by Michael Roberts
Recently, the economics editor of the Guardian newspaper in the UK, Larry Elliott, presented us with a comparison of the Great Depression of the 1930s and now.
In effect, Elliott argued that the world economy was now in a similar
depression as then. The 1930s depression started with a stock market
crash in 1929, followed by a global banking crash and then a huge slump
in output, employment and investment. In that order. The number of bank
failures rose from an annual average of about 600 during the 1920s, to
1,350 in 1930 and then peaked in 1933 when 4,000 banks were suspended.
Over the entire period 1930-33, one-third of all US banks failed. But
it was the stock market crash that was first.
The Long Depression, as I like to call the current one, started with a
housing crash in the US, only then followed by a banking crash that was
global and then a huge slump in output, investment and employment. The
aftermath in both depressions was a long, slow and weak economic
recovery with many national economies still not returning to pre-crash
levels of output, investment or profitability.
By the way, if anybody doubts that the major economies (G20) are not
in what I call a Long Depression, defined as below-trend growth in
output, investment, productivity and employment, then consider this nice summary by Wells Fargo bank economists of the key indicators since the end of the Great Recession in 2009 for the US, the economy that has recovered the most.
They conclude that during the 2008-2015 period, the average annual reduction in the level of real GDP from trend
was 9.9 percent, 9.8 percent in personal consumption and 10.7 percent
in real disposable personal income. During the same time period, the
average annual loss in business fixed investment was 20.1 percent, 7.8
percent in employment and 6.9 percent in total factor productivity. The
average reduction in the labor force was 2.2 percent, 7.9 percent in
labor productivity and 6.4 percent in capital services during the
“And there has been long lasting damages from the Great Recession
as the level (trend) of potential series (for all variables) has
shifted downward. These results are consistent with the overall
economic environment since the Great Recession. That is, a painfully
slow economic recovery along with a slower growth in the personal
income, employment, wages and business fixed investment.”
Elliott points out that very few economists or pundits predicted the
crash of 1929 at the height of huge credit-fuelled boom in stock markets
and economic expansion. Similarly, very few forecast the US housing
crash and subsequent global financial meltdown. But some did.
The more interesting part of Elliott’s account are the reasons given
for the Great Depression of the 1930s and whether they are the same
reasons for the current Long Depression. Elliott quotes the biographer
of Keynes, Lord Skidelsky, that the main cause was excessive debt.
“We got into the Great Depression for the same reason as in 2008: there
was a great pile of debt, there was gambling on margin on the stock
market, there was over-inflation of assets, and interest rates were too
high to support a full employment level of investment.”
This explanation is almost the conventional one among leftist and
heterodox economists. Skidelsky combines the views of post-Keynesians (Steve Keen, Ann Pettifor) and some mainstream economists (Mian and Sufi) who highlight the levels of private sector debt (particularly household debt) – “great pile of debt” – with the view of Keynes that “interest rates were too high to support full employment”.
Indeed, next month, Steve Keen, leading post-Keynesian and Minskyite, publishes a new book in which he argues that “ever-rising
levels of private debt make another financial crisis almost inevitable
unless politicians tackle the real dynamics
causing financial instability.” Ironically, And Anne Pettifor has just published a new book that seeks to argue that printing money (more debt?) could help take the capitalist economy out of its depression.
Now there is a lot of truth in the argument that excessive debt (or
credit, which is just the other side of the balance sheet) is a prime indicator of impending financial crashes. Debt was high in the 1920s before the crash. This has been documented by many studies, including the seminal work of Rogoff and Reinhart. And Claudio Borio at the Bank of International Settlements has also built up a weight of evidence
to show that it is the level and rate of increase or decrease in credit
(in effect, a cycle of debt) that is much better indicator of likely
financial crashes than the neo-Keynesian idea of some secular stagnation in growth and a collapse in ‘aggregate demand’ (a la Paul Krugman or Larry Summers).
And it is no accident that Steve Keen was one of the few economists
to predict the impending crash of 2008. In my book, The Long
Depression, I devote a whole chapter to this issue of debt – what Marx
called fictitious capital. Credit allows capital accumulation to be
extended beyond the creation of real value, for a time. But it also
means that when the eventual contraction in investment comes because
profitability in productive sectors falls, then the crash is that much
greater as debt must be written off with the devaluation of capital
values. Credit acts like a yo-yo, going out and then snapping back. So
‘excessive debt’ is undoubtedly a ‘cause’ of crashes, in that sense.
The question is what makes it ‘excessive’ – excessive to what? Borio
says excessive to GDP growth, but then what determines that?
The other argument that is linked to the ‘excessive debt’ cause is
rising inequality as the cause of the crashes of the 1929 and 2008. As
Elliott puts it: “while employees saw their slice of the economic
cake get smaller, for the rich and powerful, the Roaring Twenties were
the best of times. In the US, the halving of the top rate of income tax
to 32% meant more money for speculation in the stock and property
markets. Share prices rose six-fold on Wall Street in the decade leading
up to the Wall Street Crash. Inequality was high and rising, and demand
only maintained through a credit bubble.” Yes, similar to the period up to 2008.
Now I don’t think that rising inequality was the cause of the crisis of the 1930s or in 2008 and I have detailed my arguments against the view in several places. The empirical evidence does not support a causal connection from inequality to crash. Indeed, a new study by JW Mason
presented at Assa 2017 in Chicago adds further weight to the argument
that rising inequality and the consequent (?) rise in household debt was
not the cause of the financial crash of 1929 or 2008. “The idea is
that rising debt is the result of rising inequality as lower-income
households borrowed to maintain rising consumption standards in the face
of stagnant incomes; this debt-financed consumption was critical to
supporting aggregate demand in the period before 2008. This story is
often associated with Ragnuram Rajan and Mian and Sufi but is also
widely embraced on the left; it’s become almost conventional wisdom
among Post Keynesian and Marxist economists. In my paper, I suggest some
reasons for skepticism.”
The gist of my view is that inequality is always part of capitalism
(and for that matter class societies, by definition) and rising
inequality from the 1980s in the neo-liberal period went on for decades
before there was the crash. It is more convincing that rising
profitability and a rising share going to capital from labour in
accumulation was the cause of rising inequality, not vice versa. So the
underlying cause of the eventual slump must be found in the capitalist
accumulation process itself and some change in the profit-making
The third cause or reason offered by Elliott for the Great Depression
of the 1930s and the Long Depression now is that there is no hegemonic
power in a position to act as a ‘lender of last resort’ to bail out
banks and national economies with credit and also set the rules for
global economic recovery. Between the two world wars, the UK was no
longer hegemonic as it had been in mid-19th century and the
US was unable or unwilling to take its place. So there was, in effect,
no global banker and thus anarchy and protectionism in the world
This was the main argument of the great economic historian, Charles
Kindleberger, with his “hegemonic stability theory” in his book, The
World in Depression, 1929-39. This theory of international crises has
been followed on by such economic historians as Barry Eichengreen and HSBC economist, Stephen King, cited by Elliott as saying, “There are similarities between now and the 1930s, in the sense that you have a declining superpower”.
So the argument goes that the US is now no longer hegemonic and cannot
impose international rules of commerce as it did after 1945 with the
IMF, the World Bank and GATT. Now, there are rival economic powers
like China and even the European Union that no longer bend to US will.
And the IMF is no position to act as lender of last resort to bail out
economies like Greece etc.
This view also comes from Marxist economists like Leo Panitch and Sam Gindin, who (conversely) argue that the US is still a hegemonic power and thus still decides all in an “informal American empire” and this explains the huge economic recovery after the 1980s in the neo-liberal period. Yanis Varoufakis argues something similar in his book,
The Global Minotaur. Skidelsky too likes the argument that the
neoliberal ‘recovery’ was achieved by globalisation under US imperial
control. “Globalisation enables capital to escape national and union control.” He considers this the Marxist explanation: “I am much more sympathetic since the start of the crisis to the Marxist way of analysing things.”
But is the crisis of the 2008 the result of weak US imperial power or
too much US power? Either way, I doubt that the hegemonic stability
theory is a sufficient explanation of the Great Depression or the Long
Depression. Clearly, the US has been in (relative) decline as
the leading imperialist power economically, although it remains the
leading financial power and overwhelmingly dominant as a military power – similar to the Roman empire in its declining period.
No doubt that this has had some effect on the ability of all the
major capitalist economies to get out of this depression and increased
the move towards nationalism, protectionism and isolationism that we now
see in many countries and in Trump’s America itself now. But the end of
‘globalisation’ was not the result of weakening American power but the
result of the slowdown in global investment, trade and, above all, in the profitability of capital that empirical evidence has revealed since the late 1990s. The ‘death’ of globalisation was accelerated by the global financial crash and the collapse in world trade and debt flows since 2008.
The long depression has continued not because of high inequality or
the weakening of US hegemony or because of the move to protectionism
(that has hardly started). It has continued, I contend, because of the
failure of profitability to rise sufficiently to revive productive
investment and productivity growth; and the continued hangover of
fictitious capital and debt. Indeed, I have shown that these are the same reasons that extended the Great Depression of the 1930s: low profitability, high debt levels and weak trade.
In Elliott’s article we are also offered some differences between the
1930s and now. The first is that, unlike the 1930s, now central banks
acted to boost money supply and bail out the banks with interest-rate
cuts to zero and quantitative easing. Back in the 1930s, according to
Adam Tooze in his book The Deluge, deflationary policies were pursued everywhere. “The
question that critics have asked ever since is why the world was so
eager to commit to this collective austerity. If Keynesian and
monetarist economists can agree on one thing, it is the disastrous
consequences of this deflationary consensus.” (Tooze).
And they did agree on this in the current depression. As I have shown in several posts, former US Fed chief Ben Bernanke was a mainstream expert on the causes of the Great Depression and once told a meeting of the mainstream to commemorate his mentor, the great monetarist, Milton Friedman, that the mistake of the 1930s not to expand the money supply would not be repeated. But QE and easy money may have bailed out the banks and restored ‘business as usual’ fro them, but it did not end the current Long Depression.
Actually, that easy money and unconventional monetary policy would end
the Great Depression was thought possible by Keynes in 1931. But by
1936, when he wrote his famous General Theory, he realised it was inadequate.
And indeed, the idea that things would be different this time compared
to the 1930s because of easy monetary policy has turned out to be bogus.
The Keynesians, having in many cases advocated easy money as the way
out of the current depression, now push fiscal stimulus as the solution,
just as Keynes finally resorted to in 1936. Keynesians like Skidelsky
claim that the UK had fiscal ‘automatic stabilisers’ that were kicking
in to ameliorate the slump of the 1930s but the governments of the day
smashed those and imposed austerity and that caused the extension of the
slump into depression.
Most governments now have not adopted massive government spending or
run large budget deficits to boost investment and growth – mainly
because they fear a massive increase in public debt and the burden that
will put on funding it from the capitalist sector. So we hear from the
battery of leftist and Keynesian economists that the application of
‘austerity’ is the cause of the continued Long Depression now. It is
difficult to prove one way or another, but in a series of posts and
papers, I have put considerable doubt on the Keynesian explanation of the Long Depression.
The New Deal did not end the Great Depression. Indeed, the Roosevelt regime ran consistent budget deficits of around 5% of GDP from 1931 onwards, spending twice as much as tax revenue. And the government took on lots more workers on programmes – but all to little effect. Coming off the gold standard and devaluing currencies did not stop
the Great Depression. Indeed, resorting to competitive devaluations and
protectionist tariffs and restrictions on international trade probably
made things worse.
And monetary easing has not worked this time and nor has fiscal stimulus (as Abenomics in Japan has shown),
which we shall see again if Trump ever does manage to run budgets
deficits to lower corporate taxes and increase infrastructure spending.
Now it seems protectionism and devaluations are becoming more likely
in this post-Trump, post-Brexit period of the Long Depression. Indeed,
the latest policy document for the upcoming G20 summit in Germany next week has actually dropped its condemnation of protectionist policies. As Elliott sums it up: “So
far, financial markets have taken a positive view of Trump. They have
concentrated on the growth potential of his plans for tax cuts and
higher infrastructure spending, rather than his threat to build a wall
along the Rio Grande and to slap tariffs on Mexican and Chinese
imports. There is, though, a darker vision of the future, where every
country tries to do what Trump is doing. In this scenario, a shrinking
global economy leads to shrinking global trade, and deflation means
personal debts become more onerous.”
The Great Depression only ended when the US prepared to enter the
world war in 1941. Then government took over from the private sector in
directing investment and employment and using the savings and
consumption of the people for the war effort. Profitability of capital
rocketed and continued after the end of the war. Looking back, the
depression of the 1880s and 1890s in the major economies only ended
after a series of slumps finally managed to raise the profitability of
capital in the most efficient sectors and national economies and so
delivered more sustained investment – although eventually that led to
imperialist rivalry over the exploitation of the globe and the first
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