The psychology of economic downturns

Does community sentiment trump statistics in deciding which recession was nastiest?  

For my money, the 1991 recession was far worse than today's downturn.

The unemployment rate, which nearly hit 11 per cent that year, affected a much larger section of New Zealand society, and the rapid, vertiginous drop in national output also supports the argument that the events of 18 years ago were harsher.

But it is an apples-and-oranges sort of reasoning. The recession of 2008-2009 was much longer and the cumulative quarterly contraction deeper than in 1991. The economy recovered quickly in the early 1990s, whereas New Zealand now faces a slow grind upwards at best.

Deciding which was the Devil is a subjective judgment, as much about perception as reality. Even so, many New Zealanders do deem 1991 as more pernicious, despite economic indicators suggesting the contrary.

This is what the Reserve Bank's Matthew Wright would call social memory, one that reduces economic data to meaningless, popularist, mumbo-jumbo. The judgment of economists cannot compete with the psychology of the populace.

Wright's recent analysis of New Zealand during the Great Depression examines this disconnect between economic data and public perception in a piece titled Mordacious Years.
Few are alive today who remember the Great Depression yet we all know in our hearts and heads that the early 1930s were the worst of times.

But as Wright shows, the global shock of 2007-2009, as measured by world trade, industrial production and stock prices, nearly rivalled the unrepeatable events of 1929-1930.

As writer John Mulgan noted in Report On Experience, New Zealanders were still talking of the crisis as a domestic rainstorm in 1931. By 1932, it had become a calamity in general discourse. What changed the national narrative?

Wright cogently argues that political mismanagement and the ''community-wide emotional experience of great personal depth and social-cultural breadth'' tipped the scales.

It was not the Great Depression, per se, that engendered a sense of society under siege but rather a decade's-worth of economic reversal that betrayed a national sense of entitlement to home ownership, employment and a standard of living  savagely exposed as unaffordable.

The similarity to events leading up to 1991 could not be starker. In the 1920s, agricultural income plummeted as European production recovered from the war and the US maintained its productivity, which had been boosted to replace produce from the continent.

Following reforms in the 1980s, the New Zealand economy took a drastic downward slide; manufacturing was obliterated and farming income, the country's backbone, suffered economic spina bifida.

Interestingly, folklore from both periods cite farmers walking off the land, when evidence of such catastrophe is sketchy at best.

The government of 1931 courted public opprobrium by taking the razor to pensions, healthcare and public service salaries to address spiralling debt. ''These cuts, often pursued to petty extremes, affected a wide proportion of the population and became the public face of the Depression,'' Wright notes.

Similarly, finance minister Ruth Richardson instituted breathtaking cuts to public expenditure in 1991 that consigned a large swathe of New Zealand society to a standard of living considered insufficient by standards of the day.

In both eras, many believed cuts were pursued ''for reasons of conviction rather than economics''.

The social reaction to the Great Depression, to Wright's mind, stemmed from the denied expectations of ''idealism, professed egalitarianism and an exaltation of the nuclear family, underpinned by security of housing and employment''.

Those expectations in the 1930s were betrayed, just as they were in the 1990s. The promised economic improvements for the average Kiwi taxpayer from reform either  never eventuated or arrived far too late. Whither now the trickle-down theory?

But Wright is painstaking in enumerating why the Great Depression was not, in a macroeconomic sense, quite the monster it is in our imagination.

This is not to deny the pain and suffering. Perhaps, Wright infers, the perception is just as real as the preferred economist's method of measuring decline.

As historian Jim McAloon notes, all modern economic history ''is a thoroughly politicised affair''.

 Nick Smith is a freelance writer.

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David   #1   04:15 pm Oct 16 2009

All well and good Nick but isn't it a little premature to be calling this recession over. The worst effects of this current debt deflation have been blunted for sure. Compared with the thirties, Government is way bigger with an entrenched entitlement culture now firmly in place. Trouble is the underlying issues remain unresolved.

1/ Massive indebtedness, mostly borrowed for consumption and non productive assets. Debt has been rising by double digits for decades and is still rising while productivity has been virtually stagnant.

2/ asset prices still way out of wack with fundamentals

3/ Very weak international trade

4/ global wage arbitrage and 'free trade' continue to carve great chunks out of our productive sector employment.

5/ foreign interests climbing into our best assets at fire-sale prices. How much more have we got to flog off to our Chinese masters? Once our farms, fisheries, forests and businesses are gone that only leaves our labour. Nice prospect there.

Nothing has been corrected and in almost every respect we are in a more precarious position than we were in late '07. Wake up New Zealand.

steve ryan   #2   09:24 am Oct 17 2009

some nice phrases nick, your a poet, but what we need here is numbers and you havnt provided anything but social commentary.

you get paid for this stuff.

i hope not.

your clever, intelligent but what we need to know is how is new zealand going to grow. what is the lever that creates growth. i would suggest some articles that investigate some real facts

Justice   #3   06:27 pm Oct 17 2009

"For my money, the 1991 recession was far worse than today's downturn."

This "recession" is in it's infancy so to make that statement is very pre-mature. Any 'figures' pointing to recovery are not based of the reality of WHY this recession occured and WHY the reasons for it have not YET been solved. Until we do admit to the problem, that being "huge excessive worldwide debt and living beyond means" then the 10,000 DOW is looking pretty ridiculous and pretty much a ticking time bomb. Drastic fundamental change MUST occur in not only our financial markets but also our western lifestyles. Ofcourse as we have seen there is much resistance and "head in the sand" mentality about. Well next year we will begin to see just how bad things really are. Mark my words. Prepare for a total collapse as all around the globe markets fail AGAIN and no bailouts options are left. Only admissions of being "deluded".

steveusa   #4   11:06 am Oct 19 2009

@David#1: your post is a perfect fit for the USA as well

I am getting a gut feeling that the embers of a US Dollar bonfire are heating up and about to be inflamed by the Health-for-All (entitlement) program being passed by December that's just what we need, another entitlement

I now call my government "mis-government"

Charlie   #5   12:41 pm Oct 19 2009

Matthew Wright claims that "With a duration of just 18 months, followed by a fast recovery, the Great Depression in New Zealand was relatively short as a purely economic phenomenon." A ludicrous assertion when high unemployment was not finally mopped up until two years into the War. It is absurd to compare the, TO DATE, minor pertubations in the New Zealand economy with the Douglas/Richardson induced hell of the early nineties let alone the horrors of the thirties.

Peter S   #6   03:59 pm Oct 20 2009

"For my money, the 1991 recession was far worse than today's downturn."

"But as Wright shows, the global shock of 2007-2009, as measured by world trade, industrial production and stock prices, nearly rivalled the unrepeatable events of 1929-1930."

"As writer John Mulgan noted in Report On Experience, New Zealanders were still talking of the crisis as a domestic rainstorm in 1931."

The second two quotes make the first one look a tad naive and premature. Did you actually stop to proof read what you had written and see if it made overall sense?

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