The Depression as a Positive Productivity Shock

How does the credit bubble of the 1920s figure into this story?

From my link: "Credit fueled a real estate boom in 1925, a Wall Street boom in 1928-9, and a consumer durables spending spree spanning the second half of the 1920s."

That sounds like a pretty similar story to the Great Recession. Didn't these credit bubbles push resources into unsustainable patterns of trade, while their busts caused recalculations?

I don't think the story of credit is inconsistent with the PSST story or the idea that we will come out of the recession with much higher productivity. But it seems like a stretch to blame the Great Depression on a sudden burst of increased productivity.

Dave,

I think the point of this post is that a credit boom/bust was combined with a positive productivity shock caused a prolonged era of unemployment.

I believe Scott Sumner once made a point very similar to the one I'm about to make.

Productivity increases are not inconsistent with an aggregate demand explanation of the Great Depression. Between 1929 and 1941, if productivity grew on average 3% per year, then 1941's level of productivity would be over 40% higher than 1929's. Aggregate demand shortfalls are not supposed to also stifle productivity increases, so I don't think this in itself suggests PSST over aggregate demand.

Dan S,

so would the correct Keynesian response be to smash productive forces, assembly lines and what-not?

In the years 1933-1939, when unemployment was largely stagnant, annual GDP growth was 10%, 9% 13%, 5% -3.5%, 8%, 8%. This was about 7 percent annualized (even including the '37 recession). So in this case the economy was expanding extremely rapidly despite the unemployment which fits the theory that large gains we're being made by re-ordering our economy.

But in our current recovery, GDP is at the usual 2.5%, sometimes worse. So there are very clearly no massive gains from reordering the economy going on. Output per hour has increased over 3% the last two years, which is impressive, but not impressive to explain the disappearance of a tenth of the workforce from employment. So where are the signs of this positive shock? Are you saying they will just start suddenly start appearing two years down the road?

Doesn't it seem more like our economy is growing like normal but with 10% of the possible workforce simply removed from employment? Which in turn fits something like an AD theory or maybe Cowen's zero marginal product worker idea?

This was a common view in 1945. It came as a great shock to many observers that the economy did not collapse back to the Depression in 1946. Perhaps the postwar prosperity is more in need of explanation than the Depression?

It is inportant to note that Fields is pointing to *total factor productivity* not *labor productivity* alone. TFP increased at an average annual rate of 2.8% from 1929-41. In 1995-2005 it increased at an average annual rate of 1.5%. Since 2005 TFP has, if anything, slown down.

Sorry, no evidence for PSST here either.