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!

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 …

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

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 ≈ $ 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%(!)

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 FeatureBretton WoodsInflation Targeting 1Regime DurabilityLowHigh 2Exchange Rate Regime FixedFloating 3Focus of Monetary Policy Partly InternationalWholly Domestic 4Intermediate TargetExchange RateNone/Inflation Forecast 5Capital MobilityControlledRelatively unrestricted 6Current Acc. Imbalances LimitedHigh 7System DesignPlannedUnplanned

8International CooperationNecessaryNot required 9Role of IMFKey in principle Small 10Role of GoldKey in principle Negligible 11Role of US as CenterKey in practice Small 12Key MembersLarge, Northern OECD/LDCs, often small 13Central BanksDependent, Unaccountable Independent, Accountable 14TransparencyLowHigh 15Alignment with AcademicsWorrisomeHigh

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