Asia-Pacific Economics and Business History Conference, 17-19 February 2010.
Keywords: Political Economy & History;
I originally said I would recycle the paper It’s the Same this Time? which I gave in November 2008 shortly after it became evident to everyone that the world economy was about to enter a severe recession – if it was not already in it. At that time some people were trying to draw comparisons with earlier downturns. Most of them had little economic history and, other than a vague notion there had been the ‘Great Depression’ of the 1930s, were depending on their experiences of the last decade or so, when there had been business fluctuations which seemed mild in comparison to what this one seemed likely to be.
That is why the earlier paper began with a discussion on the post-war business cycle. To cleanse the young’s minds from the view that this was the only kind of fluctuation; that this time – 2008 and after – it was going to be different..
The paper’s title, ‘It’s the Same this Time?’, refers to what are said to be the four most dangerous words in banking ‘this time it is different’. My conclusion was ‘yes this time it is the same; yes, this time it is different’. I cannot simply recycle the paper because it is too long. Moreover in the fifteen months since I gave it, I have collected more evidence and had more time to think about the issues. In November 2008 we were scrambling around, even for those of us who had been expecting a severe downturn for some months – in my case since August 2007.
Even then I was aware of a couple of ambiguities in the paper. I omitted discussing the case that the whole of the period from 1920 to 1935 was one of depressed conditions with the Great Depression at a desperate end. One might argue the same story for the Long Depression which became particularly desperate towards the end when the Auckland economy joined southern New Zealand following the Australian economy – to which Auckland was linked – going into a downturn in the late 1880s. And one might want to draw the same conclusion about the growth retardation from 1966 with the Rogernomics Recession again the more difficult phase at its end.
Regrettably there is a question of terminology – what constitutes a depression and what constitutes a recession? Leaving aside the use of the recession term as a phase of the traditional business cycle perhaps we might call a long shallow depression a ‘long recession’. That would mean there has been only one depression – in the 1930s – so its adjective ‘great’ is redundant.
While this might seem to be a matter of words, but it affects the way we think and make comparisons. It may be that we are wrong to chop up the economy into depression and recession periods on one hand and times of prosperity on the other. I have considerable respect for the Schumpetarian view that the boom and bust are intimately connected. That might tell us something about the current downturn, that it is a reaction to the long boom of the 1998 to 2008 period, with the significance that it might presage a longer downturn or recession, sometimes summarised as the L outcome.
Long Term Growth Trends
Difficulties with data complicate linking booms and busts in New Zealand. Properly estimated official volume aggregate output (GDP) figures go back only to March year 1955 There are nominal estimates derived from incomes and output going back to 1919, which can be converted into volume figures by using an output deflator. Before then – back to about 1860 – the nominal output figures are synthesised from money multipliers and converted into volume output using the consumer price index. Angus Maddison uses estimates derived this way by Keith Rankin.
Recently David Greasley and Les Oxley have been estimating volume of output in the pre-official period using individual sector outputs based on volume of production indicators. Thus far they provided estimates for only some sectors. With the addition of the service sectors New Zealand may well have reasonably reliable output series back to 1870.
So at the moment we have two unsatisfactory series of GDP per capita. Fitting a polynomial to them gives two different accounts of the long run trend of New Zealand, although they both recognise the Long Depression of the 1880s and the Great Depression; their accounts after 1955 are similar since they are using the same data.
The Maddison-Rankin Series.
The Maddison-Rankin data trend line in per capita GDP might be interpreted as follows. While there is little evidence of economic growth in the nineteenth century, and evidence of a shallow ‘Long Depression’ to 1895, after that New Zealand goes into a long growth upswing, despite various recessions and depression.
Perhaps the series tells a story of a Rostovian take-off into sustained growth. If so, the key to the takeoff is not the one described by Rostow of institutional change generating sustainable growth. Instead technological innovation had refrigeration opened up the shipping of meat and dairy products to Britain supplanting the nineteenth century economy of wool to the south and quarrying to the north. Wool remained the most important export by value but it was now a joint product with sheep meats.
The trend line shows a climacteric in the 1960s, with a slow down in the economic growth rate, presumably as a result of the fall in the structural price of wool in 1966. The slower trend after that has various fluctuations around it. The economy seems to run above the long term trend in the 1998 to 2008 period although we need some further observations before we can decide whether that was a fluctuation or there was a growth recovery.
As someone who has argued the case that there was a structural break in the New Zealand economy when the wool price fell in 1966. I am not uncomfortable with the notion of the climacteric, although I did not envisaged it before I looked at the Maddison-Rankin series.
A climacteric adds to the difficulties of the conventional wisdom sustaining its account of the reasons for New Zealand’s relatively poor quality economic performance in recent decade. However the conventional wisdom has never been strong in economic history.
The Greasley-Oxley Series.
The Greasley-Oxley series covers the 1870 to 1939 period so it tells the same story afterwards, although its climacteric in the 1960s is not as strong. A complication of the series is that while it is is based on outputs rather than money multipliers, it currently covers only the primary and manufacturing sectors, and it is possible that when the service sectors are added the growth pattern may appear a little different (although various tests I have applied suggest that it will not). A more serious problem is that it has yet to incorporate the wool inventory build up during wool during the First World War (although I have made some very crude adjustments).
There is no Rostovian ‘takeoff’ in the Greasley-Oxley series, or – what amounts to the same thing – there are two. Again there is an evident lift in economic performance from 1895, but this time the growth boom seems largely exhausted sometime in the 1905 to 1910 period. After that there is little substantial economic growth until the late 1930s. The interwar depression might be seen as an output plateau, ending in the Great Depression.
The Greasley-Oxley GDP per capita is about 30 percent higher in 1900 than the Maddison-Rankin. By 1939 they have to be at the same level, so the Greasley-Oxley series is going to grow markedly slower – say about half the long term rate – than the Maddison-Rankin one. So it does not show the takeoff. (Part of the divergence may be explained if the sectors G-O omits grow faster than the commodity sectors.)
There has been little enough research on the economy in the early twentieth century to do other than hazard some hypotheses to explain the Greasely-Oxley series – assuming that the plateau of the economic stagnation from 1905 to 1935 is not a statistical artefact, Among the hypotheses are
– New Zealand farming had exhausted the available land which had been extended as a result of refrigeration;
– there were no significant technical changes;
– the manufacturing sector never took over as a significant engine of growth;
– there was market saturation in a slowly British market.
Such possibilities have to be addressed – and the Greasley-Oxley series will be improved. In the interim we must be cautious as the pattern of long run economic growth in New Zealand.
Recessions and Depressions in New Zealand
Recessions and depressions are a monetary phenomenon, so while no doubt the pre-market of the Maori had it fluctuations, they were due to natural shocks. There were fluctuations in the market economy before 1870 but there are poorly quantitatively tracked and probably all the result of external shocks. I am also going to omit discussion on the shorter business cycle fluctuations – those we might characterise by a V.
That leaves five longer New Zealand recessions or depressions for comparison purposes:
– The Long Depression approximately 1878-1895
– The Interwar Depression which ended in 1935 but may have started as early as 1905;
– The Great Depression from 1929 to 1935, which was the tail-end of the Interwar Depression;.
– The Post-climacteric Recession, (the ‘Third Great Depression’) from 1966 to 1994;
– The Rogernomics Recession from 1987 to 1994, which was the tail-end of the Post-climacteric Recession.
There is some overlap, so I am going to confine the comparators The Long Depression; The Great Depression and The Rogernomics Recession. I now briefly describe each.
The Long Depression of the 1880s
Following the failure of the City Bank of Glasgow in October 1878, and three further bank collapses in December, there was a tightening in the London money market. New Zealand had spent the previous decade relying on borrowing in London to support the Vogel boom. The tap was turned off and there was a credit contraction. Trading bank advances, which had almost trebled between 1870 and 1879, fell 15 percent in the following year, and while there was some subsequent growth, New Zealand struggled through the next decade in ‘The Long Depression’.
There are two other elements crucial to this story. First, wool prices had been falling since 1873. So while the Long Depression was precipitated by a monetary crisis overseas, the independent terms of trade deterioration compounded the misery. Second, there had been land speculation in the 1870s, and land prices were out of line with the returns from farming them. Owners were thus saddled with excessive interest payments on overvalued land (and falling output prices). Banks were faced with the dilemma of carrying such owners and some banks failed with the New Zealand Government bailing them out.
Factor and product prices were flexible in those days, and there was a general lowering of price levels. However debts are usually set in fixed nominal terms, and so are inflexible. One of the greatest problems in each depression has been how to realign debts with actual prices; sometimes bankruptcy is the only option.
The Great Depression of the 1930s
New Zealand had entered the Great Depression with excessive debt, and the fall in both export and import prices disrupted the relationship between external and internal prices, and hence debt and domestic prices. Because the prices were relatively inflexible downwards (and debt values perhaps moreso) markets adjusted with falling output and rising unemployment.
Much of the policy activity of the period was to re-balance relative prices. This realignment of nominal price relativities is central to a sustainable Keynesian expansion. The conventional account of New Zealand in the Great Depression is based on a simple model in which a single commodity can be expanded and contracted by demand management. However an open economy must have multiple commodities, for otherwise it would not be necessary to export and import. A multi-sectoral analysis in which the relative prices between sectors and the debt they carry is a critical part of the story of the Great Depression. Fortunately the economist advisers of the 1930s grappled with it.
The Rogernomics Recession 1986-1994
The Rogernomics recession came at the end of the long adjustment to the climacteric of the 1960s. Per capita output fell every year between 1986 and 1994. Unemployment exceed 10 percent of the labour force between March Quarter 1991 and June quarter 1993 peaking at 11.4 percent. This was probably higher than at any previous time in New Zealand’s history – the Great Depression excepted – although labour market conditions were so different in the nineteenth century as to make the comparison limited.
There is no agreement as to why the Rogernomics Recession occurred. Although it is in living memory many current commentators just ignore it. In my view it was in part a working through of the climacteric, but its intensity was compounded by poor economic management – especially in regard to the exchange rate and fiscal and monetary policy which interacted with it.
Is it the Same This Time?
Table 1 compares the three substantial depressions which New Zealand has faced.
|The Long Depression
1878- mid 1890s
|The Great Depression
|Yes||Yes||No, but World share market crash in October 1987.|
|Terms of Trade||Fell, some recovery||Fell and recovered||Steady|
|Domestic Price Alignment||Probably not serious||Major measures to deal with it||Real exchange rate over-valued|
|Debt Problem?||Farm debt too high;
Excessive Government borrowing
|Farm debt too high;
Excessive Government borrowing
|Not a serious problem, except during 1986-7 financial speculation|
|Economic Management||Hardly existed, fiscal stringency||Good, but limited by institutions||Poor|
This Time 2008-
So while many of the economic mechanisms were the same, there were differences in external circumstances, terms of trade, debt and economic management. Closer inspection suggests the first two depressions/recessions had similarities, but the third was different. How do those previous experiences compare with what we are now heading into?
There is no doubt the New Zealand economy was booming in the 1998 to 2008 period. some might say it was overheated.
The a monetary crisis with weak and insolvent major financial institutions seems to have been largely resolved, but there is the concern that there will be a second phase sovereign debt crisis. Even if there is not , the monetary and fiscal authorities have to unwind the support they have been giving the financial sector and the economy as a whole. The world economy is now in recession, perhaps it is in the recovery phase although the subsequent expansion may be weak in output terms (or highly inflationary), or perhaps different in ways we cannot anticipate.
Terms of Trade
There has been some falling off in commodity terms of trade from recent high levels. Some of the falls, such as for oil, are of benefit to New Zealand. There is no reason to believe that the current export price trends are a deteriorating as they were in 1873, 1929 or 1966 (except that we might expect energy prices to rise). There is some reason to believe that the food price terms of trade may be secularly rising.
Internal Price Alignments
Assessment of the domestic price structure is complicated by the real exchange rate, which undergoes medium term cycles. The rise in the 2000s choked off export growth and tipped the New Zealand economy into a growth slowdown – even a recession – before the world recession started. The exchange rate seems to be too high, and there has to be a doubt that the export sector cannot lift the economy out of the downturn even if the world economy recovers. If it cannot, there will be parallels with the Rogernomics Recession.
Compared to previous depressions the government and the business sectors appear to have favourable debt levels. However the household sector is holding unusually high debt by past standards., largely secured against over-priced housing, although there is some consumer debt with little security except that the consumer is employed. Most is owed to banks. Insofar as they are protected by the Reserve Bank, the private sector debt becomes a public sector problem.
While most consumer debt is legally secured against housing, it is largely serviced from labour earnings. As long as unemployment remains tolerable, the housing debt problem is manageable for most individuals, although there are some who are over-borrowed against their human capital. The macroeconomic challenge may be whether New Zealand can rollover its international debt at reasonable cost.
The banking system seems sound, but there have been collapses in the non-bank financial sector, a little reminiscent to what happened to some banks in the Long Depression, except there have been no government bailouts. There is a worry that some framers have paid too much for their land and carry too much debt – shades of the Long and Great Depressions.
Government Macro-economic Management
Its current quality is too soon to tell.
Table 2 puts the previous sections discussions in the context of Table 1.
|This one? 2008-|
|International Monetary Crisis?||Yes||Yes||Not really||Yes|
|Terms of Trade||Fell, some recovery||Fell, some recovery||Steady||Probably not a long term problem|
|Domestic Price Alignment||Not serious?||Major measures||Real exchange rate over-valued||Exchange rate|
|Economic Management||Hardly existed||Good||Poor||?|
As I said, I finished the original paper with ‘Yes this time it is the same; yes, this time it is different.’ While nothing has happened in the last fifteen months to revise this assessment, additional pondering suggests that the Long Depression may be the best comparator with the current downswing. The difference, which may save us from the prospect of a 17 year stagnation, is that 125 years ago there was a parallel European long depression (but not an American or US one). We may hope that this time the world economy will soon be stronger.