Is the Private Economy Self-Correcting or Should We Fear Deflation? Examining the Experience of the Great Depression and the Current Great Recession

By Mario SeccarecciaProfessor of Economics, University of Ottawa, Ontario, Canada

“Fear of Deflation” From the early postwar years until the mid-1990s, fear of

deflation, which had been a principal concern of numerous economists and policy makers of the interwar era of the twentieth century (i.e. from J.M. Keynes to Irving Fisher), had practically disappeared.

The rise of the postwar Keynesian welfare state with its built-in stabilizers and the growth of “big” government associated with a rising public sector, together with the emergence of a strong trade union movement, all suggested that such a fear was unfounded and that the real danger was a new inflationary bias that was supposedly to characterize the workings of Western capitalist economies after W.W. II.

However, by the end of the 1990s, the potential for deflation came once again to haunt economists and policy makers alike.

Reasons for the Fear of Deflation Some have argued that this was the result of the success of monetary

policy of inflation targeting, coupled with “New Economy” which had brought the inflation rate in most Western countries hovering ever closer to zero (see, among others, the writings of De Long 1999, DeLong and Sims 1999, Burdekin and Siklos, 2004, Raines and Leathers 2008, Siklos 2009).

Others, instead, saw what had been happening to the Japanese economy since the early 1990s as it lost vitality after a lengthy period of unprecedented export-led growth together with the bursting of the real estate bubble, and was suddenly faced with long-term stagnation and falling prices (Bernanke 2002, Koo 2008).

Others, especially from the anti-globalization movement, feared the consequences of unrestricted free trade, which was opening up and integrating vast new regions of the world, such as China, as potential new sources of cheap labor and very low priced tradable goods (Farrell 2004).

However, it is the major recession of 2008-2010 that accompanied the worst financial crisis in postwar U.S. economic history, which solidified the fear of deflation in the psyche of some present-day policymakers as they observed some ominous signs during the crisis that deflation can once again become a reality in the world economy (see Bernanke 2010).

Policy Makers’ Fear and Theoretical Models of the Macro-Economy that Celebrate the Virtues of Deflation in a Recession

In contrast, most theoretical models, which continue to be taught by mainstream macroeconomists to both undergraduate and graduate students using the standard AD/AS analysis, preach the virtue of deflation as a market-clearing device in both the product and labour markets. If ever the system derails and falls into recession, all that is needed to fill the recessionary gap is wage and price flexibility that will insure eventually the system’s self correction.

All mainstream economists agree with its simple logic based on a micro analysis of the macro economy. Largely oblivious to these fears, the debate among mainstream academic economists is not really over the self-correcting properties of the price mechanism, since all agree that the private market system is self-adjusting, but over the speed at which the system self-adjusts, with New Keynesians emphasizing the stickiness of wages and prices in the short run while New Classicals do not.

Purpose of Present Analysis The object of this presentation is to provide an

analysis of how these legitimate fears of deflation among policy makers can be better understood using a simple framework of AD/AS that would be widely understood by mainstream economists of the so-called New Consensus and to show its internal contradictions.

These competing analyses of the effects of deflation are then used to shed further light on what happened during the Great Depression of the 1930s as well as during the current Great Recession of 2008-2010.

Simple New Consensus Framework of Analysis 1. An aggregate demand relation that could explain both the level of output

or, as specified below, its deviation from potential output:(y – y*) = γ1A + γ2r [1]where y is real output or income, y* is potential output (consistent with some pre-specified NAIRU), A is real “autonomous” spending that is inelastic to interest rate changes, r is the policy-determined real rate set by the monetary authorities such as the “overnight” (or interbank) rate, and the parameters γ1 > 0 and γ2 < 0 in accordance with received theory.

2. There is the usual aggregate supply (or inflation expectations-augmented Phillips Curve) relation:∆P/P = α1(y – y*) + α2(∆P/P)e [2]where ∆P/P is the rate of inflation, (∆P/P)e is the expected rate, (y – y*) is as above the output gap, and α1>0 and α2>0.

3. There is also specified a Central Bank reaction function normally of the Taylor rule variety as described below:r = ρ0 + ρ1((∆P/P) - (∆P/P)T) + ρ2(y - y*) [3]where (∆P/P)T is the central bank’s target rate with ρ0, ρ1, ρ2>0 and ρ1, ρ2 = 0.5. This model gave all the power to the monetary authorities to tinker with the real rate of interest r, by keeping the economy at a zero output gap consistent with a low target inflation rate of, say, 2%, as pursued in Canada since 1991 (see Seccareccia and Lavoie 2010).

Figure 1: Graphical Integration of the First Two Relations to Derive an AD Curve in Inflation/Output Gap Space (Positive Quadrants Only)

Graphical Analysis of the New Consensus Approach Let us now focus on the top right-hand quadrant, by depicting it in

Figure 2 for all possible values (positive and negative for y - y* and ∆P/P) and adding to it the short-run Phillips Curve relation described in equation (2) above.

Let us now imagine a situation in which the economy is initially at price stability as depicted in Figure 2 and, suddenly, there is a positive demand shock that pushes the inflation rate above the target level associated with y-y* > 0.

In the New Consensus framework, the usual solution offered is that, under the Taylor-type assumption about central bank behavior, the central bank will raise real interest rates much above the natural rate ρ0 not only because inflation has exceeded its target level, (∆P/P) - (∆P/P)T> 0, but also because y-y* > 0 in equation (3). This would therefore have the effect of tightening monetary policy through higher real interest rates as shown in Figure 2, consistent with a steady-state inflation with ∆P/P = (∆P/P)e.

Figure 2: The Effect of a Positive Aggregate Demand Shock

New Consensus Policy Analysis and Inconsistency with Traditional Neoclassical Analysis

In the typical story to be found in the New Consensus literature, if the policy authorities wish to get the inflation rate back to zero, one would need a strong dose of either fiscal or monetary austerity (in the latter case perhaps by some shock effect that can impact the γ2 coefficient in equation 1) that would shift the AD down to the original level.

Alternatively, if inflationary expectations had also risen, thereby shifting upward the Phillips Curve (not shown in Figure 2), the effect would be to reduce the difference between y and y* automatically as the PC relation would rise upward along the AD’ curve. But this would still require a similar strong dose of fiscal/monetary policy to get the higher inflation rate down to its previous level ∆P/P = (∆P/P)e at (y – y*) = 0.

While this analysis is of interest and points to the need for discretionary policy, this tale is somewhat inconsistent with the traditional neoclassical vision, since there is no market mechanism in place to bring the inflation rate back to zero. All of this requires a precise government policy mix in place.

Alternative Neoclassical Laissez-Faire Mechanism All those hard-line neoclassical economists

uncomfortable with this New Consensus story could, however, easily rely on a much simpler mechanism, going back to A.C. Pigou, to insure that AD falls back automatically to its original level.

This is because one of the elements of “autonomous” expenditures (A) in equation 1 is normally assumed to be negatively affected by rising prices, owing to negative wealth effects.

This could be assumed to be the “self-adjusting” solution compatible with not only the old textbook view but which is also consistent with the opinion of certain laissez-faire economists in recent times that have been critical of the discretionary actions of the fiscal and monetary authorities (see, among others, Safner 2010).

Application of the Automatic Mechanism in a Great Depression But how would these policy tools or automatic mechanisms

just described work themselves out in an extraordinary situation like the Great Depression in which a vicious cycle of deflation had already taken hold and where the “fear of deflation” had become a reality?

As shown in Figure 3, the self-adjusting mechanism ought to work itself out smoothly as the positive wealth effect of the deflation brings the economy back to its natural level where y - y* = 0.

Indeed, if the expectations of deflation are sufficiently strong so as to shift down also the short-run Phillips Curve, this would only speed up the process of self correction. In fact, the system may even react to such an extent that there is overshooting, as the AD curve moves outward towards AD”, but the inflation will then reverse the shift and bring the economy back to a situation of price stability with y = y*.

Figure 3: Traditional Pigouvian Mechanism of Adjustment in a Deflationary Environment

A Fly in the Ointment: Questioning the Traditional Neoclassical Story

As much as this is a logically consistent analysis that questions the validity of those, even among the New Consensus, who have justified short-term fiscal policy measures in a situation of deflation, there are a number of problems.

Firstly, the shape of AD relation would actually be different than that shown in Figure 3 above. The assumed symmetry of the shape (when there is inflation or deflation) that is depicted in the diagram above is problematic. This is so for at least three reasons.

First Problem The first reason has been sufficiently discussed even in the

mainstream literature since it could reverse the slope of the AD curve in a situation of deflation. This is because monetary policy becomes completely ineffective as real interest rates are most likely to be rising with falling prices as a result of the lower bound of zero for nominal interest rates.

Moreover, this is undoubtedly an important reason why central banks fear deflation, since it would take away their only effective instrument of policy.

As depicted in the Figure 4 below, in such as situation of deflation, the slope of the AD curve in inflation/output space is reversed. As prices continue to fall in a downward spiral, real interest rates would rise and, therefore, reduce further AD.

The perversity of this effect would, of course, depend on the elasticity of the components of AD to real interest rates, but, even in the best case scenario in which the interest elasticity of AD is zero, the shape of the AD curve would become vertical in an economy faced with a state of deflation.

Figure 4: Effect of Deflation in an Economy Reaching the Lower Bound of Nominal Interest Rate

The Resilience of the Neoclassical Model to the New Consensus Critique

As shown in Figure 4 this does not, however, leave the New Consensus economists off the hook. Even in this case, there is a problem with the New Consensus analytics in dealing with the traditional argument that the positive wealth effects resulting from the falling prices will eventually move the AD curve back towards a situation in which y = y*.

Indeed, even in the case in which the short-run Phillips curve does not spiral downward as with PC shown above, the whole AD relation will inevitably be shifting rightward toward where ∆P/P = (∆P/P)e at (y – y*).

If, instead, prices are shocked into an accelerated downward spiral, as with the downward-shifting PC’, then the adjustment process merely speeds up and could even lead to overshooting, as previously discussed. But, once again, the inevitable consequence is for the private economy to correct itself through an automatic mechanism of adjustment.

In both cases, the powerful wealth effects that are assumed by traditional theory make the latter highly resilient to the critical analysis coming from the New Consensus that has recently opened the door for the use of discretionary fiscal policy.

The Resilience of the Neoclassical Model to the New Consensus Critique

This story, which rests on the importance of wealth effects, has been devastating for those New Keynesian economists who have pointed to the incapacity of monetary to be conducted in a deflationary environment, thereby necessitating discretionary fiscal policy.

Consequently, it has provided since the 1940s a powerful argument that continues to serve to inoculate mainstream economists against fears of deflation and it remains the Achilles’ heal of those New Keynesian economists who have tried to revive fiscal policy as a legitimate policy tool in the mainstream literature.

Indeed, literally since the 1940s and 1950s, we have seen, for instance, the resurrection of consumption functions that have traditionally emphasized these positive wealth effects from Patinkin to Friedman and Modigliani (Bodkin, 2010).

Second Problem: Kaleckian Critique Starting with Kalecki (1944), post-Keynesian economists

have questioned this analysis on both logical and empirical grounds.

These critics of the mainstream view argue that, while consumption may well be affected by positive wealth effects, it could also be affected by negative Fisher debt effects (Lavoie 2010).

These debt effects, in a period of deflation, may become significant in not only offsetting the positive wealth effects on the consumption function, but even more significantly it could badly hamper real investment because of problems of insolvency and negative expectations of return.

This would have the effect of shifting the AD curve further away from where y = y*. A spiraling deflation with a downward shifting Phillips Curve would only compound the effects already resulting from the initial deflation.

Second Problem: Kaleckian Critique Hence, in terms of the first New Consensus equation (1), not only

would the first term on the right-hand side have to be revised because of the significance of real wealth, W/P, as an element in the determination of A; but one would have to include also the real debt burden, D/P, with ∂A/∂W/P > 0 and ∂A/∂D/P < 0, as discussed in Lavoie (2010) and in Baumol, Blinder, Lavoie, and Seccareccia (2010).

Indeed, from equation (1’), during periods of inflation it may well be that ∂A/∂W/P > ∂A/∂D/P, even though the effect of inflation on investment may not be neutral for reasons articulated by writers such D.H. Robertson in the 1920s.

However, for an economy in a depressive state of deflation, it would most likely face a situation in which ∂A/∂W/P <∂A/∂D/P because of the significance of this balance-sheet effect, as emphasized, among others, by Koo (2008).

(y – y*) = γ1A(W/P, D/P) + γ2r [1’]

Second Problem: Kaleckian Critique It follows from this that a deflationary episode, as

depicted in Figure 5, would lead to a cumulative process away from y = y* as the economy plunges ever further into stagnation.

The downward expectations of deflation would merely feed further this negative cumulative process as the PC relation shifts downward with the private economy spiraling into the abyss of a Great Depression.

Without some other counterforce in place, in a world in which monetary policy is impotent, the only effective tool to stop this downward spiral is through strong fiscal policy actions of the New Deal variety.

Figure 5: The “Fear of Deflation” Realized, in an Economy Characterized by a Kaleckian Cumulative Negative Process of Deflation

Third Problem: Real Wage as a Distribution Parameter Keynes (1936) had argued that, while these instabilities are a

characteristic feature of the capitalist process, such economies are not violently unstable with certain forces also working to stabilize the economy.

But what forces other than the negligible positive wealth effects emphasized by neoclassical economists could serve as countervailing force against such Kaleckian downward pressures?

Clearly, for Keynes and Post-Keynesians, consumption spending is not only affected by real disposable income which would be falling sharply during a depression, but also by the distribution of this income over time.

One such key income distribution variables is the evolution of the real wage itself, ω/P, which normally tends to work in reverse to what is depicted in the neoclassical conception of the labor market. This would suggest that the real wage, ω/P, or some other such distribution variable, ought also to be considered a critical determinant of A, as depicted in equation (1”) below.

Third Problem: Real Wage as Distribution Parameter The real wage, ω/P ought to be considered a critical determinant of

A, as depicted in equation (1”) below for reasons made clear by Kalecki, Kaldor and Pasinetti, who had postulated differential propensities to consume according to income groups, with the propensity to consume out of labor income being significantly higher than that from property income.

In contrast to neoclassical theory, which would predict an overall increase in employment and output resulting from a fall in the real wage for standard microeconomic reasoning pertaining to the neoclassical conception of the labor market, Keynesians and Post-Keynesians would argue that a fall in the real wage would tend to exacerbate the situation in the labor market because of the downward consequences on the product market.

Hence, in terms of equation (1”) below, the relation between the real wage and private spending would normally be a positive one unless perhaps the domestic economy is overly dominated by foreign trade, i.e. ∂A/∂ω/P > 0.

(y – y*) = γ1A(W/P, D/P, ω/P) + γ2r [1”]

Third Problem: Real Wage as Distribution Parameter From this reasoning, it follows that the reaction of real

wages to a downward aggregate demand spiral is important and could, therefore, either intensify the depression or mitigate its effects.

Indeed, if the traditional neoclassical prescription of cutting wages actually brings about a decline in the real wage, a falling real wage would merely aggravate the situation.

However, these are all empirical questions to which I would like to turn by looking at some stylized facts about the Great Depression of the 1930s and the recent Great Recession by focusing on the experience of the United States and Canada for which some data was readily available.

Are Depressions Self-Correcting? A Brief Analysis of the Experience of the 1930s and the Current Great Recession

While there are obvious similarities between the Great Depression of the 1930s and the Current Great Recession, the current recession has not degenerated into a serious deflationary episode characterized by rising real interest rates and falling money wages and prices.

As argued by Desmedt, Piégay and Sinapi (2010), both crises have their roots in problems of rising inequality and bubbles in asset markets.

However, the recent crisis was triggered by problems in the housing market (starting in 2007) which was then transmitted to the banking and financial markets (in 2008) and eventually to the real economy (by 2009).

During the Great Depression, the sequence was somewhat in reverse, which problems beginning in the stock market, which then led to the collapse of the banking sector and then had ramifications in the real economy, including the housing market.

However, by any measure the Great Depression was more severe than the Great Recession.

Figure 6: Fluctuations in Employment and Real Gross Domestic Product, United States and Canada 1926 - 1939

70

80

90

100

110

120

26 27 28 29 30 31 32 33 34 35 36 37 38 39

US Employment IndexUS Real GDP Index

Source: S.B. Carter et al. (eds), Historical Statistics of the United States(Millenium Edition), New York: Cambridge University Press, 2006. Vol. 2.

Table Ba840, p. 12-112; and Vol. 3, Table Ca9, p. 3-25.

Inde

x (1

926

= 10

0)

80

90

100

110

120

130

26 27 28 29 30 31 32 33 34 35 36 37 38 39

Canada Employment IndexCanada Real GDP Index

Inde

x (1

926

= 10

0)

Source: Statistics Canada, CANSIM I, Series Label D14442;and Statistics Canada, Historical Statistics of Canada (Second Edition),Ottaw a: Statistics Canada, 1983, Series D528.

Figure 7: Movement in Average Hourly Wage Rates, the Consumer Price Index, and Average Real Wages, United States (Mfg.) and Canada (Industrial Composite) 1926 - 1939

60

80

100

120

140

160

180

26 27 28 29 30 31 32 33 34 35 36 37 38 39

US Average Hourly EarningsUS Consumer Price IndexUS Real Average Hourly Earnings

Source: S.B. Carter et al. (eds), Historical Statistics of the United States(Millenium Edition), New York: Cambridge University Press, 2006, Vol. 2,

Table Ba4396, p. 2-281; and Vol. 3, Table Cc1, p. 3-158.

Inde

x (1

926

= 1

00)

70

80

90

100

110

120

130

26 27 28 29 30 31 32 33 34 35 36 37 38 39

Canada Average Wage Rate (General)Canada Consumer Price IndexCanada Real Wage Rate Index

Source: Statistics Canada, Historical Statistics of Canada (Second Edition),Ottawa: Statistics Canada, 1983, Series E198 and K8.

Inde

x (1

926

= 1

00)

Figure 8: Evolution of Saving Rate, United States and Canada 1926 - 1939

-2

-1

0

1

2

3

4

5

6

7

26 27 28 29 30 31 32 33 34 35 36 37 38 39

US Saving Rate

Source: S.B. Carter et al. (eds), Historical Statistics of the United States(Mil lenium Edition), New York: Cambridge University Press, 2006,

Vol. 3, Table Ce122, p. 3-312.

Pe

r Ce

nt

-12

-8

-4

0

4

8

12

26 27 28 29 30 31 32 33 34 35 36 37 38 39

Canada Saving Rate

Source: Statistics Canada, Historical Statistics of Canada (Second Edition),Ottawa: Statistics Canada, 1983, Series F83 and F90.

Pe

r Ce

nt

Broad Analysis of Charts on the Great Depression (1929-1939) 1. Collapse in AD, employment and output. 2. Although prices were already gently falling the late 1920s,

the collapse in AD triggers a sharp fall in prices and wages. Since wages fall less than prices, real wages rise significantly, despite the growing unemployment.

3. The initial collapse in the saving rate can be explained by two dominant effects that have little to do with the importance of wealth effects: (1) there is the traditional Duesenberry effect where household losing jobs are trying to maintain consumption levels by drawing down their savings, (2) there is the distribution effect of a rising real wage, ω/P, which is initially sustaining consumption demand, despite the fall in employment resulting from the decline in business spending.

4. The steep rise in the saving rate after 1933 is primarily a balance sheet phenomenon. Indeed, once employment stabilized and began to turn around and then reinforced by New Deal policies, household began to reduce their debt load in face of still continued uncertainty about income growth.

Figure 9: Fluctuations in Employment and Real Gross Domestic Product, United States and Canada 2004 - 2010

98

100

102

104

106

108

2004 2005 2006 2007 2008 2009 2010

US Employ ment (Nonfarm) IndexUS Real GDP Index

Inde

x (2

004

= 10

0)

Source: U.S. Bureau of Labor Statistics, Establishment Data, Historical Employ ment B-1;U.S. Department of Commerce, Bureau of Economic Analysis, Selected NIPA Tables, Table C1.

98

100

102

104

106

108

110

2004 2005 2006 2007 2008 2009 2010

Canada Employ ment Index (Total, All Industries)Canada Real GDP (Chained 2002 Dollars)

Inde

x (2

004

= 10

0)

Source: Statistics Canada, CANSIM Series V2522952 and CANSIM Series V1992067.

Figure 10: Movement in Hourly Earnings, the Consumer Price Index, and Real Hourly Earnings, United States and Canada 2004-2010

96

100

104

108

112

116

120

124

2004 2005 2006 2007 2008 2009 2010

US Real Hourly Earnings (Total Private Sector)US Hourly EarningsUS Consumer Price Index

Ind

ex

(20

04

= 1

00

)

Source: U.S. Department of Labor, Bureau of Labor Statistics, Establishment Data,Historical Hours and Earnings, B-2, and Consumer Price Index, All Items.

96

100

104

108

112

116

2004 2005 2006 2007 2008 2009 2010

Canada Real Average Hourly Earnings IndexCanada Average Hourly Earnings IndexCanada Consumer Price Index

Ind

ex

(20

04

= 1

00

)

Source: Statistics Canada, CANSIM Series V1806037 and V41693271.

Figure 11: Evolution of Saving Rate, United States and Canada 2004-2010

1

2

3

4

5

6

2004 2005 2006 2007 2008 2009 2010

US Saving Rate

Pe

r Ce

nt

Source: U.S. Department of Commerce, Bureau of Economic Analysis,Tables from Personal Income and Outlays.

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2004 2005 2006 2007 2008 2009 2010

Canada Saving Rate

Source: Statistics Canada, CANSIM Series V647038.

Pe

r Ce

nt

Broad Analysis of Charts on the Great Recession (2007-2010) 1. Collapse in AD, employment and output triggered initially by the

subprime crisis in 2007 and then followed by the widespread financial crisis in 2008 .

2. Although prices had been gently rising during the early-to-mid 2000s, the collapse in AD triggers a disinflation in prices, but without making any significant dent on the upward trend in nominal wages. Hence, despite the significant fall in employment and rise in unemployment, real wages continued to grow, much as they had done during the Great Depression, but, in the recent case, as a result of disinflation (not a deflation) in prices but with only a small observable disinflation in nominal wages.

3. Unlike the initial collapse in the saving rate during the Great Depression, there was no fall in the saving rate. Given the weaker fall in employment and output during the Great Recession, the traditional Duesenberry effect did not take hold, as a result of the strong distributional effect of a rising real wage, ω/P.

4. The sharp rise in the saving rate that started immediately with the collapse of the housing market and fears of household indebtedness out of control reflects primarily a Kaleckian balance sheet phenomenon. Indeed, while this phenomenon of rising personal saving rate began just before the subprime crisis, households have been consistently trying to reduce their debt load in face of continued uncertainty about income prospects.

Conclusion: Is the Private Economy Self-Correcting?

As stated in the previous analysis, the only self-correcting property of a deflationary episode is its positive distributional effect on the real wage, which could sustain some increased consumption demand despite the fall in employment.

The self-destructive property of a deflationary episode was highlighted long ago by Fisher and Kalecki and these effects dominated not only the experience of the Great Depression after 1933, but also the current Great Recession.

SEE SEPARATE CHARTS BELOW

Important: See Figure 14 for separate series on total labor compensation (composite measure) in the US during the Great Depression.

Figure 12: Fluctuations in Employment and Real Gross Domestic Product, United States 1926 - 1939

70

80

90

100

110

120

1926 1928 1930 1932 1934 1936 1938

Employment (Nonagricultural) Real GDP

Source: S.B. Carter et al. (eds), Historical Statistics of the United States(Millenium Edition), New York: Cambridge University Press, 2006. Vol. 2.

Table Ba840, p. 12-112; and Vol. 3, Table Ca9, p. 3-25.

Inde

x (1

926

= 1

00)

Figure 13: Fluctuations in Employment and Real Gross Domestic Product, Canada 1926 - 1939

80

90

100

110

120

130

1926 1928 1930 1932 1934 1936 1938

Employment Index (Industrial Composite) Real Gross Domestic Product

Source: Statistics Canada, CANSIM I, Series Label D14442;and Statistics Canada, Historical Statistics of Canada (Second edition),Ottawa: Statistics Canada, 1983, Series D528.

Index (1

926 =

100)

Figure 14: Movement in Hourly Earnings, Total Compensation, the Consumer Price Index, and Real Hourly Earnings and Real Total Compensation, United States 1926 - 1939

60

80

100

120

140

160

180

1926 1928 1930 1932 1934 1936 1938

Hourly Earnings in MfgTotal Compensation (All Industries)Consumer Price IndexReal Hourly Earnings in MfgReal Total Compensation

Index (1

926 =

100)

Source: S.B. Carter et al. (eds), Historical Statistics of the United States(Millenium Edition), New York: Cambridge University Press, 2006. Vol. 2.Table Ba4396, p. 2-281 and Table Ba4419, p. 2-283; and Vol. 3, Table Cc1, p. 3-158.

Figure 15: Movement in Average Wage Rates (Industrial Composite), the Consumer Price Index, and Average Real Wages, Canada 1926 - 1939

70

80

90

100

110

120

130

1926 1928 1930 1932 1934 1936 1938

Real WagesMoney Wages (Total)Consumer Price Index

Source: Statistics Canada, Historical Statistics of Canada (Second Edition),Ottawa: Statistics Canada, 1983, Series E198 and K8.

Index (1

926 =

100)

Figure 16: Evolution of Saving Rate, United States 1926 - 1939

-2

-1

0

1

2

3

4

5

6

7

1926 1928 1930 1932 1934 1936 1938

SAVINGRATE

Pe

r Ce

nt

Source: S.B. Carter et al. (eds), Historical Statistics of the United States(Millenium Edition), New York: Cambridge University Press, 2006, Vol. 3, Table Ce122, p. 3-312.

Figure 17: Evolution of Saving Rate, Canada 1926 - 1939

-12

-8

-4

0

4

8

12

1926 1928 1930 1932 1934 1936 1938

Saving Rate

Source: Statistics Canada, Historical Statistics of Canada (Second Edition),Ottawa: Statistics Canada, 1983, Series F83 and F90.

Perc

ent

Figure 18: Fluctuations in Employment and Real Gross Domestic Product, United States 2004 - 2010

98

100

102

104

106

108

2004 2005 2006 2007 2008 2009 2010

Employment (Nonfarm) Real GDP

Source: U.S. Bureau of Labor Statistics, Establishment Data, Historical Employment B-1;U.S. Department of Commerce, Burea of Economic Analysis, Selected NIPA Tables, Table C1.

Ind

ex

(20

04

= 1

00

)

Figure 19: Fluctuations in Employment and Real Gross Domestic Product, Canada 2004 - 2010

98

100

102

104

106

108

110

2004 2005 2006 2007 2008 2009 2010

Employment Index (Total, All Industries)Real GDP (Chained 2002 Dollars)

Source: Statistics Canada, CANSIM Series V2522952 and CANSIM Series V1992067.

Index

(2004 =

100)

Figure 20: Movement in Hourly Earnings, the Consumer Price Index, and Real Hourly Earnings, United States 2004-2010

96

100

104

108

112

116

120

124

2004 2005 2006 2007 2008 2009 2010

Hourly Earnings (Total Private Sector)CPIReal Hourly Earnings

Source: U.S. Department of Labor, Bureau of Labor Statistics, Establishment Data,Historical Hours and Earnings, B-2, and Consumer Price Index, All Items.

Inde

x (2

004

=10

0)

Figure 21: Movement in Hourly Earnings, the Consumer Price Index, and Real Hourly Earnings, Canada 2004-2010

96

100

104

108

112

116

2004 2005 2006 2007 2008 2009 2010

Real Average Hourly Earnings IndexAverage Hourly Earnings IndexConsumer Price Index

Source: Statistics Canada, CANSIM Series V1806037 and V41693271.

Index (2

004 =

100)

Figure 22: Evolution of Saving Rate, United States 2004-2010

1

2

3

4

5

6

2004 2005 2006 2007 2008 2009 2010

Saving Rate

Per

Cen

t

Source: U.S. Department of Commerce, Bureau of Economic Analysis,Tables from Personal Income and Outlays.

Figure 23: Evolution of Saving Rate, Canada 2004-2010

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2004 2005 2006 2007 2008 2009 2010

Saving Rate

Per C

ent

Source: Statistics Canada, CANSIM Series V647038.