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After the Crisis--Part I

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.

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Reader Comments


January 18, 2009 10:58 AM

Very interesting perspective.
Could you check if there is a similarity between Sweden/Japan and the US by extrapolating the US data on the same time-frame ? ie 1975-1992 or 1950-1990 instead of 1900-1929.


January 18, 2009 11:25 AM

More than interesting, fascinating.

It indicates that we have knowledge always available to get optimum growth, that technology has been overcoming resource restraints by a comfortable margin. That, over long time periods, we get the relationship between investment and savings; and their match with technology capability.


January 18, 2009 01:30 PM

lets see,

country goes socialist, slower growth, economic misery results, surprise, surprise

America, its not too late, but we need to fight

Mike Reardon

January 18, 2009 06:49 PM

Strangely the continuous transfer of production and manufacture from the US is a constant with US GDP growth.

In the mid 60’s the real line trends above exactly from the point where Japanese manufacturing and world steel production begin to impact US manufacturing. Our embracing retail and services supported by increased productivity seems to have been a constant relief against our dropping manufacturing.

Restrictive banking and finance may cause our trending lowering without a continuation of our increasing productivity. I don’t care who innovates as long as we continue to apply it to a growth in services that continue the movement of money and raise our GDP.


January 18, 2009 09:26 PM

Sweden: Interesting choice, considering that the Swedes have been measured as happier than Americans for some time, not to mention that I believe Sweden has been running a budget surplus, and the global economic crisis caused their December unemployment rate to rise to only 4%. Perhaps a decade or more ago, I read rather often of a hefty black market in their service sector; now we seem to have lost interest, but inside Sweden, reports suggest that the black market is still going strong. I would presume that this is not captured in GDP. I don't mean to say that a black market is a good thing, but as always there may be more to the story than the numbers reveal.

Joe Cushing

January 20, 2009 08:52 AM

I'm not that familiar in Japan and sweden. I would guess that in Japan, there are new rules or taxes affecting the economy. Sweden looks like it was knocked down but not out. Its post 1990s growth is at the same slope as the trend line. It might never catch up but in the long run it wouldn't be noticed. Japan's slope is less than the trend. That's where I get the idea there must have been policy/tax change.

They might not have to change the policy back to have the economy turn around though. In the great depression businesses kept finding ways around bad policy but then they were shut down by new bad policy. Al long as Japan doesn't create new bad policies, companies will probably find a way around the current bad policies. This is what happened in the banking industry in the Glass Steagall era.


January 20, 2009 10:53 AM

The industrialized countries are in unchartered waters now because of their declining populations and we will see. I believe that Japan went through an economic outperformance from 1975-1992 and an economic underperformance from 1992-to present. The trend line in that case should be drawn from 1975-2009 and that is their trend. How would the trend line look like for the Asian Tigers, where 40 years ago they were walking around barefoot and were as poor as Sub-Saharan Africa only to grow their way into U.S. like prosperity? On the opposite side of the spectrum, Argentina at the turn of the century was one of the seven richest countries in the world, only to fall into an economic malaise.


January 26, 2009 10:17 PM

OK, you got that right. But hold off on the counterattack until the libs are shown for what they are and then mop the floor with them.

brandon w

January 27, 2009 01:28 PM

found this article on greenfaucet. great facts about the current market situtation and the potential outcome.

worth a look.

Sam Vaughn

May 21, 2009 07:55 AM

Good information. I was looking for this to correlate how the liquidity bubble of the past fews years correlated to inflated growth. Theory being that demand and consumption for many years was driven by debt expansion. The mean trend line should indicate where the economy should fall back to. What is does not predict is the impact of massive government takeover of banks, auto's and healthcare with the associated impact on GDP. Nor does it take into account the impact of cap and trade energy taxes and the associated reduction of buying power. Where is the straw that breaks the camels back of the US economy? Liberal politicians seem to think they can increase taxes without economic consequences......

Thank you for your interest. This blog is no longer active.



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.

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