Is Switzerland in a Great Depression?

Transcription

1 November 2004 Is Swizerland in a Grea Depression? Timohy J. Kehoe Universiy of Minnesoa and Federal Reserve Bank of Minneapolis Kim J. Ruhl* Universiy of Texas a Ausin Absrac Abrahamsen, Aeppli, Aukeren, Graff, Müller and Schips (2004) objec o Kehoe and Presco s (2002) characerizaion of he Swiss economy as being in a grea depression over he period They argue ha (1) depressions should be defined in erms of declines in labor produciviy raher han in GDP; (2) examining deviaions from rend in GDP is equivalen o examining levels; (3) Swiss daa from he 1970s should be ignored because i is of low qualiy and because he 1970s were a period of urmoil in he Swiss labor marke; (4) Swiss GDP daa should be adjused o accoun for appreciaions in he erms of rade; and (5) he change in Swiss naional accouns from a sysem based on SNA68 o one based on SNA93 will make Swiss economic performance look beer. In his noe, we find ha none of hese argumens have meri excep for, possibly, he need o adjus GDP daa for changes in he erms of rade. We conclude ha Swizerland has indeed suffered a grea depression and, in fac, is mired in i even oday. *The auhors graefully acknowledge he financial suppor of he Naional Science Foundaion. We would like o hank Ellen McGraan and Edward Presco for helpful discussions. We would also like o congraulae Ed and Finn Kydland on he occasion of he award of he Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel for The general equilibrium mehodology ha hey developed for analyzing business cycles led o he mehodology for analyzing grea depressions discussed in his noe. The daa used in his aricle are available a hp:// The views expressed herein are hose of he auhors alone and do no necessarily reflec hose of he Federal Reserve Bank of Minneapolis or he Federal Reserve Sysem.

2 1. Inroducion In developing a mehodology for analyzing grea depressions, Kehoe and Presco (2002) use he economic experience of he Unied Saes over he wenieh cenury o find crieria for defining a period as a grea depression. As shown in Figure 1, real GDP per working age (15-64) person has grown consisenly by 2 percen per year in he Unied Saes, wih he major excepions of he U.S. Grea Depression of he 1930s and he subsequen World War II buildup. Kehoe and Presco define a grea depression as a period of large decline in GDP from a rend growh pah. Looking a daa from he period afer World War II, hey find ha ouside of some counries in Lain America he only wo relaively prosperous, marke economies ha have had periods ha saisfy heir definiion of a grea depression are New Zealand and Swizerland. Abrahamsen, Aeppli, Aukeren, Graff, Müller, and Schips (2004) objec o Kehoe and Presco s (2002) characerizaion of he Swiss economy as being in a grea depression over he period They argue 1. The Kehoe-Presco definiion of grea depression based on deviaions of real GDP per working age person from a 2 percen per year growh rend is flawed. They argue ha declines in real GDP per hour worked provide a beer measure. 2. The inclusion of he growh rend in he Kehoe-Presco definiion is irrelevan. 3. We should hrow ou daa from he 1970s because he Swiss daa from he 1970s is of low qualiy and, because of problems in governmen policy regarding unemploymen insurance for migran workers, he 1970s were a period of urmoil in he Swiss labor marke. 4. If we adjus he concep of real GDP o accoun for he large appreciaion in he Swiss erms of rade ha occurred in he 1980s and 90s, Swiss economic performance does no look as bad. 1

3 5. We should expec he swich in he Swiss naional accouns from SNA68 o SNA93 o make Swiss economic performance over he period look even beer 1. Abrahamsen e al. reach he conclusion ha Swiss economic performance over he period is no noiceably worse han ha of he Unied Saes and ha, herefore, Kehoe and Presco are no jusified as classifying he Swiss experience as a grea depression. In his noe, we reply ha 1. Given he U.S. experience and economic heory, he Kehoe-Presco definiion of a grea depression is appropriae for deecing large negaive deviaions of an economy from is poenial growh pah. Declines in produciviy are no he same as depressions. Furhermore, even as a measure of produciviy, he measure presened by Abrahamsen e al. has serious problems because of he consrucion of heir daa on hours worked before Trend growh is an imporan par of he heory behind he depressions mehodology. Comparing daa o he rend growh rae is essenial for deermining how large is he negaive deviaion from rend and, consequenly, for deermining wheher or no a grea depression has occurred. 3. I is unforunae ha Swiss daa from he 1970s is no of high qualiy. Using sandard echniques o deal wih he bes available Swiss daa, however, we see ha Swiss economic performance in he 1970s was abysmal. Furhermore, he sors of policy changes ha caused he urmoil in he Swiss labor marke in he 1970s are exacly wha he Kehoe-Presco grea depressions mehodology has been designed o deec and analyze. 4. Adjusing GDP for appreciaion in he erms of rade does indeed make Swiss economic performance look beer. This is a opic ha needs o be sudied more. 1 The Swiss naional accouns have recenly swiched from a sysem based on he European Commission s European Sysem of Accouns of 1979 (ESA79) o a sysem based on ESA95. ESA79 in urn was based on he Unied Naions Sysem of Naional Accouns of 1968 (SNA68), and ESA95 is based on SNA93. We follow Abrahamsen e al. in referring o hese wo sysems of naional accouns as SNA68 and SNA93. 2

4 5. The Swiss SNA93 daa have recenly been published. Using SNA93 daa raher han SNA68 daa does make Swiss economic performance look slighly beer if we do no make he adjusmen for changes in erms of rade. The SNA93 daa show much less of an appreciaion in he Swiss erms of rade, however, especially in he 1990s. If we adjus for he appreciaion in he erms of rade, he overall effec of using SNA93 daa raher han SNA68 daa is o make Swiss economic performance look worse. We conclude ha Swiss economic performance over he period is much worse han ha of he Unied Saes. If we do no adjus for changes in he erms of rade, Swiss economic performance easily saisfies he Kehoe-Presco definiion of a grea depression. If we do adjus for changes in he erms of rade, he case is closer o he borderline, bu expanding he period slighly o , Swiss economic performance sill saisfies he Kehoe-Presco definiion. A minor aside: Using daa adjused for changes in he erms of rade, we see ha he Swiss grea depression acually sars in 1973, raher han The Kehoe-Presco Definiion of Grea Depression Kehoe and Presco (2002) use economic heory o guide heir view of economic daa. GDP per capia or, as in heir case, per working age person is widely used o measure he performance of an economy, because i is he relevan measure as deermined by widely acceped economic heory. This heory is formalized in he workhorse model of general equilibrium macroeconomics, he neoclassical growh model. The model feaures an aggregae producion funcion of he Cobb-Douglas form, Y = AK L, (1) α 1 α where Y is oupu, A is oal facor produciviy (TFP), K is capial and L is labor inpu. If populaion grows a a consan rae, N = N0η, and TFP grows a a consan rae, ( ) ( 1 α ) A = A +, hen he economy has a balanced growh pah in which all 1 0 γ quaniies per working age person grow a he rae γ excep hours worked per working age person, which is consan. Mos noably, oupu per working age person grows a he 3

5 rae γ. I is his implicaion of he growh model ha drives he widespread use of GDP per capia as a measure of economic performance. Economiss who sudy growh look a he deerminans of his rend in GDP per capia; oher economiss sudy deviaions from his rend. Small deviaions from rend in GDP per capia are called business cycles in he radiion of Schumpeer (1935) and Lucas (1977). Large deviaions from rend are called grea depressions. Kehoe and Presco (2002) moivae heir definiion of a grea depression by examining daa on real GDP per working age person in he Unied Saes over he wenieh cenury depiced in Figure 1. The sraigh line in he figure is a 2 percen per year growh rend, which is he average growh rae of GDP per working age person in he Unied Saes over he las 100 years, or more. A period in which GDP per working age person is below rend is a grea depression if i mees he following hree condiions: 1. There is a leas one year in which oupu per working age person is a leas 20 percen below rend. 2. There is a leas one year in he firs decade of he grea depression in which oupu per working age person is a leas 15 percen below rend. 3. There is no significan recovery during he period in he sense ha here is no subperiod of a decade or longer in which he growh of oupu per working age person reurns o raes of 2 percen or beer. This definiion is moivaed by he daa in Figure 1, where he period in he Unied Saes saisfies he grea depression crieria. Figure 2 depics he analogous daa for Swizerland. In Swizerland, he periods and boh saisfy he grea depression crieria. In erms of fall in oupu from rend, is worse han in Swizerland. Kehoe and Presco (2002) rewrie he producion funcion (1) as ( ) α /(1 α) ( ) Y N = A K Y L N. (2) 1/(1 α ) / / / 4

6 They noe ha, along a balance growh pah, when A grows a a consan rae, he capial-oupu raio K / Y and hours worked per working age person L / N are consan. Figure 3 depics he decomposiion of he growh of oupu per working age Y / N in he Unied Saes over he period ino he hree facors A, ( ) /(1 ) 1/(1 α ) K / Y α α, and L / N. Noice ha he U.S. growh pah is close o balanced: he growh in Y / N is close o ha in A 1/(1 α ) K / Y α α and L / N are close o consan. To be sure,, and ( ) /(1 ) here are deviaions from balanced growh behavior. Over he period , oupu per working age person Y / N rises faser han does he produciviy facor A 1/(1 α ), for example, because hours worked per working age person L / N seadily increase. The Swiss daa depiced in Figure 4 are srikingly differen from he U.S. daa. 2 The poor performance of he Swiss economy is accouned for by he sagnaion in he produciviy and by he drops in hours worked per working age person in he 1970s and 1990s. Abrahamsen e al. look a daa on oupu per hour worked, ( ) /(1 ) 1/(1 α ) / / Y L = A K Y α α, (3) ignoring flucuaions in hours worked per working age person L / N. Cole and Ohanian (1999, 2004) and Fisher and Hornsein (2002) find ha much of he grea depression in he Unied Saes and he grea depression in Germany is accouned for by drops in hours worked per working age person in he form of massive unemploymen. If we measure economic performance only in erms of drops in oupu per hour worked, boh he U.S. experience and he German experience look mild. By he crieria of Abrahamsen e al., i would be hard o call eiher experience a grea depression. Since he erm grea depression is associaed precisely wih experiences like ha in he Unied Saes and Germany in he 1930s, we herefore rejec he crieria of Abrahamsen e al. 2 The daa used in his paper, ogeher wih documenaion, can be found on hp:// These daa do no come he Penn World Table. Nor do he daa used by Kehoe and Presco (2002), conrary o he asserion of Abrahamsen e al. 5

7 As an aside, we noe ha here is somehing wrong wih he hours worked daa employed by Abrahamsen e al. Figure 5 conrass he daa employed by Abrahamsen e al. wih he daa employed by Kehoe and Ruhl (2003). Noice ha he daa of Abrahamsen e al. seem o have been consruced by linearly connecing daa from he 1990s wih wo daa poins, one in 1987 and one in 1980 or earlier. Abrahamsen e al. have obained hese daa from he Groningen Growh and Developmen Cenre (GGDC). The GGDC daa have since been correced, however, and he daa on hours worked in Swizerland on he GGDC web sie a he ime his noe has been wrien (November 2004) are close o hose of Kehoe and Ruhl (2003). If Abrahamsen e al. were o reconsruc heir graphs 1 and 2 using he correced GGDC daa, he performance of Swiss GDP per hour worked in he 1980s would look much worse. 3. Derending Kehoe and Presco (2002) argue ha he rend growh of wo percen per year experienced by he Unied Saes during he wenieh cenury was echnologically feasible for oher counries. Counries ha improve heir insiuions, hereby allowing hemselves o adop he mos efficien echnologies more rapidly, o accumulae capial more rapidly, or o work more, could grow even faser. Kehoe and Presco define grea depressions as large losses in poenial oupu defined in erms of his wo percen rend growh. Abrahamsen e al. argue ha, since he derending facor is consan across counries and ime, one could skip he derending sep, se a higher value of he depression signal and arrive a exacly he same resuls. As a maer of simple algebra, he argumen of Abrahamsen e al. is wrong. If we accep he Kehoe-Presco premise ha poenial oupu is growing, hen loses in poenial oupu are seen much more clearly in derended daa like ha depiced in Figure 6 han hey are in non derended daa like ha depiced in Figure 7. To see if an economy during some period of ime saisfies Kehoe and Presco s crierion 1 for being in a grea depression in Figure 6, for example, we merely check wheher oupu per working age person normalized o 100 in he year before he period falls below 80 a some poin during he period. In conras, wih he non derended daa in Figure 7, he crierion is a moving one. We have o check wheher oupu per working age person falls below

8 (= ) in he firs year, or below 83.2 in he second year, or below 84.9 in he hird year, and so on. Figure 6 makes i easy o make saemens like: By he year 2000, Swizerland has fallen 30.4 percen below rend since 1973, while he Unied Saes is 4.5 percen below rend. Figure 7 does no. 4. The Swiss Downurn in he 1970s The mos sriking difference beween he graph of Swiss economic performance presened by Abrahamsen e al. and hose presened by Kehoe and Presco (2002) and by Kehoe and Ruhl (2003) is he reamen of daa for he 1970s. The Kehoe-Presco and Kehoe-Ruhl graphs show real GDP per working age person rapidly falling by 4.6 percen from 1973 o 1978, dropping 12.6 percen below rend. Abrahamsen e al. ignore he daa for he 1970s. One of he argumens ha hey employ o jusify ignoring hese daa is ha he underlying Swiss GDP daa for he 1970s is based on an old income-based sysem of naional accouns, raher han more modern sysems based on SNA68 or SNA93 ha sysemaically accoun for boh income and expendiures. Kehoe and Presco (2002) and Kehoe and Ruhl (2003) employ he same sors of echniques for splicing ogeher he differen Swiss GDP series as do, for example, he Inernaional Moneary Fund and he Organisaion for Economic Co-operaion and Developmen. The various sudies of hisorical episodes in he Federal Reserve Bank of Minneapolis s Grea Depression Projec (Kehoe and Presco, 2002, 2004) use he bes GDP daa available. Fisher and Hornsein (2002), for example, analyze he German grea depression of using GDP daa no consruced in accordance wih SNA. The poor qualiy of daa obviously presens poenial problems in he analysis bu does no jusify ignoring imporan hisorical episodes. Nor does i mean ha we canno refer o he experiences like ha of Germany in he 1930s or ha of Swizerland over he pas 30 years as grea depressions. 3 The second argumen ha Abrahamsen e al. employ o jusify ignoring Swiss daa from he 1970s is ha he lack of mandaory unemploymen insurance for migran 3 The poor qualiy of Swiss economic daa is noorious even oday. A recen IMF repor on Swizerland concludes, Addiional resources need o be allocaed o he improvemen of economic saisics o srenghen he basis for sound economic analysis and policy (Inernaional Moneary Fund 2004). 7

9 workers mean ha he severe recession of he mid 1970s forced many of hese workers o leave Swizerland. Since hese migran workers had very high labor force paricipaion raes, his mean ha he working age populaion lef in Swizerland had a lower paricipaion rae. The Swiss governmen implemened a reform in 1978 ha mandaed unemploymen insurance for migran workers, and Abrahamsen e al. argue ha i is no fair o look a Swiss daa before his reform was implemened. The Kehoe-Presco grea depressions mehodology has been designed precisely o deec and analyze episodes like hose in Swizerland in he 1970s. Tha we can undersand why Swizerland did so poorly in he 1970s does no imply ha we should ignore his episode. 5. Terms of Trade Adjusmens o GDP Changes in he erms of rade have been large and favorable in Swizerland compared o he Unied Saes. Abrahamsen e al. argue ha adjusing GDP for he erms of rade appreciaion which is no done in Kehoe and Presco (2002) improves he graph of Swizerland s economic performance. Kehoe and Ruhl (2003) address his issue; we revisi i here. In an open economy, favorable changes in he erms of rade increase he amoun of goods and services an economy can produce in ways ha are no capured in he usual definiion of GDP. In sandard naional accouning, changes in he raio of he price of expors o impors he erms of rade are reaed as price phenomena. An increase in he price of expors would show up in he price deflaor for expors, for example, and, if oher real quaniies did no change, real GDP would no change. The increase in he price of expors, however, means ha a counry can ge more impored inpus for he same amoun of expor goods; he change in he erms of rade increases he amoun of goods and services a counry can produce. Raher han hink of changes in he erms of rade as price phenomena, we can hink of hem as changes in echnology. To do his, he Unied Saes Bureau of Economic Analysis compues command-basis GDP in which he rade balance (expors minus impors) is deflaed by he implici price deflaor for impors. This mehod values nominal expors in erms of he impor goods ha hey can purchase. For a comprehensive analysis of he erms of rade and GDP measuremen beyond he simple command-basis GDP approach see Kohli (2004). 8

10 We plo command-basis GDP and radiionally measured real GDP for Swizerland in Figure 8. Real GDP and command-basis GDP move ogeher over ; he erms of rade change lile during his period. Beginning in 1982, he erms of rade in Swizerland quickly appreciae, which leads o higher growh in command-basis GDP han in real GDP. By 2000, command-basis GDP per working age person has fallen only 18 percen below rend while real GDP per working age person has fallen 30 percen below rend. Accouning for changes in he erms of rade does indeed have an impac on our evaluaion of he economic performance of Swizerland. 6. Changing Sysems of Naional Accouns Abrahamsen e al. argue ha differences in naional accouning sysems may be sysemaically undersaing growh in Swizerland. The daa used in Kehoe and Presco (2002) and Kehoe and Ruhl (2003) were colleced when Swizerland was sill using a sysem similar o SNA68 while he Unied Saes was using as sysem similar o he SNA93. As discussed in Kehoe and Ruhl (2003), a major difference beween hese wo sysems is ha compuer sofware is reaed as an inermediae good in SNA68 while i is reaed as invesmen in SNA93. If he real value of sofware was growing faser han he oher componens of oupu, GDP calculaed under SNA68 would grow more slowly han ha calculaed under SNA93. Abrahamsen e al. did no seem o have access o he recenly released Swiss GDP calculaed under SNA93 when hey wroe heir noe. They use he difference in U.S. GDP under he wo sysems o infer how Swizerland s GDP migh change when compiled under SNA93. Over he period 1980 o 1997, Abrahamsen e al. show ha U.S. GDP per capia grew an average of 0.31 percen more per year under SNA93 han SNA68. Wih he release of GDP daa for Swizerland compiled under SNA93, we can see how Swizerland has faired under he new sysem of accouns. As expeced, GDP compiled under SNA93 grows faser han ha compiled under SNA68, mosly during he period 1985 o The boos in growh, however, is no as large as ha in he Unied Saes. Over he period 1981 o 1997 he average increase in he annual growh rae from SNA68 o SNA93 was 0.16 percen, abou half ha found in he Unied Saes over he same period. Over he period 1981 o 2000 his increase is abou 0.17 percen and over 9

11 he period 1981 o 2001 he longes period in which we have daa under boh sysems he difference falls o 0.15 percen. The cumulaive effec of hese adjusmens is small. As can be seen in Figure 9, SNA93 GDP per working age person in Swizerland grows only 2.8 percen more over he period han does he comparable SNA68 daa. Anoher difference in he Swiss daa colleced under SNA93 a difference no anicipaed by Abrahamsen e al. is a large change in he measured erms of rade. Under SNA93 he erms of rade decline beginning in 1996, while he SNA68 measured erms of rade coninue o increase. By 2000, he SNA93 measured erms of rade have appreciaed 13.4 percenage poins less han he erms of rade measured under SNA68. While we would expec he change in accouning sysems o have some impac on he erms of rade, he difference beween he wo series in Figure 10 is large. If we are o adjus GDP for changes in he erms of rade, as argued by Abrahamsen e al., and we are o use SNA93 daa, hen we mus look a command-basis GDP as measured under SNA93. The smaller appreciaion of he erms of rade implies ha command-basis GDP based on SNA93 daa grows less han he command-basis GDP in Figure 8, which was compued using he SNA68 daa. As discussed above, he change o SNA93 has wo effecs on GDP in Swizerland. The inclusion of sofware in invesmen leads o more GDP growh in he SNA93 daa, bu he change in he erms of rade leads o less command-basis GDP growh. Quaniaively, he effec of he laer is larger han he effec of he former. This can be seen in Figure 11, which plos command-basis GDP using SNA93 daa. By 2000, he SNA93 command-basis GDP per working age person had fallen 1.5 percen more below rend han he SNA68 measured daa. Afer aking ino accoun all of he changes associaed wih he adopion of SNA93, Swizerland s economic performance, measured using command-basis GDP, is even worse han i was wih SNA68, conrary o he conjecure of Abrahamsen e al. 7. Swizerland Is in a Grea Depression Abrahamsen e al. have poined o a number of issues wih he measuremen of GDP per working age person. The adjusmen ha has he mos impac, as can be seen in 10

12 Figure 11, is he adjusmen for he erms of rade in he compuaion of command-basis GDP. Afer making he adjusmens, we reurn o he quesion, Is Swizerland in a Grea Depression? Though Abrahamsen e al. believe ha command-basis GDP, or some concep like i, is he proper measure of a counry s oupu, here is no clear consensus on his poin. This poin needs furher sudy. Wih his in mind, we consider he Swiss daa in wo ways. The firs is using he sandard definiion of real GDP, bu adjusing from SNA68 o SNA93 as discussed above. The second is using he same SNA93 daa, bu compuing command-basis GDP. Making he adjusmen o SNA93 daa changes he picure of he siuaion in Swizerland very lile. In Figure 11 we plo GDP per working age person compued wih SNA68 daa, as in Kehoe and Presco (2002) and Kehoe and Ruhl (2003) and GDP per working age person compued wih he SNA93 daa as called for in Abrahamsen e al. The SNA93 daa easily saisfies he crieria for a grea depression. In 1982 GDP per working age person has fallen 17.9 percen below rend since 1973 and by 1987 has fallen 20.3, saisfying condiions 1 and 2 in he Kehoe-Presco definiion of a grea depression. I can be easily verified from Figure 11 ha condiion 3 is saisfied as well. Making he adjusmens o SNA93 daa, as called for by Abrahamsen e al., does no reverse he findings of Kehoe and Presco (2002) and Kehoe and Ruhl (2003). In fac, looking a he mos recen daa, we see ha hings seem o be geing worse for Swizerland. In 2003, real GDP fell by 0.4 percen, driving Swizerland s GDP per working age person 33.4 percen below rend since We also presen he daa adjused for he erms of rade in Figure 11. Commandbasis GDP has Swizerland s growh las on rend in 1972, one year before Kehoe and Presco s (2002) sar dae for he Swiss grea depression. This makes a negligible difference, bu is necessary o be precise in answering he quesion a hand. Figure 11 plos GDP per working age person for Swizerland, measured using SNA93 and he command-basis GDP adjusmens for changes in he erms of rade. As can be seen in he figure, command-basis GDP per working age person was 16.6 percen below rend in 1982 and had fallen o 21.1 percen below rend by 2001, saisfying condiions 1 and 2 in he Kehoe-Presco definiion of a grea depression. The higher raes of growh in he lae 11

13 1980s and early 1990s do represen a modes recovery for Swizerland and need o be examined in more deail. Command-basis GDP per working age person grew faser han rend in 5 of he en years beween 1984 and The recovery from is mosly driven by he adjusmen made for he erms of rade. The larges growh comes during his period, wih command-basis GDP per working age person growing 2.7 percen more han rend in Condiion 3 in he Kehoe-Presco definiion of a grea depression is me, however, in ha GDP per working age person did no grow by more han rend for a leas 10 years, so Swizerland is in a grea depression beginning in Even using command-basis GDP, Swizerland can sill be classified as being in a grea depression, alhough he case is on he borderline. I is fair o say ha making he erms of rade adjusmens o he daa implies ha Swizerland grew faser han Kehoe and Presco (2002) firs believed, paricularly in he lae 1980s and early 1990s. The increase in GDP growh, however, should be aken in he conex of he overall growh pah of he las 32 years, which seems o be he overlooked by Abrahamsen e al. The auhors wrie: neiher he general public, nor policy makers, nor academic economiss [in Swizerland] would readily agree wih he idea ha hey have jus winessed a grea depression a home. No all Swiss economiss are as complacen abou recen Swiss economic performance as are Abrahamsen e al. Lambele and Mihailov (2000), for example, ask he quesions, Did he Swiss economy really sagnae in he 1990s, and Is Swizerland really all ha rich? The answers ha hey come up wih are, respecively, yes and no. Even he popular press in Swizerland has expressed concern for he poor performance of he Swiss economy. Markus Schneider, wriing in he Swiss weekly news magazine Die Welwoche in Ocober 2003, discusses Kehoe and Presco s (2002) characerizaion of Swizerland as being in a grea depression and he response of Abrahamsen e al. He agrees wih Kehoe and Presco ha he Swiss economy has suffered from poor growh since 1973 and goes on o noe ha a recen OECD repor projecs Swiss economic performance o be beer only han Japan s among indusrialized naions. I seems, conrary o he beliefs of Abrahamsen e al., ha here are people in Swizerland including he general public, policy makers, and academic economiss who agree ha hey are winessing a period of poor economic performance. 12

14 The size of Swizerland, as well as is relaive imporance in he world economy, has kep much of he inernaional aenion away from is poor growh. To appreciae he imporance of his, we only need o look o Japan. Derended oupu per working age person in Japan has fallen by abou 11 percen over he period Figure 12 displays derended oupu per working age person for Japan. A comparison of oupu per working age person in Japan and wih ha in Swizerland reveals ha he curren downurn in Japan is much milder han he firs decade of he depression in Swizerland. Japan s imporance in he world economy, however, has araced aenion o is siuaion. The 16 February 2002 cover of The Economis reads The Sadness of Japan and feaures a special repor on Japan s roubled economy. Two weeks laer, he 3 March 2002 issue of The Economis repors ha by several measures, Japan s slump is now worse han America s was in he 1930s. Japan s economy may be headed ino a grea depression. The general public, policy makers, and academic economiss agree ha he lack of economic growh in Japan is a serious concern. If Swizerland were as large and imporan as Japan, he siuaion migh be as widely publicized and freed over. People know ha Japan is in rouble, and no jus experiencing slow growh. Swizerland s small size may no be he only reason ha is growh performance is overlooked. Finland, a counry of 5.2 million people small even compared o Swizerland s 7.1 million experienced a large deviaion from rend in GDP per working age person in he early 1990s. Alhough he Finnish experience does no quie qualify as a grea depression by he Kehoe-Presco crieria, i is close. Figure 12 shows ha GDP per working age person in Finland fell 19 percen below rend in 4 years, compared o Swizerland s fall of 11 percen in he firs 4 years of heir Grea Depression. Finland, in conras o Swizerland, recovered quickly and was less han 8 percen below rend in Alhough, compared o Swizerland, he Finnish downurn was mild, a quick scan of he economic journals of Finland urns up iles such as: The Grea Depression of he 1990s in Finland (Kiander and Varia, 1996) and Labor Markes in 4 Because of he rapid aging of Japan s populaion, i makes a difference how we define working age. If we define working age as years, for example, he drop in real GDP per working age person beween 1991 and 2002 was abou 14 percen. 13

15 Finland during he Grea Depressions of he Twenieh Cenury (Bockerman and Kiander, 2002). 8. Conclusion We began by asking Is Swizerland in a Grea Depression? Abrahamsen e al. argue ha Swizerland is no in a grea depression and ha he poor Swiss economic performance is an arifac of he poor qualiy of Swiss daa. Afer adjusing he daa as called for in Abrahamsen e al., we find ha Swizerland is in a grea depression and ha, in fac, i appears o be worsening. 14

16 References Abrahamsen, Y., R. Aeppli, E. Aukeren, M. Graff, C. Müller and B. Schips (2004), The Swiss Disease: Facs and Arefacs, A Reply o Kehoe and Presco, forhcoming, Review of Economic Dynamics. Bockerman, P. and J. Kiander (2002), Labour Markes in Finland during he Grea Depressions of he Twenieh Cenury, Scandinavian Economic Hisory Review, 50(2), Cole, H. L. and L. E. Ohanian (1999), The Grea Depression in he Unied Saes from a Neoclassical Perspecive, Federal Reserve Bank of Minneapolis Quarerly Review, 23(1), Cole, H. L. and L. E. Ohanian (2004), A Second Look a The U.S. Grea Depression From a Neoclassical Perspecive, Universiy of California, Los Angeles. Fisher, J. D. M. and A. Hornsein (2002), The Role of Real Wages, Produciviy, and Fiscal Policy in Germany's Grea Depression , Review of Economic Dynamics, 5(1), Inernaional Moneary Fund (2004), Swizerland 2004 Aricle IV Consulaion Concluding Saemen, Kehoe, T. J. and E. C. Presco (2002), Grea Depressions of he 20h Cenury, Review of Economic Dynamics, 5(1), Kehoe, T. J. and E. C. Presco (2004), Grea Depressions of he 20h Cenury. Forhcoming, Federal Reserve Bank of Minnesoa. Kehoe, T. J. and K. J. Ruhl (2003), Recen Grea Depressions: Aggregae Growh in New Zealand and Swizerland, New Zealand Economic Papers, 37(1), Kiander, J. and P. Varia (1996), The Grea Depression of he 1990s in Finland, Finnish Economic Papers, 9(1), Kohli, U. (2004), Real GDP, Real Domesic Income, and Terms-of-Trade Changes, Journal of Inernaional Economics, 62(1), Lambele, J.-C. and A. Mihailov (2000), A Noe on Swizerland's Economy: Did he Swiss Economy Really Sagnae in he 1990s, and Is Swizerland Really All ha Rich? Crea Insiue, Lausanne Universiy. Lucas, R. E., Jr. (1977), Undersanding Business Cycles, in K. Brunner and A. Melzer, eds., Sabilizaion of he Domesic and Inernaional Economy, Carnegie- Rocheser Series on Public Policy, Amserdam: Norh-Holland,

17 Schumpeer, J. A. (1935), The Analysis of Economic Change, Review of Economic Saisics, 17(4),

18 Figure 1 Unied Saes GDP per working age person index (1900 = 100) Figure 2 Swizerland GDP per working age person index (1900=100)

19 Figure 3 Growh accouning for he Unied Saes index (1970=100) Y / N L / N A 1/(1 α ) ( K / Y ) α /(1 α) Figure 4 Growh accouning for Swizerland index (1970=100) L / N Y / N ( K / Y ) α/(1 α) A 1/(1 α ) 18

20 Figure 5 Swizerland annual hours worked per worker Abrahamsen e. al. hours Kehoe and Ruhl

21 Figure 6 GDP per working age person, 2 percen rend removed percen growh index (1973 = 100) Unied Saes Swizerland Figure 7 GDP per working age person Unied Saes 150 index (1973 = 100) % below rend 15% below rend Swizerland

22 Figure 8 Swiss GDP per working age person, 2 percen rend removed index (1973=100) real GDP command-basis GDP Figure 9 Swiss GDP per working age person, 2 percen rend removed index (1980 = 100) SNA 93 SNA

23 Figure 10 Terms of rade in Swizerland Swizerland (SNA68) index (1980 = 100) Swizerland (SNA93) Figure 11 Swiss GDP per working age person, 2 percen rend removed index (1973 = 100) real GDP, SNA68 command-basis GDP, SNA93 real GDP, SNA

24 Figure 12 GDP per working age person, 2 percen rend removed 105 index (year before depression = 100) Finland (1989=100) Japan (1991=100) Swizerland (1973=100) years afer sar of depression 23