Comparing 2011 with 1937

In today’s article in Bloomberg View I explore reasons for the current weak recovery, and in particular whether there is an analogy with what happened in the recession of 1937-38 which interrupted the recovery from the Great Depression. Several charts elaborate on numbers provided there which argue against such an analogy.

The first one relates to fiscal policy. It shows the ups and downs of real GDP growth in the 1930s and the contributions to that growth coming directly from government purchases and other components of GDP. (The data come from this interactive table at the Bureau of Economic Analysis ). Clearly the change in government purchases contributed little to the downturn in 1937 and 1938. Even with generous multiplier effects on consumption, the changes in government purchases are too small to make much difference. Given that any decline in government purchases now due to the end of the 2009 stimulus is even smaller than the declines in 1937, the fading out of the stimulus is unlikely to have much to do with the current slowdown.

The other two charts relate to monetary policy. One shows the large decline in the monetary base (currency plus reserves) from May 1936 to May 1937 and the other shows the large increase in the monetary base from May 2010 to May 2011. While the decline in the monetary base is likely to have been a reason for the slowdown in the 1930s, there is no such decline now to explain the current slowdown. The recent ups and downs in the monetary base are due to the quantitative easings and at some point the monetary base will have to decline again. The challenge for the Fed will be to carry out this exit strategy in a clear and transparent manner in order to minimize disruption and uncertainty.

About John B. Taylor 117 Articles

Affiliation: Stanford University

John B. Taylor is the Mary and Robert Raymond Professor of Economics at Stanford University and the Bowen H. and Janice Arthur McCoy Senior Fellow at the Hoover Institution. He formerly served as the director of the Stanford Institute for Economic Policy Research, where he is now a senior fellow, and he was founding director of Stanford's Introductory Economics Center.

Taylor’s academic fields of expertise are macroeconomics, monetary economics, and international economics. He is known for his research on the foundations of modern monetary theory and policy, which has been applied by central banks and financial market analysts around the world. He has an active interest in public policy. Taylor is currently a member of the California Governor's Council of Economic Advisors, where he also previously served from 1996 to 1998. In the past, he served as senior economist on the President's Council of Economic Advisers from 1976 to 1977, as a member of the President's Council of Economic Advisers from 1989 to 1991. He was also a member of the Congressional Budget Office's Panel of Economic Advisers from 1995 to 2001.

For four years from 2001 to 2005, Taylor served as Under Secretary of Treasury for International Affairs where he was responsible for U.S. policies in international finance, which includes currency markets, trade in financial services, foreign investment, international debt and development, and oversight of the International Monetary Fund and the World Bank. He was also responsible for coordinating financial policy with the G-7 countries, was chair of the working party on international macroeconomics at the OECD, and was a member of the Board of the Overseas Private Investment Corporation. His book Global Financial Warriors: The Untold Story of International Finance in the Post-9/11 World chronicles his years as head of the international division at Treasury.

Taylor was awarded the Alexander Hamilton Award for his overall leadership in international finance at the U.S. Treasury. He was also awarded the Treasury Distinguished Service Award for designing and implementing the currency reforms in Iraq, and the Medal of the Republic of Uruguay for his work in resolving the 2002 financial crisis. In 2005, he was awarded the George P. Shultz Distinguished Public Service Award. Taylor has also won many teaching awards; he was awarded the Hoagland Prize for excellence in undergraduate teaching and the Rhodes Prize for his high teaching ratings in Stanford's introductory economics course. He also received a Guggenheim Fellowship for his research, and he is a fellow of the American Academy of Arts and Sciences and the Econometric Society; he formerly served as vice president of the American Economic Association.

Before joining the Stanford faculty in 1984, Taylor held positions as professor of economics at Princeton University and Columbia University. Taylor received a B.A. in economics summa cum laude from Princeton University in 1968 and a Ph.D. in economics from Stanford University in 1973.

Visit: John Taylor's Page, Blog

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