Bryan Caplan  

Ohanian and His Critics

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Lee Ohanian's paper on "What - or Who - Started the Great Depression?" didn't get a lot of love in the comments.  I'm not going to reply to all the criticisms, but there are a few I'd like to address.

1. From Lord:

(1) the Great Depression was the first recession where wage cuts were rare and work sharing was common

Average manufacturing wages -20%, coal mining wages -25%, skilled wages -20%. You should be ashamed to mention this one.

There's nothing to be ashamed of.  Yes, it's true that wages eventually declined.  But Ohanian's focusing on the first two years of the Great Depression.  Unless his data is wrong (see his Figure 3), nominal wages were almost perfectly stable for the first year, and declined only 5% by the end of the second year.  In contrast, he reports, "Nominal earnings of full time manufacturing workers fell about 19 percent between 1920 and 1922."

2. From Boonton:

What portion of the labor force was employed in major industry in 1929? If its a minority how would jawboning by the President have prevented wage drops when the majority of workers were in farming or other industries not subject to this verbal cheerleading for high wages?

The contrast between agriculture and manufacturing is actually a crucial part of Ohanian's story: "[A]griculture, which accounted for about the same share of employment as manufacturing in 1929, does not experience a drop in hours or real output. In fact, hours worked in agriculture actually rise slightly between 1929 and 1931, increasing by about 1.5 percent. Real agricultural output rises by about 4 percent over this time period..."

3. Also from Boonton:

And how does this theory square with the experience of the UK during the 20's? The UK had returned to the gold standard but wanted prices to return to the pre-WWI level. As a result they drove up interest rates and unemployment hoping for wages and prices to fall. While they did fall somewhat, they would not come down to pre-WWI levels despite the explicit desire by gov't officials coupled with harsh monetary policy.

Back in the 70s, Benjamin and Kochin launched a multi-decade debate by blaming poor British labor market performance on high unemployment benefits.  Most of the subsequent literature says they're wrong, but their thesis still seems plausible to me.

4.  Again from Boonton:

Back then there was no widespread income reporting to the IRS. There was barely an official unemployment rate. What exactly prevented industry leaders from promising Hoover they would "do whatever we can" to hold wages steady and then proceed to cut them?

This is esp. important if firms were 'allowed' to do layoffs but not wage cuts. It's easy for a firm to lay off the highly paid workers, keep the low paid one and then brag to Hoover that they 'stabilized wages' for their employees. Since Hoover and the Fed. gov't had nearly zero data processing ability there would be no way to verify compliance.

Umm, outcry from workers, unions, and media?

5. Sandwichman blames Ohanian for omitting disconfirming citations on work-sharing:

The study in question examined the results of a "work-sharing" experiment at Bell Canada that took place in 1994, not exactly at the start of the Great Depression of the 1930s... Furthermore, one of the authors, Lanoie, also co-authored another paper, with Michel Huberman, which put the Bell Canada results in a broader context. Of the five Canadian work-sharing cases evaluated by Lanoie and Huberman, only the Bell Canada one had a negative effect on productivity. Two resulted in no change, one had mixed results, and the fifth case study resulted in productivity improvements.

If this is an accurate summary of the literature, Ohanian ought to be more careful.  But this is from a throwaway remark in a footnote.  It's hardly central to his thesis, is it?

With a little luck, perhaps I can get some additional feedback from Ohanian.  Stay tuned.

Update: See Sandwichman's reply in the comments.  He makes a fair point.

Comments and Sharing

COMMENTS (4 to date)
Niccolo writes:

It's hard to change the central teachings that most people get about a certain subject.

Whether or not "jawboning" or using the bully pulpit to effect a politically desired outcome will usually happen or not is irrelevant to the statistics.

The fact is that labour was very slow to adjust at this time.

As far as the British experience, I don't know enough about the history to make any judgment on it.

Wouldn't it be reasonable, however, to assume that other factors were at foot?

Just because the existence of A does not lead to an exact C outcome doesn't mean that the theory is wrong.

There may be other factors.

Sandwichman writes:

Bryan Caplan: "But this is from a throwaway remark in a footnote. It's hardly central to his thesis, is it?"

A throwaway remark that is hardly central to his thesis? Here's how I read the relationship of this footnote to Ohanian's thesis:

1.Ohanian "I find that Hoover's program substantially depressed the economy, reducing aggregate output and hours worked by about 20 percent."

Sandwichman: Output in Ohanian's model falls in tandem with hours worked.

2. Ohanian: "This paper provides such a theory for a large and protracted monetary non-neutrality. The non-neutrality is quantitatively large in the Hoover economy because Hoover's wage maintenance and work-sharing program reduces steady state hours and capital stocks."

Sandwichman: Work-sharing is thus a central component in Ohanian's theory, at least according to what Ohanian wrote. Or did Ohanian include a "throwaway remark" in his theory statement?

3. Ohanian: "Capital input in this model is variable, and is equal to the capital stock scaled by the length of the workweek... This treatment is also reasonable because there is evidence that worksharing that reduces the number of days an employee works, even keeping the length of the workweek fixed, also reduces output per hour (see Lanoie, Raymond, and Shearer)."

Sandwichman: Ohanian is saying that output fell, at least in part BECAUSE of work-sharing and that it is reasonable to assume it did because of evidence from the outlier Bell Canada case study. If that argument is "hardly central to his thesis" then it is not very helpful for Ohanian to explicitly say it is (see argument #2).

Lord writes:

The crash was in the fall of 1929. From -5% to -8% in 1930 to 1931, by 1932 they were at the bottom.

Lord writes:

Nor should they have fallen much initially. No one knew the Great Depression had arrived. In the spring of 1930 there was optimism it would all be over soon and the market rebounded. Cutting jobs, not salaries is standard practice to keep remaining employees motivated. The fall of 1930-1932 matched that of 1920-1922. A measure of Hoover's ineffectualness.

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