Arnold Kling  

New and Exciting Economics

Galbraith vs. the Internet... Credentialism Trap?...

Tyler Cowen asks

what is the most interesting work in the economics profession today?

He gives a few answers, one of which is World Bank data on corruption and governance. I would broaden that to political economy and institutional economics in general, including Bryan's book. Incidentally, my vote for the book title would be Myth of the Rational Voter, which is more straightforward and less insider-ish than the others. Still, I think it needs a subtitle that conveys the important point, which is that the incentives for good policies are weak. Maybe a subtitle like: why it's easy for bad policies to win support.

I think that work on intellectual property will be important, although perhaps there is not enough that merits being called new and exciting.

I think that some of the stuff that Bob Hall is pushing on employment dynamics has potential to merit a Nobel Prize if it continues to develop and gets broad empirical support.

I think that economic history in general, not just the Industrial Revolution, is bringing in new and exciting perspectives. As an aside, I am working on a proposal for a seminar on the Great Depression, and I would welcome recommendations for readings on that topic in the comments.

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CATEGORIES: Political Economy

COMMENTS (10 to date)
spencer writes:

Have you seen

Great Expectations and the End of the Depression
by Gauti B. Eggertsson

This paper argues that the U.S. economy's recovery from the Great Depression was driven by a shift in expectations brought about by the policy actions of President Franklin Delano Roosevelt. On the monetary policy side, Roosevelt abolished the gold standard and—even more important—announced the policy objective of inflating the price level to pre-depression levels. On the fiscal policy side, Roosevelt expanded real and deficit spending. Together, these actions made his policy objective credible; they violated prevailing policy dogmas and introduced a policy regime change such as that described in work by Sargent and by Temin and Wigmore. The economic consequences of Roosevelt's policies are evaluated in a dynamic stochastic general equilibrium model with sticky prices and rational expectations.

Arnold writes:

That was an excellent recommendation, because the paper is highly relevant.

I disagree with the premise of the paper, which is that the U.S. economy recovered from the Great Depression between 1933 and 1937.

My grandfather went bankrupt during the recession of 1937. At a less personal level, the consensus among the economists that Randall Parker interviewed for this book "Reflections on the Great Depression" was that the Depression did not end until World War II.

The graph of real GDP in the FRB article shows real GDP only returning to its 1929 level in 1936. It was still way below potential, and the unemployment rate was still in double digits.

Brad DeLong has a much more instructive graph, showing GDP relative to trend, here:

See the graph entitled "The United States Business Cycle, 1890-1940"

Also, see his remark that "In a normal pre-Great Depression business cycle, the economy the economy closes 97% of the gap back to usual employment in three years. But the Depression shows a different picture: the economy closed only half of the gap back to full employment in three years." In other words, 1933-1936 was notable for how much worse the economy did than what ordinarily might have been expected.

spencer writes:

It depends on what you measure. If you measure output (real gdp) the economy recovered to the 1929 level in 1937. So that makes 4 years down and 3 years back, about the norm for a post WW II recession where it is 4 quarters down and two or three back. If you do the long run trend of GDP the economy was about back to its long term trend before WW II broke out. I have this data in an excell spreadsheet if you want.

If you measure employment it was a weak recovery.
But as I have discussed here before, the difference was strong productivity something that tends to happen after a capital spending boom, as we are seeing now.

I don't think the real value of the paper is this discussion however. I think the real new thinking in the paper is the use of policy --especially the gold price increases --to generate a change in inflation expectations.

There are several big questions about the depression. One is its strength of the 1933-1940 era, and I consider that secondary. But another is why did the massive collapse end in 1933 right after Roosevelt took office and changed policies. This paper clearly does a very good job of looking at the second question. I think that is the real value of this paper.

spencer writes:

P.S. my grandfather lost his job on the railroad and had to go back to the farm in Kentucky to live with family. You know the old saying, home is where when you have to go, they have to take you.

Randall E. Parker, Reflections on the Great Depression (Edward Elgar, 2002). Interesting interviews with Samuelson, Friedman, Abramovitz, Kindleberger, Schwartz, Tobin, etc.

spencer writes:

also be sure and read this on the depression

Remarks by Governor Ben S. Bernanke
At the H. Parker Willis Lecture in Economic Policy, Washington and Lee University, Lexington, Virginia
March 2, 2004
Money, Gold, and the Great Depression

It is something your students can understand without much background knowledge

dearieme writes:

I remember reading someone who argued that even WWII didn't really end the Depression, because the unemployment figures were hopelessly biased just because of all the men in the services: he seemed to think that what really needed to be understood was why, when the war ended, the Depression didn't resume. Perhaps a cynic would suggest that that was a reaction to FDR's death?

spencer writes:

According to the NBER classification system for business cycles "recovery" has an exact meaning. It is the period of the cycle from when real gdp bottoms until it surpasses the prior peak. From that point until real gdp peaks and starts to decline is an expansion.
So according to this, Eggertsson is using the term "recovery" exactly as it is suppose to be used to describe this period in the 1930s.

Part of the problem of discussing the depression is that there is no exact definition of a depression and different people use it differently and many forget that the 1930s had two distinct business cycles. But the real unusual part of the depression was the 1930-33 "recession" when real gdp and price levels each fell by about a third.

To be difficult, in economic terms WW II was just the New Deal on steroids of massive government spending and income redistribution to generate demand. So in a way if you are saying WW II was what ended the depresioin aren't you just saying the problem with the New Deal is that it was too small?

James writes:


Who said that "it was WWII that ended the depression"? Some say that WWII reduced unemployment by sending the potentially unemployed off to die, but sending people to their death wasn't something that the New Deal was already doing to a lesser extent. Some say that the monetary inflation associated with WWII got nominal prices back to market clearing levels, but printing money was only a minor part of the New Deal. Almost everyone agrees that the depression ended at the same time as the end of WWII, but that's history, not causation. But I've honestly never heard that WWII was causally responsible for ending the depression, at least from an economist. Who did you have in mind?

Gem Hudosn writes:

You got to look into why not all the business went out of business in the stock crash of 1929.
As Joseph Kennedy said. "Make sure they are actually servicing an economic need."

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