Scott Sumner  

The Midas Paradox

What Was Balkanization?... Wars of Negligence...

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My book on the Great Depression is officially published today. Looking back on the long project, I see 6 themes that have been there throughout my research career (which began in 1986, with this project.)

Never reason from a price change. The Great Depression can only be understood by considering both AD and AS shocks. Most previous explanations (not all) focused only on demand-side factors, or only on supply-side factors. It was gold hoarding (a negative demand shock) and artificial attempts to raise wages (a negative supply-shock) that made the Depression "Great". My best journal article (1989 JPE, with Steve Silver) was nothing more than never reason from a price change applied to real wage cyclicality.

It's all about the supply and demand for the medium of account. Gold was the medium of account throughout the Depression, except 1933-34. And even then, gold prices were an indicator of the future expected gold price peg.

Monetary policy shocks are changes in the future expected path of policy. This is where my "long and variable leads" idea comes from. It also explains why Gauti Eggertsson was initially drawn to my gold standard research, in his 2008 AER piece. However, he didn't accept my view that the New Deal wage policies were contractionary.

Auction-style financial and commodity markets are efficient, and provide the best indicator of macro shocks. I looked at short and long term interest rates, bond risk spreads, stock prices, commodity prices, and gold (or forex) prices. Also forward exchange rates. "There is no wait and see", markets immediately provide the optimal forecast of the long run impact of a shock.

It's complicated. A given policy shock can be expansionary in one setting, and contractionary in another. For instance, expectations of dollar depreciation were contractionary under Hoover (when pegged to gold), but expansionary in 1933, when they led to a weaker dollar. Failure to implement Smoot-Hawley was contractionary in October 1929 (when it indicated Congressional disarray) and enactment of Smoot-Hawley was contractionary in June 1930 (when it led to fears of an international trade war.) Higher discount rates were contractionary in 1928, but not in 1931 (when they helped end the wave of gold hoarding).

Musical chairs model. Business cycles are mostly caused by the interaction of sticky nominal wages and nominal shocks. In the book I used falling (wholesale) prices as a proxy for a contractionary nominal shocks, but in practice falling NGDP is better indicator.

I have some additional comments over at TheMoneyIllusion.

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COMMENTS (12 to date)
Greg G writes:

Amazon delivered my copy two days ago. I'm only 50 pages in but that's more than enough for me to give an enthusiastic recommendation.

It is interesting, important, original and very well written. There is enough original research and technical material to interest the specialist. The writing is so clear and lucid as to be also quite accessible to the layman. Thanks for this Scott.

Jeff B writes:

As a non-economist who enjoys reading this blog and others like MR, accepting that there will often be posts beyond my understanding, how accessible is this book to those without a strong background in these areas? Historically, it sounds like something I’d be interested in learning about, but struggling due to lack of prior education would probably undermine my ability to get through it.

Frank writes:

Does your book set forth, or have you set forth elsewhere, a summary of the competing theories of the causes of the Great Depression? It's the sort of thing you would do well, and it would give those of us who are not economists an idea of the lay of the land, and also an idea of what of general interest may be at stake in these controversies. I notice that there is a chapter on the Depression's impact on 20C macro; perhaps that contains part of what I'm looking for.

Scott Sumner writes:

Thanks Greg!

Jeff, That's hard for me to say. My best answer is that the bulk of the book (except the final chapter which is a sort of technical appendix) would be somewhat accessible to you, but not 100%. If you are content reading a book and picking up 90% of the ideas, then I'd recommend it. But there are a few bits here and there that would be difficult for a non-economist.

As far as technical material, it's mostly just basic regression. And I explain the regression results in words.

Also see Greg's comment, which suggests it is fairly accessible.

TravisV writes:

Prof. Sumner wrote:

"It's complicated. A given policy shock can be expansionary in one setting, and contractionary in another."

This (somewhat mysterious) area might be where Prof. Sumner impresses other economists the most with his intuition / analytical ability.

P.S.: Was that a run-on sentence? Anyway, look forward to reading the book on my iPad!

P.P.S.: If possible, could someone please provide an old Sumner post where he explains "A given policy shock can be expansionary in one setting, and contractionary in another" in detail?

ThomasH writes:

I understand how legislated higher wages are contractionary, but wonder about the magnitude? The Wagner act was very late in the game.

Lorenzo from Oz writes:

Jeff B: Scott's comment on the accessibility of the book to a lay audience is correct.

ThomasH: The question of why the intense contraction occurred is a different question from why the recovery from it took so long. The NIRA and the Wagner Act are about aborting recovery, not the contraction itself.

Jon Murphy writes:

Added to my Christmas list

David R. Henderson writes:

Congrats, Scott. The cover looks great!

Scott Sumner writes:

Thomas, See Lorenzo's comment.

Jon and David, Thanks.

Larry writes:

This is thrilling. Now that you've redefined the rules on monetary policy, will you begin tearing your stuff apart to take it to the next level? I wish there was a Newsweek where you could spend the next 30 years educating us, as MF did. Maybe Econlog is that.

ThomasH writes:


Good point about NIRA/AAA which came sooner than the Wagner Act and were certainly damaging supply side distortions and must have had some effect on investment expectations, too.

Nevertheless, In terms of magnitudes, I still have my doubts. Private investment was growing very strongly throughout the recovery and the abortion of the recovery in '38 was probably much more a failure of monetary policy to offset fiscal austerity than supply side distortions. To put things in MMT terms, If the Fed had been targeting NGDP, how much would NIRA/AAA/Wagner Act and all the other microeconomic mistakes of the New Deal have reduced RGDP? The same can be said of raising marginal tax rates? I have a hard time thinking that the deadweight losses of these policies would have shown up in RGDP growth if the Fed had been doing what we now understand to be its job.

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