1. Economic Recovery in the UK: Lessons from the 1930s Nicholas Crafts

2. Real GDP GDP Deflator Unemployme nt (%) Stock Market Prices 1929100.0 8.0100.0 1930 99.9 99.612.3 80.5 1931 94.4 97.216.4 62.8 1932 95.1 93.717.0 60.2 1933 96.0 92.515.4 74.3 1934102.8 91.712.9 90.3 1935106.6 92.612.0100.0 1936109.9 93.110.2115.9 1937114.7 96.6 8.5108.0 1938118.2 99.310.1 88.5 The UK in the 1930s

3. Relevance to Today First fiscal consolidation and then fiscal stimulus at the ZLB 4 per cent growth from 1933-37 but double-dip recession in 1932 The initial growth strategy was based on raising the price level and taking control of monetary policy away from the B of E

4. The 1930s Recovery: 1 st Phase Started during fiscal consolidation which between 1930 through 1934 reduced structural deficit by 4%GDP Strong growth 1933-35 based on monetary stimulus which offset negative impact of fiscal policy: cf. the ‘foolproof way’ to escape the liquidity trap Exit from gold standard plus cheap money provided stimulus; housing investment led the recovery

5. The 1930s Recovery: 2 nd Phase From 1935 onwards rearmament takes centre stage Large exogenous fiscal shock with short term interest rates held constant Suggests significant fiscal multiplier in 1930s conditions

6. The “Managed Economy” in 1930s UK Post-1932 policy package included capital controls, devaluation, tariffs, cheap money and cartels Understandable as a short-term fix at a time of high unemployment; raise P, reduce RW Regrettable in terms of long-term implications for productivity performance; retreat from competition very hard to reverse

7. Medium-Term Implications of Devaluation Permitted cheap money policy Nominal and ex-post real interest rates fell Fiscal sustainability improved as deflation ended International competitiveness improved; change in net exports modest contribution to demand growth during recovery

8. Exchange Rates (1929 = 100) Pound/DollarPound/French Franc Average Exchange Rate 1929100.0 1930100.1 99.9 99.6 1931 93.3 93.2 93.7 1932 72.1 71.9 75.2 1933 86.8 68.2 77.0 1934103.8 62.0 75.4 1935100.9 59.9 74.5 1936102.3 66.9 77.7 1937101.8100.5 84.7 1938100.7137.6 86.9 Source: Dimsdale (1981)

9. Double-Dip Recession Quarterly GDP estimates reveal that after initial recovery in late 1931/early 1932 there was another recession in 1932 q2 and q3 So, unlike the USA, devaluation did not signal the turning point Adds weight to Eggertsson (2008) argument that devaluation was not sufficient in USA but had to be part of bigger package ( the New Deal) that committed to future inflation

10. Quarterly Real GDP Estimates (Mitchell et al. 2011) 1929 1 97.51931 1 93.61933 1 94.4 1929 2 98.91931 2 93.11933 2 96.0 1929 3 99.91931 3 92.81933 3 97.6 1929 4 99.91931 4 93.71933 4 99.1 1930 1 1001932 1 94.01934 1 101.2 1930 2 99.11932 2 93.41934 2 102.6 1930 3 97.81932 3 92.91934 3 103.5 1930 4 95.91932 4 94.61934 4 104.0

11. The ‘Cheap Money’ Policy Was a coherent framework arrived at by mid- 1932 with HMT not B of E in charge (Howson, 1975) Aim to raise the price level and to underpin this by holding exchange rate at $3.40 then FFr. 88 (Howson, 1980) Short term interest rates kept at lower bound and real interest rates fell Credible because it was clearly in HMT’s interests as a route to recovery that did not open Pandora’s Box and improved fiscal arithmetic

12. Interest Rates (%) (Dimsdale, 1981; Chadha & Dimsdale, 1999) Bank RateTreasury Bill Rate Yield on Consols Real Short Rate Real Long Rate 19295.505.264.60 5.265.14 19303.422.484.48 8.638.01 19313.933.594.40 9.739.20 19323.001.493.75 5.117.24 19332.000.593.39 0.665.65 19342.000.733.10 0.804.26 19352.000.552.89 0.593.59 19362.000.582.93-2.861.22 19372.000.563.28-2.090.93 19382.000.613.38-2.560.99

13. Fiscal Policy Became ‘Keynesian’ only with rearmament Early 1930s is episode of tightening (over-riding automatic stabilizers) provoked by worries about fiscal sustainability Defence expenditure rose from £118 mn. in 1934 to £181 mn. in 1936 and £353 mn. in 1938 Defence Loans Act in 1937 to use deficit finance of military - £400 mn. over 5 years; ‘defence news’ has significant effect on real GDP; fiscal multiplier may have been about 2

14. Fiscal Indicators (% GDP) (Middleton, 1996) Public Debt ReceiptsOutlaysBudget Surplus Debt Interest Constant Employment Budget Surplus 1929158.423.824.5-0.77.70.4 1930159.224.125.5-1.47.61.1 1931169.825.928.2-2.27.72.5 1932173.627.427.9-0.57.83.0 1933179.226.926.5 0.47.04.2 1934173.125.625.1 0.56.23.2 1935165.025.025.3-0.36.02.0 1936158.725.025.7-0.75.70.8 1937147.224.526.0-1.55.4 -0.1 1938143.824.428.1-3.75.2 -1.5

15. Estimates of Net Present Value of Changes in Expected Defence Expenditure (£ 1938 million) 1934Q101936Q30 1934Q201936Q40 1934Q3+15.71937Q1+393.0 1934Q4+51.51937Q20 1935Q101937Q30 1935Q201937Q40 1935Q301938Q10 1935Q4+178.71938Q2+98.8 1936Q1+159.51938Q3+29.1 1936Q201938Q40

16. The 1930s: Onward and Upward? Trend growth did not increase (Greasley & Oxley, 1996; Mills, 1991) Correctly measured, the labour productivity gap with the US widened further TFP growth remained modest and investment stayed low This is not the optimistic picture that the over- commitment school painted

17. Real Output/Hour Worked in Manufacturing UK growth (% per year) US growth (% per year) US/UK (UK = 100) 1870 195.2 1870-90 1.581.75 1890 201.9 1890-1913 1.332.11 1913 241.2 1913-29 2.463.05 1929 264.5 1929-37 2.903.35 1937 274.0 Source: de Jong and Woltjer (2011); data kindly supplied by Herman de Jong.

18. Competition and Productivity Performance Literature on postwar UK says weak competition a big problem for productivity until 1980s (Crafts, 2012) Weak competition in product markets nurtured infamous industrial relations and management problems Vested interests politically strong enough to block strong anti-trust and trade liberalization policies (Mercer, 1995) so 1930s legacy lasted a long time

19. UK Protectionism Tariffs on UK manufacturing remained at 1930s levels until the mid-1960s; when trade costs fell mark-ups collapsed Median tariff twice that in West Germany in the late 1950s (PEP, 1962) Major reason for weak competition in UK product markets in the early postwar period

20. Trade Costs Index (Jacks et al., 2011) UK- France UK- Germany France- Germany Italy- Germany 192910099 110 1938121122133112 1950122142112127 196012211591101 19701101057379 198074665561

21. Market Power and UK Productivity Performance (Broadberry & Crafts, 1992, 1996, 2011) In 1930s increased market power substantially reduced productivity growth 1930s tariffs did not improve productivity performance In early postwar years, collusion undermined productivity performance Both pre- and post-WWII, high CR3 associated with low levels of UK labour productivity relative to US

22. The “Managed Economy” Revisited Can see why the policy target of raising prices seemed important But, depending on how this is achieved, raising the price level can have bad supply-side implications (cf. the New Deal) and in 1930s UK this is big downside Retreat from competition hard to reverse and would sustain bad management and dysfunctional industrial relations later on

23. Lessons Conventional inflation targeting may be inappropriate with fiscal consolidation at the ZLB Fiscal stimulus can help recovery when interest rates are held constant if sustainability not an issue Severe recessions can risk bad supply-side policies that can seriously damage long-run growth – perhaps the EU and WTO are useful constraints