Don’t always blame austerity

Bill McBride (Calculated Risk) writes: “The causes of the Great Recession were similar to the Great Depression–as opposed to most post war recessions that were caused by Fed tightening to slow inflation–and I’m frequently asked if we could compare the percent job losses during the two periods. Unfortunately there is very little data for the Great Depression.”

“In April 2012, Treasury released a slide deck titled Financial Crisis Response In Charts. One of the charts shows the percentage jobs lost in the current recession compared to the Great Depression.”

Here is that graph (I’ve modified the graph slightly and added a few dots to update the current recession).

The next chart is a version of his second graph showing how employment behaved following all post war recessions. And if you pay close attention you’ll notice the close correspondence between employment and the behaviour of Nominal GDP.

And then he makes the now conventional mistake of ascribing the 1937-38 recession to “austerity”. It was a classic monetary tightening (gold sterilization mostly) induced recession. As soon as that restriction was lifted the economy (and employment) picked up again: “Although the 2007 recession is much worse than any other post-war recession, the employment impact was much less than during the Depression. Note the second dip during the Depression–that was in 1937 and the result of austerity measures.