Posted by: Michael Mandel on January 18
What happens after we (hopefully) deal with the current crisis? Will the U.S. and global economies return to their former growth path? Or will the crisis be followed by a long and extended period of slower growth?
Take a look at this chart. It traces out real GDP per capita for the United States, since 1900. (The chart uses a logarithmic scale, so that a straight line means a constant growth data.. The data is drawn from Angus Maddison’s web site).
This chart, or something similar, appears in many economics textbooks. What’s striking is this: After the disruptions of the Great Depression and World War II, the U.S. resumes its former growth trajectory as if nothing happened.
In fact, the U.S. does a bit better after the disruptive years. This next chart extrapolates the 1900-1929 growth history into the remaining years, through 2006, based simply on the average growth rate.
The worst year after World War II is 1947, and that falls somewhat below the 1900-29 trend line. After that, the average growth rate in real GDP per capita was roughly 2% per year, compared to 1.8% in the pre-1929 period.
So from the long perspective, the Great Depression-World War II combo did not break the long-term growth path of the U.S. economy.
Now let’s take a look at two more recent examples on the negative side. First, Japan. Obviously the financial crisis of the 1990s was followed by an extended period of slower growth. The chart below shows the trend line of real GDP per capita from 1975 to 1992, extended and compared to the actual events (1990 is set equal to 1).
Another similar example comes from Sweden, which had a bad banking crisis in the early 1990s. The chart below extrapolates the trend growth in real GDP per capita from 1950 to 1990, which was the peak year for GDP per capita. After the crisis was over, the Swedish economy return to the earlier growth rate, but never made back the losses of the crisis.
Solving the crisis now is very important. But we also want to be thinking about how to ensure long-term growth afterwards. I think I will hold this thought for the next post.
Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.