of Contempt" and to some extent Per Paterson have raised
some questions and challenges to my blog, "Krugman’s
Prescription for Disaster." I will try to answer them as
best I can. "Economics of Contempt" writes:
implication of Krugman’s argument is that the New Deal would have
made the Great Depression at least somewhat shorter than it would
have been had we followed the old approach for curing recessions.
How do you know that the old anti-recession policy would have
made the Great Depression shorter than it actually was? How do
you know that in the absence of the New Deal, the Great Depression
wouldn’t have been longer than the Long Depression? You don’t.
know for sure that that the old anti-depression policy would
have made for a shorter downturn but, then, Krugman doesn’t know
that the reverse is true. I point to the historical evidence from
previous depressions that were fought by using the old anti-depression
policy. These were mostly over in two or three years.
believes that the decade-long Great Depression was exceptional in
nature compared to previous depressions and could only be fought
with a new Keynesian approach, he needs to give some evidence for
that claim. As far as I can tell, however, he doesn’t try. Pending
such an attempt, the main burden of proof is on him, not me.
the Great Depression with the recession in 1921–1922 is ridiculous.
Output in 1929 alone contracted more than twice as much as output
contracted in the entire 1921–1922 recession. And 1929 was
before Hoover started his expansionary fiscal policy (which I
agree Hoover never gets credit for, although you’d probably call
it "blame" rather than "credit"!).
It is not ridiculous
at all, that is if the goal is to understand why we had an unprecedented
decade long depression. The comparison becomes especially instructive
if we limit the analysis to the first year of both downturns. Between
1921 and 1922, there was a significantly faster drop in prices and
GDP and a greater rise in unemployment than between 1929 and 1930.
From 1921 to 1922, Unemployment advanced from 4 percent to twelve
percent, the gross national product fell by a staggering 17 percent.
All this was in one year. By contrast, unemployment was still well
under 10 percent at the end of 1930.
not have started his expansionary fiscal policy until later when,
for example, he ramped up agricultural loans in 1930 and 1931 but
his began his ultimately more destructive high policy only a month
or so after the Crash.
period, he called the first of several White House conferences.
He successfully used these to pressure employers to maintain nominal
wage rates. Henry Ford actually raised wages for his workers after
attending. Later, Hoover reinforced this high wage policy through
Smoot-Hawley (which kept out low wage competition) and Davis-Bacon
(which required prevailing (e.g. union) wages for federal contractors.
The upshot, as I said, that nominal wages did not begin to fall
into 1931 and real wages were actually 12 percent higher in 1932
than they had been in 1929. Even Keynes, Krugman’s hero, often commented
that "downward stickiness" of wages had not occurred during
Harding allowed wages, prices, profits, and the GDP to fall relatively
unobstructed from 1921 and 1922. As a result, by the beginning of
1923, unemployment was down to 1921 levels. By allowing the malinvestments
to readjust, Harding, unlike Hoover, had prevented a very steep
initial downturn from turning into a decade long depression.
Much of this
is dealt with at length in Lowell Vedder and Richard Gallaway, Out
of Work: Unemployment and Government in Twentieth Century America
and the works by Higgs cited in the previous blog.