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G20 too quick to claim credit for recovery from global recession
By Robert J. Shiller |
November 20, 2009, Friday
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Print Edition
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THE International Monetary Fund's October World Economic Outlook proclaimed that "strong public policies have fostered a rebound of industrial production, world trade, and retail sales."
The IMF, along with many national leaders, seem ready to give full credit to these policies for engineering what might be the end of the global economic recession.
National leaders and international organizations do deserve substantial credit for what has been done to bring about signs of recovery since the spring. The international coordination of world economic policies, as formalized in the recent G20 statement, is unprecedented in history.
But one also suspects that world leaders have been too quick to claim so much credit for their policies. After all, recessions generally tend to come to an end on their own, even before there were government stabilization policies.
For example, in the United States, the recessions of 1857-8, 1860-61, 1865-7, 1882-85, 1887-88, 1890-91, 1893-94, 1895-97, 1899-1900, 1902-04, 1907-8, and 1910-12 all ended without help from the Federal Reserve, which opened its doors only in 1914.
Historical lessons
Economic theorists long ago developed models that describe how recessions end on their own. In his 1959 book "The Business Cycle," in a chapter titled "The Lower Turning Point," Cambridge University economist R.C.O. Matthews summarized a host of factors that business-cycle theorists of his day argued tend to bring on recovery automatically.
For example, demand for investment goods may rebound, especially in certain hard-hit sectors, after a recession has caused physical capital to become technologically obsolete.
Moreover, interest rates tend to decline in a recession, even if there is no central bank, stimulating investment demand further.
Similarly, manufacturing can expand to restore inventories depleted by over-contraction of output, while random shocks such as major innovations or harvest variations may have an asymmetric effect in a recession, with upward shocks in some sectors having a greater impact than the downward shocks in others.
On the financial front, the failure of weaker banks in a recession leaves survivors that benefit from greater public confidence and are therefore able to resume profitable business.
Some of these factors, rather than just the actions taken by governments and multilateral organizations, plausibly played a role in the current economic improvement.
Unpredictable human psychology also plays a role. Such factors, indeed, matter very much for the economic outlook, and for judging the success of the recovery program.
Puzzling market
One can start with the stock market turnaround since March of this year, which has been stunning. Using monthly S&P Composite data, the 38 percent increase from March to September was the second-largest six-month increase since 1871, surpassed only by a 71 percent increase from February to August 1933, during the Great Depression.
This same sharp turnaround occurred in many countries -- and for many assets, including oil prices, gold, and, in some countries, residential real estate.
Any solid understanding of the causes of this turnaround is likely to prove elusive. People are still puzzling over the reasons for other major market upturns (1933, 1982, etc).
A market boom, once started, can continue for a while as a sort of social epidemic, and can foster inspiring "new era" stories that are spread by news media and word of mouth.
But any such speculative boom is inherently unstable, as the stories evolve in time and with new shocks, whose effect on markets is most uncertain.
It was, in fact, an excessive speculative boom in the stock market and the housing market that got us into this financial mess in the first place.
To be sure, governments and multilateral institutions made some reasonable attempts to restore confidence. But they did not "engineer" a recovery.
(The author is professor of economics at Yale University. The views are his own. Copyright: Project Syndicate, 2009. www.project-syndicate.org)
The IMF, along with many national leaders, seem ready to give full credit to these policies for engineering what might be the end of the global economic recession.
National leaders and international organizations do deserve substantial credit for what has been done to bring about signs of recovery since the spring. The international coordination of world economic policies, as formalized in the recent G20 statement, is unprecedented in history.
But one also suspects that world leaders have been too quick to claim so much credit for their policies. After all, recessions generally tend to come to an end on their own, even before there were government stabilization policies.
For example, in the United States, the recessions of 1857-8, 1860-61, 1865-7, 1882-85, 1887-88, 1890-91, 1893-94, 1895-97, 1899-1900, 1902-04, 1907-8, and 1910-12 all ended without help from the Federal Reserve, which opened its doors only in 1914.
Historical lessons
Economic theorists long ago developed models that describe how recessions end on their own. In his 1959 book "The Business Cycle," in a chapter titled "The Lower Turning Point," Cambridge University economist R.C.O. Matthews summarized a host of factors that business-cycle theorists of his day argued tend to bring on recovery automatically.
For example, demand for investment goods may rebound, especially in certain hard-hit sectors, after a recession has caused physical capital to become technologically obsolete.
Moreover, interest rates tend to decline in a recession, even if there is no central bank, stimulating investment demand further.
Similarly, manufacturing can expand to restore inventories depleted by over-contraction of output, while random shocks such as major innovations or harvest variations may have an asymmetric effect in a recession, with upward shocks in some sectors having a greater impact than the downward shocks in others.
On the financial front, the failure of weaker banks in a recession leaves survivors that benefit from greater public confidence and are therefore able to resume profitable business.
Some of these factors, rather than just the actions taken by governments and multilateral organizations, plausibly played a role in the current economic improvement.
Unpredictable human psychology also plays a role. Such factors, indeed, matter very much for the economic outlook, and for judging the success of the recovery program.
Puzzling market
One can start with the stock market turnaround since March of this year, which has been stunning. Using monthly S&P Composite data, the 38 percent increase from March to September was the second-largest six-month increase since 1871, surpassed only by a 71 percent increase from February to August 1933, during the Great Depression.
This same sharp turnaround occurred in many countries -- and for many assets, including oil prices, gold, and, in some countries, residential real estate.
Any solid understanding of the causes of this turnaround is likely to prove elusive. People are still puzzling over the reasons for other major market upturns (1933, 1982, etc).
A market boom, once started, can continue for a while as a sort of social epidemic, and can foster inspiring "new era" stories that are spread by news media and word of mouth.
But any such speculative boom is inherently unstable, as the stories evolve in time and with new shocks, whose effect on markets is most uncertain.
It was, in fact, an excessive speculative boom in the stock market and the housing market that got us into this financial mess in the first place.
To be sure, governments and multilateral institutions made some reasonable attempts to restore confidence. But they did not "engineer" a recovery.
(The author is professor of economics at Yale University. The views are his own. Copyright: Project Syndicate, 2009. www.project-syndicate.org)
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