New Tremors in Global Finance and Trade

PALO ALTO – With the American and global economies in the early stages of post-recession recovery, serious questions remain about that recovery’s strength and sustainability. In addition to traditional business-cycle concerns, there is a long list of policy tensions threatening to curb growth, including: 1) protectionism; 2) currencies; 3) monetary- and fiscal-stimulus exit strategies; and 4) the explosion of public debt.

Recovery from deep recessions is usually strong – the American economy recovered from the two other deep post-World War II recessions with annual real growth over 6% for three years. But nobody forecasts strong growth like that now, because recoveries from financial crises are usually slow and painful.

It is worth remembering the real dimensions of the 1930’s Great Depression, with which politicians compare this recession to justify massive government intervention. From 1929 to 1933, real GDP in the United States fell 30%, and the unemployment rate reached almost 25%, while the depression itself lasted more than a decade – all large multiples of the recent decline, and of the somewhat larger decline that the intervention helped to avert.  

Policy mistakes ranging from tax hikes to poor central-bank decisions to a global wave of protectionism (most famously America’s Smoot-Hawley tariff) turned a deep recession into the Great Depression. We should not repeat those mistakes now.