Rothbard Vindicated

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In America’s
Great Depression
, originally published in 1963, Murray
Rothbard argued that the recession-adjustment that began in 1929
was greatly worsened and turned into a full-blown depression by
the policies implemented by Herbert Hoover. Among the Hooverite
policies that stifled the adjustment process, Rothbard identified
public-works programs, increases in taxes, the imposition of the
Smoot-Hawley tariff, but especially Hoover’s efforts to prevent
the downward adjustment of nominal wages by exerting pressure
on big industrialists not to cut (and even to raise) their employees’
wage rates.

Rothbard’s
explanation of how the temporary and benign recession-adjustment
process was impeded and diverted into the Great Depression ran
counter to the view that Milton Friedman and Anna Schwartz put
forth in their classic work A
Monetary History of the United States, 1867–1960
,
also published in 1963. According to Friedman-Schwartz, it was
the collapse of the money supply due to the negligence of the
Fed that turned what should have been a "garden-variety recession"
into the Great Depression. The Friedman-Schwartz view came to
dominate mainstream macroeconomics after the collapse of the Keynesian
consensus in the 1970s. Indeed, it is today the conventional explanation
of the Great Depression, which Bernanke holds to and which governs
the policy response of the Fed to the current financial crisis.

Thus, for
decades Rothbard and a handful of Misesian economists were virtually
alone in maintaining that Hoover’s interventionist policies, particularly
as they impacted the industrial labor market, were mainly responsible
for transforming what should have been a short and sharp recession
into the economic catastrophe of epic proportions that we now
know as the "Great Depression." Now comes a National
Bureau of Economic Research (NBER)
working paper written by a prominent macroeconomist with impeccable
academic credentials – and accepted for publication by the
influential Journal of Economic Theory – which challenges
the Friedman-Schwartz view and lends ample evidence to the Rothbardian
position on the genesis of the Great Depression. In writing his
article, "Who – or What – Started the Great Depression,"
UCLA economist Lee E. Ohanian spent four years poring over wage
data and culling information from sources related to Hoover and
his administration.

In order
to quantify the magnitude of the effects of Hoover’s industrial
labor market program, Ohanian used these data and sources to construct
and calculate a general-equilibrium model of the Hoover economy
and compared it to how the model economy would have behaved without
the Hoover program.

Ohanian contends
that Hoover’s policy of propping up wages and encouraging work
sharing "was the single most important event in precipitating
the Great Depression" and resulted in "a significant
labor market distortion."

Thus, "the
recession was three times worse – at a minimum – than
it otherwise would have been, because of Hoover."

The main
reason is that in September 1931 nominal wage rates were 92 percent
of their level two years earlier. Since a significant price deflation
had occurred during these two years, real wages rose by
10 percent during the same period, while gross domestic product
(GDP) fell by 27 percent. By contrast, during 1920–1921 –
a period that was accompanied by a severe deflation – "some
manufacturing wages fell by 30 percent. GDP, meanwhile, only dropped
by 4 percent."

As Ohanian
notes, "The Depression was the first time in the history
of the US that wages did not fall during a period of significant
deflation." Ohanian estimates that the severe labor-market
disequilibrium induced by Hoover’s policies accounted for 18 percent
of the 27 percent decline in the nation’s GDP by the fourth quarter
of 1931.

Read
the rest of the article

September
10, 2009

Joseph
Salerno [send him mail]
is a senior fellow at the Ludwig
von Mises Institute
, professor of economics at Pace University,
and editor of the Quarterly
Journal of Austrian Economics
.

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