Various Austrians are asserting that 1920–1921 proves that austerity can “quickly” end a recession. I have debunked that nonsense here, and the dishonest (or at least misleading) reference to a depression of 1920–1921, when there was no such thing, just a mild or moderate recession (depending on whether you use the revised data of (1) Romer or (2) Balke and Gordon).
Moreover, there was quite clearly a mild or moderate recession in the 1890s that completely contradicts the Austrians’ belief that austerity leads to rapid prosperity and high employment.
I. The GNP Data
According to the figures of Balke and Gordon, 1890s America suffered a double dip recession, with contractions in real GNP from 1893–1894 and 1896.
Balke and Gordon’s estimates for real GNP are here (the GNP growth rates are my own calculations):
Year | GNP* | Growth RateAs we can see, according to these figures, the US had a moderate recession from 1893–1894 in which GNP fell by 2.96%, with a recovery in 1895, but a further serious recession in 1896 with real GNP falling by 2.27%.
1890 | $183.9 | 1.43%
1891 | $189.9 | 3.26%
1892 | $198.8 | 4.68%
1893 | $198.7 | -0.05%
1894 | $192.9 | -2.91%
1895 | $215.5 | 11.7%
1896 | $210.6 | -2.27
1897 | $227.8 | 8.16%
1898 | $233.2 | 2.37%
1899 | $260.3 | 11.6%
1900 | $265.4 | 1.95%
* Billions of 1982 dollars
(Balke and Gordon 1989: 84).
What were the effects of these output shocks on employment? There are three estimates that have been done:
(1) Lebergott’s estimates of the unemployment rate.Here are Lebergott’s estimates of the unemployment rate:
(2) Romer (1986: 31):
(3) Vernon (1994: 710).
Year | Unemployment RateBy these figures, the unemployment rates were a disaster in the 1890s, but Lebergott’s figures are challenged by Romer (1986).
1890 | 4.0%
1891 | 5.4%
1892 | 3.0%
1893 | 11.7%
1894 | 18.4%
1895 | 13.7%
1896 | 14.5%
1897 | 14.5%
1898 | 12.4%
1899 | 6.5%
1900 | 5.0%
The revised figures in Romer are as follows:
Year | Unemployment RateEven using Romer’s figures, the US economy did not return to high employment for nearly a decade after 1893.
1892 | 3.72%
1893 | 8.09%
1894 | 12.33%
1895 | 11.11%
1896 | 11.965
1897 | 12.43%
1898 | 11.62%
1899 | 8.66%
1900 | 5.00%
(Romer 1986: 31).
Finally, here are Vernon’s (1994) figures:
Year | Unemployment RateThey are lower than Romer’s, but still in the high single digits.
1890 | 3.97%
1891 | 4.34%
1892 | 4.33%
1893 | 5.51%
1894 | 7.73%
1895 | 6.46%
1896 | 8.19%
1897 | 7.54%
1898 | 8.01%
1899 | 6.20%
(Vernon 1994: 710).
So it does not matter what figures you use: the double dip recession of the 1890s led to high unemployment that persisted to the end of the decade. There was a period of protracted unemployment in the 1890s comparable to the aftermath of the Great Depression (in the years from 1933–1939).
An important point is that 1890s America had no central bank, government spending was a very small percentage of GDP (it fluctuated between 2.55% and 3.62% in the 1890s), and governments tended to pursue austerity in times of recession. In fact, US federal government spending fell from 1893 to 1896 and fell from $465.1 million in 1893 to $443.1 million by 1896, which was obviously contractionary fiscal policy. Yet the culmination of the fiscal contraction in 1896 saw the economy in recession again.
Above all – and I wish to emphasise this – the fiscal contraction from 1893-1896 is correlated with rising unemployment in both the unemployment estimates of Romer and Vernon. Even by Vernon’s figures unemployment remained at nearly 8% until 1898. In Lebergott’s original estimates, unemployment soared from 1892-1894, went down in 1895, but then surged again in 1896 and stayed at 14.5% in 1897. No estimates of unemployment give any support to the view that austerity returns a shocked economy to high employment quickly. Curiously, a quick look at the data on
US federal government spending shows that spending rose from 1897 to 1899, and that this is also correlated with falling unemployment in the estimates from 1897 to 1899.
As an aside, I note how utterly absurd it is for Austrians to invoke 1920–1921 as an (alleged) vindication of their theories, when in that period America had a central bank. By any definition, 1920–1921 was even less of a laissez faire system than 1890s America, so it should be less relevant than the 1890s.
If 1920–1921 can be invoked as some kind of “proof” that austerity works, then, with even greater reason, the 1890s should show the “proof” of austerity too. But it does no such thing: although there was some high real GNP growth after the double dip in 1896, this was not sufficiently high to bring unemployment down.
Why was this? After all, real GNP growth rates of 8.16% (in 1897) and 11.6% (in 1899) seem very high by the contemporary averages of the mature US economy.
But there is a crucial issue: the US was a newly industrialising economy in the late 19th century, and in this respect was very much like China in the last three decades. With a large reserve of urban labour, coming from the countryside and from overseas in the case of the US in the late 1800s, an industrialising economy requires very high growth rates to maintain employment levels. In the case of China, a GDP growth rate of less than 7–8% leads to serious unemployment:
“‘China needs a growth rate of at least 7 per cent to avoid massive unemployment’ (www.economist.com, 10 November 2008). ‘The original estimated for China’s minimum rate of growth, which was made in the mid-1990s, was 7 per cent’ (The Economist, 15 November 2008, p. 88).In other words, a growth rate of less than 7% in China today is the functional equivalent of a recession for workers in terms of its effects on unemployment.
More recently somewhat higher figures for minimum GDP growth have been mentioned. ‘Most economists estimate that 8 per cent growth is needed to prevent urban unemployment from rising, which could trigger demonstrations and undermine the country’s social stability’ (www.iht.com, 20 October 2008; IHT, 21 October 2008, IHT, 21 October 2008, p. 11).
‘The government is expected to supply a fiscal stimulus to keep growth above 8 per cent’ (The Economist, 11 October 2008, p. 110). ‘China's own leaders believe they need growth of at least 8 per cent a year to avoid painful unemployment’ (The Economist, 15 November 2008, p. 14).” (Jeffries 2011: 10).
I suspect a similar phenomenon was going on in 19th century America: just because there were positive growth rates (even what seem like high ones in 1897 and 1899), it does not mean that unemployment was always falling or that the economy was booming.
A research question I would propose is: what level of real GNP growth was necessary in 1890s America to mop up idle labour and reduce high unemployment? If there was a certain level of positive GNP growth required to prevent falling unemployment, a moderate recession (in technical terms) with a contraction of 2.96% in GNP may well have been a disaster for employment levels. In fact, it is possible that positive growth rates of 1%–4% may have been insufficient to maintain employment. All in all, this suggests to me that America’s actual GNP was well below its potential GNP in these years. This was not a healthy economy: it was an economy operating at well below its potential and no “proof” of the success of austerity at all. Rather, the 19th century, laissez faire policies of the US government were a disaster, above all in terms of unemployment.
It is no surprise to me that you do not see the Austrians appealing to the 1890s as an example of the wonders of the free market allegedly ending the aftermath of a recession, because on the metric of unemployment alone the 1890s completely contradict their absurd fantasies.
Appendix 1: Romer’s Figures for GNP in the 1890s
Romer’s estimates for real GNP are here (the GNP growth rates are my own calculations):
Year | GNP* | Growth RateRomer’s figures show no contraction in 1896, and only a mild contraction in 1893–1894. Yet we know by all estimates unemployment soared in these years. What is going on? Romer’s estimates might be flawed. More likely, I think this supports the view that America in the late 19th century was very much like China today: just because growth rates were positive does not necessarily mean the economy was healthy, or that it was growing at its potential capacity.
1890 | $182.964 | 4.53%
1891 | $191.757 | 4.80%
1892 | $204.279 | 6.53%
1893 | $202.616 | -0.81%
1894 | $200.819 | -0.88%
1895 | $215.668 | 7.39%
1896 | $221.438 | 2.67%
1897 | $233.655 | 5.51%
1898 | $241.459 | 3.33%
1899 | $254.728 | 5.49%
1900 | $264.540 | 3.85%
* Billions of 1982 dollars
(Romer 1989: 22).
Appendix 2: Were Movements in the Labour Force Pro-cyclical or Countercyclical in the 19th century?
There is the question whether movements in the labour force – especially involving women – were pro-cyclical or countercyclical in the 19th century. If it was countercyclical, this adds to unemployment, as women, young adults, and perhaps even children go out and look for employment when their husband/fathers/breadwinners lose employment (for literature, see James and Thomas 2007; Weir 1986, 1992). This is relevant for the method and accuracy of unemployment estimates in the 1890s.
Balke, N. S., and R. J. Gordon, 1989. “The Estimation of Prewar Gross National Product: Methodology and New Evidence,” Journal of Political Economy 97.1: 38–92.
James, J. A. and M. Thomas, 2007. “Romer Revisited: Long-Term Changes in the Cyclical Sensitivity of Unemployment,” Cliometrica 1.1: 19–44.
Jeffries, I. 2011. Political Developments in Contemporary China: A Guide, Routledge, Oxon, England and New York.
Lebergott, S. 1964. Manpower in Economic Growth: The American Record since 1800, McGraw-Hill, New York.
Lebergott, S. 1964. Men Without Work: The Economics of Unemployment, Prentice-Hall, Englewood Cliffs, N.J.
Lebergott, S. 1986. “Discussion,” Journal of Economic History 46: 367-371.
Romer, C. D. 1986. “Spurious Volatility in Historical Unemployment Data,” Journal of Political Economy 94: 1–37.
Vernon, J. R. 1994. “Unemployment Rates in Post-Bellum America: 1869–1899,” Journal of Macroeconomics 16: 701–714.
Weir, D. R. 1986. “The Reliability of Historical Macroeconomic Data for Comparing Cyclical Stability,” The Journal of Economic History 46.2: 353–365.
Weir, D. R. 1992. “A Century of U.S. Unemployment, 1890–1990: Revised Estimates and Evidence for Stabilization,” Research in Economic History 14: 301–346.