Comments on O’Rourke
Andrew K. Rose
UC Berkeley, NBER, CEPR and EIEF
Some Tensions Exist:
Let’s Eat the Cake and Have it Too
• Is Loose Monetary Policy
– “better policy response”
or
– “beggar thy neighbour”?
• Special Role of American Dollar
– “days of dollar supremacy numbered”
or is there
– “no alternative”?
1. O’Rourke data on Industrial
Production Now and Then: Terrifying!
130
120
110
100
90
80
70
60
10
20
30
40
50
60
70
80
Months since peak
June 1929=100
90
100
A pril 2008=100
110
120
Dating the Recessions
• O’Rourke uses June 1929, April 2008
• But NBER has peaks at August 1929 (2 months
later) and December 2007 (4 months earlier)
– CEPR uses January 2008 (3 months earlier)
• Does Changing Dates by 6 months Matter?
– Quick Check on American Data shows …
Using NBER Dates: Scary but …
ip829
ip1207
106.507
46.918
0
120
period
Months since Peaks, 8/'29 & 12/'07
2. Is Decline in Industrial Production
Serious, Permanent?
• Many Countries
– Serious decline in (trade and) IP
– Dramatic bounce-back of late in at least some
• Especially Small Open Economies Most Affected by
Trade
Singapore Manufacturing
Singapore Total Manfuacturing in
120
100
80
2007m7
2008m5
date
2009m3
Relevant?
Industrial Production and GDP
• Industrial Production a Small Part of GDP
– OECD: Most value-added and employment is
services
– USA 2009Q1: GDP = $14,097.2 billion
– Equivalent IP ≈ $5035.7 billion (35%!)
• Unusually cyclic compared to services, direct
government (especially investment,
inventories, durable goods)
• But IP is still obviously relevant …
And IP Shows Up in GDP:
2009q2 Singapore Real GDP +20.4%(!)
60000
Real Singapore GDP
58000
56000
54000
52000
2007q1
2009q2
date
3. Why Has Trade Collapsed?
• Fall in International Trade has been:
1. Very Fast
2. Very Large
3. Essentially Simultaneous across Countries
•
•
10/’08 – 3/’09 OECD average was -21%!
“Great Synchronization” of Trade Collapse
“Great Synchronization”
High fraction of countries now experiencing
negative export value growth
But: No Big Signs of Protectionism
• So the decline in trade simply cannot have
been “unnatural” – must be some “natural”
reason(s)!
Policy Implication
• Fears about Protectionism are forward-looking
– Warranted and Reasonable, but
– Not (yet) Realized
– Reasonable if protection driven by macroeconomy
Causes of Collapse of Trade
• Trade always responds disproportionately to
recessions (goods respond more than services)
– Contracts faster than GDP, bounces back faster too
• Shrinking Trade Credit may play special role in ‘08
• Probably Key: More Trade in Intermediates
– Trade recorded gross, not value-added; trade may fall
a lot without value-added changing much
– Elasticity of Trade wrt Income rising; now ≈ 4 (Freund)
• So 5% decline in global growth → 20% decline in trade
• Elasticity used to be <2 (Irwin)
Should We Care?
Minnesota on Great Depression
• Cole and Ohanian agree with O’Rourke: trade
effect on GD is trivial
– (So is everything else … though any policy
response slowed recovery … of course …)
– Still, perhaps trade (and protection) a side-show …
except insofar as it affects real activity …
4. Great Depression: a Once-Off?
• One observation can estimate one coefficient
with zero degrees of freedom
• World Quite Different Now
– Legacy of WWI; Gold Standard; Communism; Fascism;
Empires; Stabilizers (automatic, discretionary) …
• More Trade Institutions (in part, because of GD)
– WTO
– Regional Trade Arrangements
– Recognized Importance of Trade (e.g., G-20)
• Previous Recessions Haven’t Lead to Protection
– 1975, 1982 recessions; Asian crisis; …
International Monetary System:
Closer to Bretton Woods Reversed:
No “Golden Fetters” preclude growth
Feature
Regime Durability
Bretton Woods
Low
Inflation Targeting
High
Fixed
Floating
Partly International
Wholly Domestic
4
Exchange Rate
Regime
Focus of Monetary
Policy
Intermediate Target
Exchange Rate
5
Capital Mobility
6
Current Acc.
Imbalances
System Design
Limited
None/Inflation
Forecast
Relatively
unrestricted
High
Planned
Unplanned
1
2
3
7
Controlled
8
International Cooperation
9
Role of IMF
10 Role of Gold
11 Role of US as Center
12 Key Members
13 Central Banks
14 Transparency
15 Alignment with Academics
Necessary
Not required
Key in
Small
principle
Key in
Negligible
principle
Key in
Small
practice
Large,
OECD/LDCs,
Northern
often small
Dependent,
Independent,
Unaccountable Accountable
Low
High
Worrisome
High
Vox-Ops
• Must Guard Against Exaggeration
– Necessary for Policy-Makers
• Reform is Difficult
– But Care Required for Academic Audiences
• Vox has a LONG memory
Case for the “Tale of Two Depressions” Unclear