Wednesday, September 7, 2011
This picture pretty much resolves the Keynes vs. Austrian debate
Hat tip to Ralph Musgrave for this chart. He had it on his blog, but I cleaned it up.
Anyway, my intent was to show some perspective. I think that's always useful. We hear a lot about how Keynesian economics doesn't work and about how the world was better under the gold standard.
I think the chart below goes a long way toward resolving that debate. It plots annual changes in U.S. real GDP going back to 1860. Take a look at how many deep recessions and depressions the country experienced in the 19th century. Pretty much, every 10 years, a depression! And the swings in GDP were huge!
Compare that to the mid 20th century and especially 1971 forward. What a contrast! Very few recessions and no depressions. And even the recessions have been much milder, current one being an exception.
Remember that the U.S. was on a gold standard until 1933 (domestically) and completely off the gold standard and on a system of floating FX non-convertibility from 1971 on. Rather than get worse, things stabilized immensely.
All the recent troubles can be traced back to Clinton's surpluses, which essentially was the equivalent of putting us on a gold standard. The rebound out of the recent "Lesser Depression" was due to massive deficit spending. Did I hear someone say Keynes??