The U.S. Didn’t Cause the World Recession

The U.S. Didn’t Cause the World Recession, by Alan Reynolds
Cato, Feb 22, 2009

In the Washington Post, Ricardo Caballero of MIT has a novel and promising idea about “How to Lift a Falling Economy.” Unfortunately, he echoes the mantra that all the world’s economic problems can be traced to the U.S. in general, and to big U.S. banks in particular. “Already,” he says, “this illness has spread to the global economy.”

Already? Industrial production in Japan began collapsing in November 2007, two months ahead of the U.S., and the Japanese industrial decline has been twice as fast.

Unlike the U.S., real GDP began falling in the second quarter of 2008 in Germany, France, Italy, Japan, Singapore and Hong Kong. By no coincidence, that was when the price of oil rose as high as $145 a barrel. Soaring oil prices raise the cost of production and distribution for many industries, and reduce real household incomes and therefore consumption. Nine of the ten postwar U.S. recessions were preceded by a major spike in the price of oil.

In a piece for the Claremont Review of Books (written last November), I conclude , “This recession is not just a U.S. problem, not just about housing, and not just financial.”

Compare the decline in real GDP over the past 4 quarters (from The Economist):

U.S. -0.2%
France -1.0
Germany -1.6
Britain -1.8
Italy -2.6
Japan -4.6

Does it make sense to blame the largest declines in GDP on one country with the smallest decline? If so, then we need some explanation of how some uniquely American “illness has spread” to so many innocent victims.

If the explanation is supposed to be falling U.S. imports, then the worst decline by far would have been in Canada and Mexico (where real GDP was rising even in the third quarter). If the alleged causality is supposed to be because of some undefined links between financial centers, then Italy would not be among the hardest hit.

When it comes to trade, in fact, the shoe is mainly on the other foot: Collapsing foreign economies crushed U.S. exports.

In the second quarter of 2008, U.S. exports accounted for 1.54 percentage points of the 2.83% annualized rise in real GDP. But falling exports subtracted 2.84 percentage points from fourth quarter GDP. Falling exports, not falling consumption, were the biggest single contributor to the overall drop of 3.8%.

After looking at which economies fell first and fastest, it might be more accurate to say that some foreign illness has spread to the U.S. economy than to assert or assume the causality ran only in the opposite direction.