Cole and Ohanian ask a good question about the Great Depression

The main point of our op-ed, as well as our earlier work, is that most of the increase in per-capita output that occurred after 1933 was due to higher productivity – not higher labor input. The figure [at the link] shows total hours worked per adult for the 1930s. There is little recovery in labor, as hours are about 27 percent down in 1933 relative to 1929, and remain about 21 percent down in 1939. But increasing aggregate demand is supposed to increase output by increasing labor, not by increasing productivity, which is typically considered to be outside the scope of short-run spending/monetary policies.

There is more at the link.


Indeed. But the larger question is: "Why wasn't there a great depression before the Great Depression?". And the answer is: because the depression was largely caused by a decline in de investment rate - which had increased to unprecedented heights in the decades before 1930. It is this high level of investments and the connected increase productivity growth which changed the classical world into the Keynesian world, with liquidity traps and the like.

So they ignore the valid criticisms of some of the claims in their article and argue that that wasn't the "main point". What a defense...

P.S. I also like how they focus only on Krugman to make it seem like he is the only one who claimed they were misleading readers (even Williamson's original blogpost defending them only focused on Krugman).

Makes me think:

1. It seems to me that the Federal Reserve system is not well structured to deal with large drops in AD. What if there is a rapid and long lasting shift away from debt? In that case can the federal reserve hold off deflation just buying Federal Government debt? What if the Federal Government also cut its debt? Too me debt mostly is good for 2 things; to move some consumption to earlier in life and to enable faster growth of young business and the latter could be accomplished through equity sales. What if everyone acted on this? The federal reserve, a government controlled body would have to start buying non Government assets. That might be lead to too much tampering.

2. The minimum wage should be replaced with some kind of wage subsidy. I see no reason to have a minimum wage. Maybe in times like this a very low wage is needed to clear the labor market and we are already paying those who are able to collect un-employment so why not try to get them to work?

No law says that printed money has to invested in mortgages and other securities to lower rates, as monetary policy typically does. It can also be spent, given to charity, whatever. When the Fed buys Treasuries with newly printed money (whether short or long term), it does not matter whether that new money is spent or invested, just that it goes into the economy. The Fed also has A LOT of room until they run out of government assets About $2 trillion out of 14 trillion of just Treasuries, not to mention pseudo-government debt such as Agency MBS's or GSE debt.

I also don't get Cole and Ohanian's point with the graph. Yes, labor hours did not recover to 1929 levels, but they certainly did recover while FDR's Treasury embarked on a huge quantitative easing program 1933-36. Buying all the nation's private gold stock and new gold inflows with new money is far beyond the QE done by the Fed so far. The labor hours recovered from 70% of 1929 levels to 80% of 1929 levels in 1933, a 14% increase. Then the increase abruptly stopped when the quantitative easing program stopped. The new gold inflows were not bought with new money (like QE2) but with government bonds to be paid with old money through taxes (sort of like Operation Twist, where long-term Treasuries are bought with short-term Treasuries).

The new money, not lowering rates or whatever, is the primary tool of monetary policy. Lowering rates increases velocity somewhat because of increased loan demand, but it's silly that the Fed is stuck with velocity as its only tool. There's virtually no bound to the government buying government-backed securities and quantitative easing was shown to work both in 1933-36 and mid-2010 to mid-2011, when private-sector hiring went to 200k jobs a month. Why economists do not have a consensus to do more quantitative easing until we get back to full employment is beyond me.

Why is increased AD supposed to influence output only through increases in labor? From the perspective of an individual firm, a boost in AD shows up as increased demand for the firm's products. The firm's response will vary according to its cost structure.

Indeed, a point often made by Keynesian economists is that increasing nominal wage flexibility in a recession will not do any good, because the price level remains sticky overall, so firms will react by substituting labor for other factors (which increases hours worked and lowers unemployment), but overall output is demand-constrained and will not increase to a level consistent with maximum resource utilization. The same point would seem to apply to Cale and Ohanian's work.


Since reading Amity Shlaes' book, I've often wondered what TGD would have looked like if Coolidge had been President. He might have responded like Harding had to his recession, by cutting gov't spending. We probably still would have had a liquidity crunch and bad trade policy, but the consequences might not have been as exacerbated as they were by the policies of The Engineer and FDR.

Higher productivity, as in produce more per hour for the same way or get fired? You need a phd and some math modeling to figure that out? Cartels in labor are bad but Standard Oil style monopolies.....?

By 1937 it looks like hours worked had recovered 40% of the way from the trough to the 1929 level (from 71.5 to 83 on the graph, where 100 is the 1929 level). That seems like a pretty big recovery in labor. Then it went into a double dip, so citing the 1939 number (back down at 79) makes the recovery look smaller. But didn't GDP have a similar pattern? (Ideally you'd compare it to the long-term trend line than to the 1929 level.)

Uh, TallDave, the "Engineer" didn't do jack until the 2nd half of 1931 and that didn't even take effect to 1932. Spending was cut during the Hoover adminstration, however, because economy experienced severe deflation, taking spending down from 1.9 to 1.8 billion doesn't seem like alot in real dollars. What was Coolvitz going to do, take it down to 1.0? The private credit mechanism of the day CRASHED. It didn't work. We had a similiar problem in the 1837-48 crisis. 8 states then defaulted. You don't rebound strongly overnight. The long depressions twin depressions were bad enough as well. The fact is unemployment data was quite quite useless in the great depression. It was all estimated and had considerable lag. The recovery from 1933-36 was quite impressive and just as fast that of the 1890's and that had a war with Spain. However, that horrible FDR tried to do what you wanted TallDave, guess what happened? By the end of 1941 the depression was LONG over. Even before Pearl Harbor hit.

Amity is your typical Jewish econ whore. No different from Galbraith to Friedman. She intellectuallizes a fantasy and demands you prescribe to that fantasy. Her book is filled with half-truths and lies, no different than the Communist Manifesto. It is the trouble with economics in its fullness. Economics should be abolished. Heck, the enlightment should be abolished(the modern creator of today's economics).

I'm sorry, Tyler, but i do not see a "question" anywhwere in these remarks by Cole and Ohanian. Merely a lot of claims. What is this important question that they supposedly ask, please?

New Deal was both structural adjustment of the US economy as well as aggregate demand stimulus wrapped into one. If we're willing to buy that a big chunk of TFP s induced by misallocation (including misallocation of the already employed (extreme example is blacks in the US south)).....then it seems quite possible to have the effect of the New Deal show up as TFP growth rather than just as more bodies employed.

Productivity follows its own internal rationale and precedes apace regardless of what the economy does. No one should be surprised it rose even with labor in excess. It takes growth greater than productivity to create jobs. Output rose and unemployment fell after 32-33, but not sufficiently to close the output gap for the rest of the decade.


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