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Depressions, Crises, and Economic Policy

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"Depressions, Crises, and Economic Policy: The 1930sand Today"Government Policies that Impede CompetitionLee E. OhanianUCLA, ASU and Federal Reserve Bank of MinneapolisOctober, 2010Ohanian (Institute) Economic Crises 10/10 1 / 18Depressions and CrisesRemain a signi…cant challenge for economic theoryParticularly in economies that function well – US & other OECDcountries.Why does a good economy go so bad, and for so long?What causes them, and what prevents rapid recovery?Today, discuss US Great Depression and 2007-09 recessionOha nian (Institute) Economic Crises 10/10 2 / 181930s and Today - Labor Market DistortionsKey to understanding both episodes is labor market distortionsImportant for employment declines and recovery failure in bothepisodesBoth episodes similar with MRS < < MPLOha nian (Institute) Economic Crises 10/10 3 / 1860708090100110Hours Worked Per Capita 1929-39 (1929 = 100)40501929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939Total Private9095100105Employment Per Capita 2002Q1 - 2010Q2 (2002Q1 = 100)85Total nonfarm Private60708090100110Labor Wedge 1929-39 (1929 = 100)40501929 1930 1931 1932 1933 1934 1935 1936 1937 1938 19399095100105Labor Wedge 2002Q1 - 2009Q4 (2002Q1 = 100)85Labor Market Distortions and Economic PolicyEvidence policies that restricted competition key for 1930sCreated labor market failure by setting wages above market clearingMRS gap puzzling today, though policy may also be importantOha nian (Institute) Economic Crises 10/10 4 / 18Background"What - or Who - Started the Great Depression?", JET, 2009"New Deal Policies and the Persistence of the Great Depression",with Hal Cole, JPE, 2004"The 2007-2009 Recession from a Neoclassical Perspective", Journalof Economic Perspectives, forthcomingOha nian (Institute) Economic Crises 10/10 5 / 181930s: Hoover and FDR Market InterventionsBoth advanced policies that restricted competition and raised wagesand relative pricesPresent evidence these policies reduced employment and distorted theMRS-W conditionOha nian (Institute) Economic Crises 10/10 6 / 18Surprising Facts Ab out the DepressionTextbook views about DepressionStarted as "garden variety recession"Monetary and banking declines made it severeSigni…cant recovery after 1933Depression immediately severe, before monetary contraction andbanking panicsIndustry Depressed but not agricultureAgricultural hours worked and output change littleOha nian (Institute) Economic Crises 10/10 7 / 1860708090100110120Jan-29Feb-29Mar-29Apr-29May-29Jun-29Jul-29Aug-29Sep-29Oct-29Nov-29Dec-29Jan-30Feb-30Mar-30Apr-30May-30Jun-30Jul-30Aug-30Sep-30Oct-30Figure 1 - Manufacturing Hours and the Money SupplyIndex (Jan 1929=100)Manufacturing HoursM1M260708090100110Labor Wedge 1929-39 (1929 = 100)40501929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939Labor Market Distortions Begin in Late 1929Micro evidence - Curtis Simon, JEH, 2001Situation wanted advertisements provide data on supply price of laborBefore depression, supply price of labor and wage very similarDuring depression, supply price falls 30% lower than wageWage too high, labor market not clearing, MRS << WOha nian (Institute) Economic Crises 10/10 8 / 18Supply Price of Labor 889 -01- MfkEnEuancc Askk 0.7 0.6 { ' Office-Wom QoMf-Womn. 190 1921 1928 1929 1930 1"1 1932 1"3 134 FIGURE 6 NORMALIZED AGRICULTURAL WAGES PAID AND COMPARISONS, 1926-1934 (1929= 1.0) Source: See note 30. Wages Paid in Agriculture Some readers may find it difficult to credit the notion that the supply price of labor could have fallen so steeply between 1929 and 1933. The case would be strengthened if evidence could be found of a decline of this magni- tude from another sector of the economy. The data from agriculture provide just such evidence. Aggregate data on wages and employment obscure im- portant differences between the farm and nonfarm economy. Wages paid in agriculture-a sector that rivaled manufacturing in size-were remarkably flexible, and employment remarkably stable. Figure 6 graphs annual average wages paid in agriculture along with clerical wages asked.30 Also shown for comparison are clerical wages paid and entrance wages paid in manufactur- ing. Again, all series have been normalized to equal unity in 1929. Between 1929 and 1933, wages paid in manufacturing declined by only 17.2 percent. By contrast, wages paid in agriculture fell by 53 percent between 1929 and 1933, which was remarkably close to the 58 percent decline in clerical wages asked. Over the same period, private nonfarm employment fell by 27.3 percent, and manufacturing employment fell by about 31 percent, but the quantity of labor employed in agriculture fell by only about two-tenths of one percent from 12,763 to 12,739 thousand.3' 30 These data were constructed by Lee Alston and T. J. Hatton, who compared wages in manufactur- ing and agriculture for a period that included during the Depression, and whose careful analysis in- cluded adjustments for the value ofperquisites (as distinguished from board-many unboarded workers also received in-kind compensation). 3' U.S. Bureau of the Census, Historical Statistics, p. 468. Total farm ernployment includes fann proprietors, hired labor, and "unpaid" family workers. Family workers rose from 9,360 to 9,874 thousand, about 5.5 percent. This rise was more than offset by a decrease in hired workers from 3,403What is Source of Labor Market Failure?Economic policies that fostered cartels and wage …xingWhy policies chosen? Belief policies would raise employment - alsoredistributeHoover on cartels:".In 1927 as Commerce Secretary, I wrote the foreword to a bulletin on"Trade Association Activities" I said: ’the national interest requires acertain degree of cooperation between individuals in order that we mayreduce and eliminate industrial waste....the great area of economic wrongthat springs up under the pressures of destructive competition...throughfailure of our di¤erent industries to synchronize.. we enlisted the di¤erenttrade associations in creation of codes of fair business practice thateliminate abuses."Oha nian (Institute) Economic Crises 10/10 9 / 18FDR Believed Competition Was The ProblemFDR on competition:"A mere builder of more plants, a creator of more railroads an organizer ofmore corporations, is as likely to be a danger as a help"Many of FDRs advisors were wartime economic plannersGov planning, not markets, used to allocate many resources duringWWIPlanners interpreted higher output as


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