, Relief, and Discontent in the United States during the Depression of 1873-78", he reports that the rate of business bankruptcies doubled after the panic. However, since industrial production and GNP growth was still going up, those businesses could have been bought out by larger/growing companies (a perfect example of this is Standard Oil in the 1870s). I will have to do some more research on this to find out.

He is probably talking about business failure rather than business bankruptcy. The business failure rate is from Dun and Bradstreet. Neither bankruptcy or business failure would count mergers. Business failure only counts businesses that discontinued operation in such a way that it resulted in a loss to its creditors. It is available in both the old and the new Historical Statistics.

I will keep that in mind. He does say "bankruptcies" though, but could have meant what you are talking about.

Some interesting related commentary at


“Three panics and a nonevent”
Posted on May 28, 2012by Marcus Nunes

An adovate on NGDP Nunes concludes:

"In 1873 and in 1893 there was no Central Bank. In 1929 and 2008 the Fed was there to minimize the effects of such ‘panics’. Apparently, Central Bank or not, it surely doesn´t help to let nominal spending crash! And Bernanke should note that in the 1870s and 1880s the economy performed robustly in spite of a drawn out fall in prices, an ingredient of his worst nightmares!"

I'm a little late to the party, but the last few commentors are correct to direct us to Joseph H. Davis' recent work. It represents the latest research by economic historians into 19th century business cycles and economic growth. Much of his research was initially published as NBER working papers (perhaps eventually they will get around to updating their business cycle dates). It was then published in the Quarterly J. of Econ and the J. of Econ History.

Davis' work should be the starting point for any conversation about 19th century business cycles, not the "official" NBER dates, Balke & Gordon, or Romer (these are all worth considering, but Davis considers them as well). One general fact from Davis: there is not a single 19th century contraction lasting more than 2 years (this includes 1873 and 1883). Furthermore, fully 3 of the late 19th century recessions identified by NBER did not happen at all (1869, 1887, 1890).

I do think Davis has done good work, but I am slightly wary as to use his industrial production index as a completely reliable annual index. Unfortunately, he did not really discuss comparing the industrial index to B&G and romer (citing B&G and Romer in a minor footnote and citing Romer's work on industrial production, later), and large variations between the different series (see 74-75 above) gives me doubt. The large increases in GNP right before the panic and 79/80 could be symptoms of abnormal growth relating to a business cycle and not a steady reliable growth not financed by credit creation. Meaning that the 2.6% growth during the "stagnation" period, especially during a period of declining money stock, could represent more of the normal trend than otherwise (just a speculative observation of the moment).

Jeremy H.,

Well, the only contraction in the 20th century exceeding two years is the Great Depression, and no other even comes close to lasting two years. Much of the debate here has been about ones that bounce back sharply, such as after 1920-21 and 1982 versus ones that come back slowly. Some of the growth rates after the 1933 turnaround in the US were pretty high, but the economy went down so far that this still looked like a very slow recovery, particularly when the 1937 recession (the first downturn to be called that at the time) intervened.

As the one who started all this discussion of the 1870s, the details of the debate over data have gone beyond my expertise. But it still looks like the claim of Reinhart and Rogoff that the 1870s may resemble what we are seeing more than any other period in US history does not look disproven, if the differences may be bigger than R&R saw. There was very likely a contraction of about two years, maybe only one year, followed by a couple of years of somewhat slow growth, with that possibly still being negative when measured in real per capita terms (and unemployment apparently rose during those years, resembling the ongoing stagnation of US labor markets, although employment has risen somewhat), before there was the definitely dramatic takeoff in 1879.

Their argument was that one can distinguish between downturns that substantially involve major problems in the financial sector, with this spread internationally, and those that do not. The latter can easily bounce back rapidly; the former do not. They list three as fitting the former, the 1870s, the 1930s, and today (when the actual GDP contraction probably lasted only about a year, if that long) do not. This still looks pretty defensible, even in light of this last string of posts debating the 1870s.

Prof. Rosser,
I am somewhat unclear what criteria you are using to define "bounce back rapidly." The 1920-1 recession lasted 18 months, the same length as 2007-9 (using NBER dates). Even the 1981-2 recession was roughly the same, 16 months. The Davis series is not as useful here, since it only provides annual figures, but it is not unreasonable to suggest that it was in the ballpark of 1.5 years.

If we are talking about the speed of recovery, I'm just not seeing the evidence that the late 1870s were particularly bad. There is no reliable, independent unemployment data for intercensal years. Most estimates (e.g., the Vernon 1994 data cited above) are just built from GDP estimates (Vernon uses Belke-Gordon 1989).

Another useful data source is, which uses the Davis IP series for annual fluctuations and benchmark GDP estimates (such as Belke-Gordon, Romer, and older estimates) to provide an annual series of Real Per Capita GDP. This provides some evidence in Prof. Rosser's favor: growth rates of RPCGDP in 1876-89 were 2.0%, 2.9%, 1.3%, and 9.5%. So the first three years don't quite look "V-shaped," but 2-3% is nothing to sniff at. It doesn't look as fantastic as the first two years after the 1920-21 recession: 4.1%, 11.2%, 0.8%, 5.1%, but I think this period is actually the outlier (also, the decline was greater: 6.3% in 1920-1 compared with 3.4% in 1874-5). After 1982 we have growth of 3.6%, 6.3%, 3.2%, and 2.5%, falling somewhere in between the other two. But I'm unconvinced that the late 1870s recovery was particularly bad.

To summarize my previous comment, I'll respond to what Brad said earlier:

"Output fell after 1873 and took about four years to return to its previous peak."

The exact same thing is true for the supposedly V-shaped 1920-21 recession. Using data, the peak in 1919 (in Real per capita terms) is not passed until 1923: four years. The peak in 1873 is passed in 1877: four years. The 1982 recession is harder to compare, with the twin recessions, but 1982 is below the 1979 peak, which is finally passed in 1983: you guessed it, 4 years later.


All of this gets upended if real per capita terms are considered, given the much higher population growth rates in the 1870s compared to the other periods.

The source for unemployment rates is from the paper by Vernon from 1994. I do not know how those were estimated or how accurate they are, but as listed above, they peak at over 8% in 1878, which if accurate fits the story being told of a stagnant labor market, and a recovery not rapid enough to stay ahead of the rising population and labor force through 1878.

If you look at industrial production during the 1920s (Miron and Romer seasonally adjusted index),production peaks in May 1920 reaches a trough in June 1921 and was back to its previous peak by Dec. 1922.

I have expressed some of my concern with the Vernon unemployment measures. They use B&G series, which uses as one of its components railroad output. It is admitted, even by proponents that the 1870s were a fantastic decade, that railroads struggled during this time (many of them went bankrupt and too many were built during the boom). So naturally, using this as one of the components (while unfortunately not having all of the data to provide for a completely accurate estimate of output) would show lower growth. And using a regression estimate to fit unemployment during this time would equate to a higher jobless rate.

There are many other "nitpicks" I have (e.g. using Okun's Law and their choice of Full employment years), but that is one of my main gripes.

It is also important to note that real GNP per capita growth can be misleading during periods of high immigration and population growth. Many countries in Europe experienced higher rates of per capita growth than the U.S during this time (Gilded Age), not because they were necessary growing faster or healthier economies, but because such larger portions of their labor force left to go to America since the real wage was higher.

Its a good idea to be skeptical of estimates such as the unemployment figures. If, however, there are a variety of estimates suggesting the same thing I am more likely to be persuaded. This is why I believe that there was probably a period of about four years of relateivley stagnant economic performance from around 1874 to 1878.

1. Decreased industrial production (Davis)
2. Significantly higher levels of business failure.
3. A large drop in imports, which I beleive is a better indicator of U.S. economic performance than exports.
4. Decreases in railroad production and revenue

All of these are consistent with higher levels of unemployment.

Evidence on rapid growth from 69' to '79 isn't really relevant because these same series I listed above show unusually rapid expansion before and after the the period of stagnation. In short, they show the 1870s as a period of boom and bust, and we still have the same questions. Is four years a long time to recover? If it is, why did it take so long?

In sum, I think that revisionists are correct that the 1870s was in now way comparable to the 1930s in severity or length, but they go too far when they try to argue that it was simply period of rapid growth and falling prices. Doing so eliminates some interesting questions from economic history.

P.S. Patch, If you want to continue to discuss this as your research progresses, my email can be found under the "About Me" on my webpage.

I love would to continue this discuss and provide updates on this progress. However, I have a couple of comments on your 4 points.

"1. Decreased industrial production (Davis)
2. Significantly higher levels of business failure.
3. A large drop in imports, which I beleive is a better indicator of U.S. economic performance than exports.
4. Decreases in railroad production and revenue"

1. As explained above, only the growth in industrial production declined after 1875. From 1875 to 1878, the industrial production averaged with an increase in 2.6% per year (and during this time period B&G/Romer series showed roughly 3-6% growth rates). While these are certainly "slowdowns" compared to the periods right before the boom and right after the boom, this may not be evidence of a stagnation but rather a more normal growth not perverted by credit expansion. It is well known that in the periods right before 73 and during 79/80 (especially late in the decade), there were dramatic increases credit expansion. So the growth rates shown could have been unusually high from an Austrian boom and not evidence of a normal healthy market growth.

2.The Business failure could have resulted from the liquidation of unprofitable firms constructed during the malinvestment (for example, the railroads)

3.I have not looked at import/export tables, but if I am not mistaken I believe there was a trade deficit shortly before the bust burst. This is a symptom of overconsumption, and declining imports. Not to mention that during this period of prices continued to fall, which would make domestic markets relatively more attractive to consumers then foreign markets.

4.I would actually find the decreases in railroad production and revenue to be healthy and a clear example of the market trying to liquidate unsound investments that increased during the boom. In his American Business Cycles, 1865-1897, Rendigs Fels goes into descriptions of how railroads were grossly overbuilt and there was no shortage of roads to be made during the 1870s. Much like the housing market of today, building additional railroads at the time would have been unprofitable investments.

Prof. Rosser,
The data are in Real, Per Capita terms.

Patch does a good job of explaining the Vernon unemployment data two comments below your last comment. In short, these data tell us nothing more than the Belke-Gordon GNP data tell us. It is the essentially same data, translated from GNP to Unemployment.


I don't understand some stuff:
1. Decreased industrial production (Davis)
Patch has more values. There was still growth, just not the boom one.
2. Significantly higher levels of business failure.
That's what happens after a boom, no one denies this. How many businesses were created at the same time?
3. A large drop in imports, which I believe is a better indicator of U.S. economic performance than exports.
Why is that? I understand that you believe that, but forgive me if I don't take your word for it. I also believe that patch's response is a good one.
4. Decreases in railroad production and revenue
Ok, so what? There was no other way of transportation? Even today it is cheaper to transport stuff from Turkey to Russia by truck, but we are in a recession so maybe you have a point.

It is also worth considering the sector data from Davis in his technical appendix. Notice that there is not much co-movement going on in 1873-75. The only sectors that decline in both 1874 and 1875 are metals and machinery (locomotives are included in this sector). In fact, machinery does not reach its 1873 level again until 1881! Whereas food production and metals had doubled by 1881. Patch, you'll probably find this data useful for your research project.

Extremely! Thanks Jeremy.

1. Decreased industrial production (Davis)

Output declined for two years and then took two more years to get back to its peak. Thats four years without an increase in industrial production.

2. Significantly higher levels of business failure.

Business failures are from Dun and Bradstreet(actually the Dun Agency because this was before the merger). They include businesses that used commercial credit. The vast majority are retail and wholesale merchants who sought trade credit from other merchants and manufacturers. Failures are business that discontinued operation with a loss to their creditors. You have to look elswhere for railroad defaults.

3. A large drop in imports, which I beleive is a better indicator of U.S. economic performance than exports.

Consumption of imported goods tends to function of income in the U.S.; consumption of exports tends to be a function of income abroad.

4. Decreases in railroad production and revenue

Yes it followed a boom in railroads, but I thought that was the whole point. There was a boom followed by a bust. The question is "How long and how severe was the bust?" I suggest that there is considerable evidence that it took about four years to get back on track.

Suggesting that one would expect decreases in production and increases in business failures following a boom doesn't alter the fact that they negatively affected people when they happened.

Well, I am not digging into the data, but now simply responding to arguments about what people seem to agree on. I would say that the replies by Patch and Niko for points 3 and 4 not to be at all convincing. Neither seems to disagree that there were declining imports as well as declining revenues and production in the crucial rail industy.

So, the responses amount to that these might be "good things," if there was a trade deficit, then there was "too much consumption" and maybe the adjustment in railroads was also "healthy" along with the argument that people did not apparently need trains.

Well, these may have been healthy adjustments, but they are nevertheless consistent with falling real per capita GDP during the period in question. They support the idea that there was a recession, or depression as it was called at the time. It was not as bad as the Great Depression, and maybe it was "needed" or "healthy," but there was a definite downturn that did not really get over for quite a few years in the mid-to-late 1870s.

"So, the responses amount to that these might be "good things," if there was a trade deficit, then there was "too much consumption" and maybe the adjustment in railroads was also "healthy" along with the argument that people did not apparently need trains.

Well, these may have been healthy adjustments, but they are nevertheless consistent with falling real per capita GDP during the period in question. They support the idea that there was a recession, or depression as it was called at the time. It was not as bad as the Great Depression, and maybe it was "needed" or "healthy," but there was a definite downturn that did not really get over for quite a few years in the mid-to-late 1870s."

Not when you look at other data involved, as other areas were expanding. Railroad production/output did fall because it grew overbloated during the boom.So it is natural for it to decline during the recovery. As for trade deficits, I am not saying that is a bad thing. And declining imports does not mean declining real GDP per capita, especially during a period where prices were rapidly falling.

"They support the idea that there was a recession, or depression as it was called at the time. It was not as bad as the Great Depression, and maybe it was "needed" or "healthy," but there was a definite downturn that did not really get over for quite a few years in the mid-to-late 1870s."

Nice rhetoric.

"Output declined for two years and then took two more years to get back to its peak. Thats four years without an increase in industrial production."

That's two years of declining and two years of increasing, not four flat, low years. Uau, it's almost V shaped ...


Its certainly reasonable to be skeptical, especially about evidence, particulalry historical GDP estimates. Thats why I advocate looking at a variety of indicators. If you have access to a good university library it probably has the electronic version of Historical Statistics of the United States and there are a lot of things you are likely to find useful. By the way immigration also falls substantially.

I'm curious though. Is there a reason based in Austrian Business Cycle theory that you would expect the recovery to be rapid? I know ABCT provides an explanation for the boom and the bust, but does it explain what factors determine how long the bust phase will last?

One thing that has puzzled me about this discussion is that I would think Austrians would like to be able to claim that the bust phase is likely to be long and severe. If there is no real price to pay for the misallocation from a credit boom, why should people care?

I have been trying to look at a variety of indicators, ranging from industrial production index (Davis) to multiple GNP series.

During the decade I believe the overall population increased by a little under 30%. Yes, immigration did fall, but that does not necessarily mean that there was a poor labor market. Only that foreigners believed there was a poor labor market. There is no doubt that many contemporaries though the depression was long and severe, mainly because they looked at price indexes and asset values. So for them, since prices fell rapidly, they naturally thought it was a depression. And if nominal wages continued to decline in the latter half of the 70s, many observers would believe that the economy was still contracting.

The "bust" phase lasts as long as it needs to. The essential requirement is that the economy readjusts to the higher "natural" rate of interest, mainly by allowing costs to fall relative to price. This conforms with the higher rate of time preference that was artificially lowered by credit expansion. The speed of the recovery depends on how long this takes, or if any additional "exogenous" shocks occur (such as a fall in time preferences or technological change) which would improve the economy.

For example, the economy experienced a contraction in 73 to 75, and then experienced rising growth (slower relative to the boom years) in the mid to late 70s. Since the economy was allowed to contract, sustainable growth unaided by credit expansion could occur during those years.

@Patch: "I would think Austrians would like to be able to claim that the bust phase is likely to be long and severe. If there is no real price to pay for the misallocation from a credit boom, why should people care?"

Different things happen to different people. There are those whose enterprises fail and need to be liquidated. There are those who find investment opportunities in the liquidated assets. Government intervention, in seeking to prevent the former, inhibits the latter.

Sounds like the historical picture is a little murky.


If you go back and read the guts of Jeremy's discussion rather than his later summary, you will find him agreeing that the growth after 1875 was slower than the decline, "don't quite look v-shaped," to quote him precisely. He agreed that 1920-21 looked more "ve-shaped," although he then described that latter as "an outlier."

So, I maintain my position. What happened in the 1870s was not v-shaped, the recovery was slower than the decline, whereas the early 1920s events look a lot more v-shaped. There continues to be good reason to compare the 1870s to today, and again, 1873, 1931, and 2008 were all years of global financial crisis and collapse, followed by sharp declines in GDP in virtually of the countries affected.

One could hold the argument that the boom after 1920/21 had higher growth than the 1870s because another bout of credit expansion had occurred. That would allow for higher levels of growth, even though it all wasn't sustainable. In the 1870s, there was credit contraction.

Prof. Rosser,
Since terms like "V-shaped" and "quick recovery" are not precise, I'm willing to concede that my eyeballing is not the final arbiter. So I present the raw data, in pictures, for all to make their own judgments:

The linked Google Doc contains five different recessions (click on the Chart tabs at the bottom). Each starts from the peak year of Real GDP Per Capita (Johnston & Williamson series), then shows the 4 subsequent years. The only trick: I haven't told you what the years are!

So everyone still following this thread, please take a look at the 5 charts and tell us which recession is the most "v-shaped" in your estimation.

Prof. Rosser,
Can you provide the citation where Reinhart and Rogoff discuss the 1870s? I skimmed back through "This Time is Different" but didn't see anything.


Their paper with that title discusses it, but it is in with the other biggies, which include the Napoleonic Wars, the 1830s-40s, the GD, and the late 1980s, as well as more recently. I did not see them making a special connection between 1870s and today. I think it was somebody else's interpretation of them that did that.


I'm not sure that visual comparison of graphs will work very well when the vertical scale changes on each graph. the almost 3 percent decline on graph 3 looks as large as the almost 30 percent decrease on graph 4.

And, as you know, the use of these GDP estimates for business cycle analysis should be taken with a grain of salt.

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