Bryan Caplan  

The Great Depression with Great Brevity

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David Gordon: Harvard Universi... Light Blogging...
Sumner:
My research on the Great Depression convinced me that it was two depressions, occurring one right after the other.  A demand-side recession that began around September 1929, and a supply-side depression that began in July 21, 1933 (with another demand shock in late 1937.)  Because they occurred back-to-back, most saw them as one "Great" Depression, and looked for explanations of what caused "the" Great Depression.  No mono-causal theory has proved plausible.

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COMMENTS (5 to date)
Silas Barta writes:

Is this an endorsement on your part? And why do events happening in September '29 and July '33 count as "back to back"? Or for July '33 and late '37?

Doc Merlin writes:

Thats hardly back to back. I think its more that Hoover's and FDR's polices lengthened the effects of the '29 crash so that there wasn't a proper recovery as soon as their should have been.

Joe Cushing writes:

I read into the post a bit and stopped when he said that the initial phase was caused by a drop in housing construction and a drop in auto output. Hmm, it seems to me these were effects of problems before they were causes of more problems, so calling them initial is wrong.

Chris Koresko writes:

Sumner's post does make it look like his thinking is a little too mechanistic, meaning that he's looking at the macro-economy as a simple machine which responds to a few parameters and can be adequately described by a handful of differential equations.

One can see the appeal of that approach from the practical perspective, since it offers what appears to be a well-posed and mathematically tractable problem. But it doesn't seem to me that the resulting model can describe the real economy very well.

I'm no expert, but having read and listened to many descriptions of the GD I've concluded that it may be best to think of it as a series of structural shocks caused by the development of better technology (especially agriculture and transportation) and by regulatory policy blunders (Smoot-Hawley and most of the New Deal in the U.S., and maybe French gold-hoarding.) These shocks caused abrupt shifts in the optimal relationships various economic actors, which became unable to accommodate them due in part to the growth of cartelization and unionization.

My current picture is that the economy is able to adjust itself to structural shocks pretty quickly (on a timescale of 1-2 years, i.e., the timescale of the previous depression and of a normal recession). But it can be prevented from doing that by policies designed to protect the old order at the expense of the new. And, as Sumner points out, there's nothing to prevent a new shock from occurring when the economy is already in recession.

I also suspect that there is an important mechanism being overlooked: opportunistic regulation. By this I mean that government power and reach tends to expand during hard economic times, because the public becomes more amenable to experimentation. Adding new regulations seems unlikely to improve economic performance in most situations. I suspect that opportunistic regulation may be one of the most important elements our current economic mess has in common with the Great Depression.

Arthur_500 writes:

Technically, I would agree with him. However, if you have no work the technicallity matters little.

What is more important is what caused the supply-side problems and why.

Overall there is a good deal of evidence that the financial idustry helped bring about the first problem and the gold standard, international recession, and high tarrifs caused the second problem.

There is a strong argument that many of the policies of the Administration were counter-productive. Increasing costs on businesses while wondering why no one was hiring.

hmmm this sounds all to familiar

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