The book has a couple of great merits. The first and main one is to leverage the outstanding work of Eichengreen and O’Rourke (A Tale of Two Depressions, a short paper issued in early 2009) to essentially benchmark the Great Recession vs. the Great Depression. The second one is to demonstrate that contrary to everything you read in the press “The System Worked” actually pretty well.
In other words, just about everything you will read in this book is somewhat counterintuitive and counter establishment. That is at least relative to how those various technical subjects have been treated by the Media.
No one in the Media conveyed that the onset of the Great Recession was actually much more severe than the Great Recession. The author leveraging Eichengreen and O’Rourke work shows that in the first year of those two economic shocks, the Great Recession actually experienced a marginally more severe downturn in global industrial output, a far more severe decline in global trade flows, and even a drastically more severe downturn in global stock markets! The last one is the real shocker. In the first 12 months of the Great Depression (from June 1929 over next 12 months), the stock market had held up reasonably well and had lost only 6% of its market cap value. It is only over next two years that it will lose eventually 70% of its market value. Meanwhile, in the Great Recession (from April 2008 over the next 12 months, it will lose already 45% of its market value in the very first year (vs. only 6% for the Great Recession)!
Back in 2009, Eichengreen and O’Rourke already indicated that the policy response at the onset of the Great Recession was far more rational than during the Great Depression. They showed that immediately the main central banks and governments responded with a far more accommodative monetary policy and fiscal policy during the Great Recession. Meanwhile, the Great Depression remains an historical example of everything we can do wrong in terms of Government policies (restrictive monetary and fiscal policies, protectionism).
Interestingly Drezner policy framework is much broader and more aimed towards supranational entities than Eichengreen and O’Rourke. While the latter are concerned with monetary and fiscal policies as conducted by individual central banks and governments, Drezner is also concerned about the worldwide collaboration between the main economic powers to support supranational frameworks to mitigate the Great Recession. So, when Drezner talks about the system and assess its performance he refers to a group of institutions including: UN, IMF, World Bank, IDA,WTO, OECD, BIS, G-8 and G-20.
Drezner demonstrates throughout the book that those supranational institutions were really helpful in coordinating monetary and fiscal policy worldwide, maintaining international trade flows, and shoring up liquidity within the capital markets. And, that in turn this worldwide policy coordination was really helpful and effective into avoiding a second Great Depression. Early in the book, he revisits Eichengreen and O’Rourke work that had updated their data through the first four years of the Great Recession and Great Depression. And, there is a radical difference. The Great Depression from 1929 to 1933 continues plunging or accelerating downward on all counts. It is only in the last few months of that time series that some of the metrics indicate they had finally reached a floor. By, contrast the Great Recession on a relative basis on all counts shows a pretty healthy V shape recovery beyond the first year mark. In other words, the system really did work. But, you would never know it from the Media that is still exasperated that we experienced a recession at all. And, that the recovery is not as robust as the Media would have desired. The slow recovery is being in good part driven by demographics (an aging society) and economic maturation (a large well developed mature economy can’t keep growing at 3.5% p.a. forever).
Drezner points out to several metrics indicating that countries have remained supportive of international trade throughout the Great Recession. Those metrics include a KOF Index of Globalization that actually held up well over the 2000 – 2010 period. He also shows that the yearly number of trade restrictions have pretty much steadily declined since 2000. He also refers to business surveys indicating that the private sector was not concerned about protectionism or currency volatility throughout the 2011 – 2013 period. He later refers to a JP Morgan volatility index of exchange rate that showed a drastic increase in such exchange rate volatility in 2009 and early 2010, that had almost entirely abated by 2011 and onward.
Drezner indicates that worldwide support for Free Markets and Free Trade held up well throughout the Great Recession (an offshoot of the system, as defined, working well). He supports that with yearly survey results from 2007 to 2012. Those polls are very interesting as they have many counterintuitive data points. According to them, support for Free Trade is much greater in Russia and China than in the U.S. I gather it can be explained by Russia chronically being subject to trade sanctions for foreign policy reasons; And, China being a somewhat mercantilist nation fueling its economic growth with a strong export performance. Support for Free Markets is very low in Japan. It is even much lower than in Russia. It was nearly as high in France as in the US in 2011. But, there was a marked drop in France’s support for Free Market in 2012. Meanwhile, it held steady for the U.S.
Near the end of the book, Drezner has an interesting coverage on the intellectual economic debate between Keynesianism and Austerity. He points out that in the end, the Keynesians won the day as Austerity measures did not work well within the EU. And, just as importantly the leading economic paper on Austerity (Reinhart and Rogoff) was thoroughly debunked (cherry picking of data, embarrassing mistake in summing values in Excel).
One of Drezner’s other interesting findings is that the U.S. power is far from being as obsolete from a world leadership standpoint as people think. Indeed, a good part of the world now thinks China is the world’s leading power instead of the U.S. However, when looking at GDP per capita one can question whether China will ever catch up to the U.S. The same is true for share of capital markets that pretty much channel funds worldwide. The U.S. is by far the dominant entity on this count (New York) closely followed by a close ally: U.K. (London). China on this one count is essentially nonexistent. Regarding high technology and related dominant software platforms, the U.S. is far ahead of China and anyone else. In terms of influence on the “system” as defined, the U.S. influence is far greater than China.
All around this is a very interesting book that covers a lot of ground. Drezner’s message is very important given that it is so counter to whatever misrepresentation of the facts the Media has indulged in over the past several years.
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