FIVE GREAT STAGNATIONS Paper to Treasury Seminar: 26 July, 2011 Brian Easton Economic and Social Trust On New Zealand Introduction Definitions Beginnings Stagnation 1: The Long Depression Stagnation 2: The Interwar Recession The Great Depression Stagnation3: The Post-war Recession Stagnation 4: The Wool Price Collapse Stagnation 5: The Rogernomics Recession Stagnation6: The Great Recession? Lessons
L O G S C A L E 10000 1000 NEW ZEALAND PER CAPITA GDP y = 0.3922x 2-15.358x + 1378.8 R² = 0.9885 1862 1866 1870 1874 1878 1882 1886 1890 1894 1898 1902 1906 1910 1914 1918 1922 1926 1930 1934 1938 1942 1946 1950 1954 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 YEAR
Defining the Phenomenon 1. GDP per capita 2. At Least 5 years of negligible growth. 3. I call them stagnations; also long recessions and depressions
Beginnings Pre-market economy stagnated: end thirteenth century to end of the eighteenth. Early market economy had booms and busts 1860s Gold and War Booms
L O G S C A L E 10000 1000 STAGNATION 1: THE LONG DEPRESSION GDP per capita MOVING AVERAGE (5 years) 1862 1866 1986 1870 1874 1878 1882 1886 1890 1894 1898 1902 1906 1910 1914 1918 1922 1926 1930 1934 1938 1942 1946 1950 1954 1958 1962 1966 1970 1974 1978 1982 1990 1994 1998 2002 2006 2010 YEAR
L O G S C A L E 10000 1000 STAGNATION 2: THE INTERWAR RECESSION GDP per capita MOVING AVERAGE (5 years) 1862 1865 1868 1871 1874 1877 1880 1883 1886 1889 1892 1895 1898 1901 1904 1907 1910 1913 1916 1919 1922 1925 1928 1931 1934 1937 1940 1943 1946 1949 1952 1955 1958 1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 YEAR
The Great Depression New Zealand entered over-borrowed with a sharp fall in the terms of trade. Three major economic imbalances: - a fiscal imbalance; - a commodity price imbalance; - land values were excessive and farm balance sheets over-leveraged. There was no automatic market adjustment to these imbalances because of various rigidities in the fisc, wages, prices, the exchange rate, interest rates, the value of mortgages.
L O G S C A L E 10000 1000 STAGNATION 3: THE POSTWAR RECESSION GDP per capita MOVING AVERAGE (5 years) 1866 1862 1994 1870 1874 1878 1882 1886 1890 1894 1898 1902 1906 1910 1914 1918 1922 1926 1930 1934 1938 1942 1946 1950 1954 1958 1962 1966 1970 1974 1978 1982 1986 1990 1998 2002 2006 2010 YEAR
QUARTERLY GDP per capita 2200 2400 ll 1800 2000 Hall-McDermott Series 1600 1800 1200 1400 1000 800 Jun/47 Nov/48 May/50 Nov/51 May/53 Nov/54 May/56 Nov/57 May/59 Nov/60 May/62 Nov/63 May/65 Nov/66 May/68 Nov/69 May/71 Nov/72 May/74 Nov/75 May/77 Nov/78 May/80 Nov/81 May/83 Nov/84 May/86 Nov/87 May/89 Nov/90 May/92 Nov/93 May/95 Nov/96 May/98 Nov/99 May/01 Nov/02 May/04 Nov/05 May/07 QUARTER QUARTER
G D P p e r c a p i t 3000 2500 2000 1500 1000 500 0 STAGNATION 4: WOOL PRICE CRASH GDP per capita TREND 1 TREND 2 Mar/52 Jun/47 Jan/49 Aug/50 Oct/53 May/55 Nov/56 Jun/58 Jan/60 Aug/61 Mar/63 Oct/64 May/66 Nov/67 Jun/69 Jan/71 Aug/72 Mar/74 Oct/75 May/77 Nov/78 Jun/80 Jan/82 Aug/83 Mar/85 Oct/86 May/88 Nov/89 Jun/91 Jan/93 Aug/94 Mar/96 Oct/97 May/99 Nov/00 Jun/02 Jan/04 Aug/05 Mar/07 Oct/08 a QUARTER
G D P 3000 2500 p e r 2000 1500 c a p i t 1000 500 STAGNATION 5: ROGERNOMICS RECESSION GDP per capita TREND 1 TREND 2 TREND 3 Jun/47 Nov/00 Jan/49 Aug/50 Mar/52 Oct/53 May/55 Nov/56 Jun/58 Jan/60 Aug/61 Mar/63 Oct/64 May/66 Nov/67 Jun/69 Jan/71 Aug/72 Mar/74 Oct/75 May/77 Nov/78 Jun/80 Jan/82 Aug/83 Mar/85 Oct/86 May/88 Nov/89 Jun/91 Jan/93 Aug/94 Mar/96 Oct/97 May/99 Jun/02 Jan/04 Aug/05 Mar/07 Oct/08 a 0 QUARTER
Stagnation 6? The Great Recession September quarter 2007 late 2012 or later. The first five great stagnations totalled at least 60 years of the last 150. For over a third of New Zealand s measurable economic history, production has stagnated for long periods. We should not be surprised if there is a sixth great We should not be surprised if there is a sixth great stagnation sometime in our lifetime.
Stagnation Lessons 1. What are the international conditions? 2. Pay attention to changing patterns of production in New Zealand. 3. Try to Assess the Underlying Growth Track 4. Think About the Government Sector 5. Look for Imbalances in the Private Sector
4. Think About the Government Sector * Crude Keynesian borrowing does not work during a long stagnation, because the rising debt is likely to get out of hand. * The challenge is as much how to manage the public s expectations as to manage the public sector itself. * If there is a stagnation there will be no extra output to buy-off demands. Some people are going to suffer who? * Think about the public balance sheet. * An objective assessment of the adequacy of the government s balance sheet is not nearly as important as what the potential lenders think.
5. Look for Imbalances in the Private Sector Farms Banks and Other Financial Institutions Businesses Housing
Conclusion Until balance sheets are better balanced the economy will have difficulties recovering. Even more important may be the condition and the recovery of the world economy.
6. There are Positive Opportunities During a Stagnation There was considerable progress during all the past stagnations, not only favourable structural change, but also social gains. If we can avoid high unemployment and gross inequality, a long depression need not cause personal depression.
Are we in a long recession? Perhaps. The probability is higher than the conventional wisdom thinks. Even if we are not, consideration of the possibility is a lot more useful than blindly assuming nothing has really changed. www.eastonbh.ac.nz ac nz