Why it ain\’t your grandfather\’s depression (at least, not yet)

Edward Hugh has the charts to show that in at least some countries industrial production is falling off a cliff, just as it did in the Great Depression.

It certainly looks like he\’s got the goods there.

However, however, I think there\’s one thing that\’s being missed here. The structure of the economy.

No, I\’m not going to run off and look up the figures, rather, I\’m just going to posit something.

Depending upon which country you were in in the 1930s agriculture was anything from 10-40% of the economy, yes?

Services were a small fraction and no, as I say, I\’m not going to look up the numbers. The rest, ie the bulk, of the economy was in manufacturing/industry (those aren\’t exactly the same thing but good enough for my purposes).

OK, today, in the advanced economies, agriculture is what, 1 or 2% of the economy? Manufacturing/industry is some 16% or so in the UK? 17, 18% in the US? Higher in Germany, sure, but it\’s still a lot less than 50%, isn\’t it? (Please, please, note that these numbers are all dimly remembered and are for expository purposes only).

All I really want to point out is that using industrial output as our measure of whether this is the Great Depression II doesn\’t really work: for industrial output is a much smaller share of our economy than it was last time around.

A 20% collapse in that 60% of the economy (say) that is manufacturing/industry in 1931 is different from a 20% collapse in that 16% of the economy that is manufacturing/industry in 2008.

Of course, this point doesn\’t mean that this isn\’t the GD II. Just that for us to have a 20% overall fall in the economy we need to see services, the major part of the economy now, showing the same sorts of falls that manufacturing/industry did last time around.

It might indeed be happening but industrial production figures don\’t show us that.

 

 

5 comments on “Why it ain\’t your grandfather\’s depression (at least, not yet)

  1. Hello Tim,

    “However, however, I think there’s one thing that’s being missed here. The structure of the economy.”

    I think this is a perfectly fair point. But then I am focusing to some extent on economies were industrial output is a very important structural driver – Japan, Germany, China, and Central Europe. Arguably in these economies manufacturing output is still a very important key to everything else that happens.

    Europe’s Southern and Western perifery (Spain, Greece, the UK and Ireland) is rather different since countries there were operating a different model of being driven by construction and financial services. But I think we will find cold comfort here.

    But to be explicit, I am still not saying we are back to the hard times as our grandma knew them (actually in my case it was my dad), but simply that the risk of getting stuck in a major depression exists, and needs to be taken seriously.

    Anyway, the seasons greetings to you,

    Edward

  2. Edward Hugh has touched on it but it bears repeating. Most of the so-called “service sector” jobs are completely dependent on manufacturing. They are the engineering, software-making and accounting functions that manufacturing requires to, um, manufacture.

    That government statistics have been rejiggered to count these as a separate “service” category does not change the underlying facts.

  3. Is not there a lot more current welfare to support than back in the 30s. And when the recession really bits there will be a lot more still.
    Not many handouts in 1930+.
    I remember (just) when I broke my arm about 1939 the things you had to do to get it x rayed and put in plaster.

    Tim adds: There is indeed a lot more welfare now. Which will mitigate the effects….they’re known as “automatic stabilisers”.

  4. well I never. I was an automatic stabiliser and didn’t know it.

    Tim adds: The argument being that if you have unemployment benefits then if you get lots of unemployed then the govt has to borrow money to pay the benefits (for taxes also fall in a recession) and this “automatically” provides a fiscal boost….

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