David R. Henderson  

Tabarrok on the Great Depression

PRINT
What if we had a financial cri... Saving, cost control, and infr...

Alex Tabarrok narrates a very good video on the Great Depression. It's called "Understanding the Great Depression." In it, he applies an aggregate demand/aggregate supply framework and puts most of what happened in that framework. I have two criticisms, but they shouldn't be interpreted to mean that the video is weak: it's quite good.

3:20: Alex explains correctly that deflation increases debtors' burden. His numerical conclusion is slightly wrong, though. He says that if prices fall by 10%, your real debt increases by 10%. Actually, it increases by 11%. This may sound picky, but I worry that most viewers will generalize and say that if prices fall by 30%, your real debt will increase by 30%. In fact, your real debt would increase by 43%.

6:25: The Smoot-Hawley tariff did make things worse, as Alex said. He also gets right one of the main ways it made things worse: by causing other countries' governments to retaliate with tariffs on U.S. goods and by making trade less efficient, just as if technology had been negated.
But trade economist Doug Irwin has convinced me that the aggregate supply effects of Smoot-Hawley were not nearly as big as I, and many other economists, had thought.
There is one other way that Smoot-Hawley might have reduced aggregate demand--by causing bank failures in the agricultural sector. Alex's colleague Thomas Rustici wrote his dissertation on this.


Comments and Sharing


CATEGORIES: Macroeconomics




COMMENTS (9 to date)
Scott Sumner writes:

Smoot Hawley may have also reduced the prospects of international monetary cooperation, which would have been useful given the flaws in the interwar gold standard. That could have also reduced AD.

Thaomas writes:

Scott, Alex,

I'd like to see analysis of the costs of microeconomic errors -- Hawley-Smoot, AAA, NIRA-NRA -- in the context of optimal/non-optimal; monetary policy. My guess is that these measures were mainly harmful only because their effects on AD were not off set.

Todd Kreider writes:

Tabarrok also said around the 1:00 mark that the Roaring 20s had an average per capita growth of almost 3%," which seemed too high to me. I looked it up and saw that the the average was 2.0%, just like the "Stagnant 70s" and the "Booming 90s".

Alex then linked to George Smiley's encyclopedia entry and said growth per capita was 2.7% in the 20s. I noticed that the data set he used was from Romer in 1982 and the data set I used was from Gordon's 1989 paper: Balke, N. S., and R. J. Gordon, 1989. “The Estimation of Prewar Gross National Product: Methodology and New Evidence,” Journal of Political Economy 97.1: 38–92. Apparently Agnus Maddison used that in his 2003 book.

Assuming this data set is correct, does Sumner, Henderson or anyone else, have an idea why growth was so smooth from 1871 to 1891 before suddenly entering a period of high volatility?

http://socialdemocracy21stcentury.blogspot.com/2012/09/us-real-per-capita-gdp-from-18702001.html


Oh, the 10% error is common, but I think Alex either just spoke too fast or was using short hand. I use the latter as long as the percentage is pretty small and add the word "about" to cover the very small difference.

Scott Sumner writes:

Thaomas, That's much more true of Smoot Hawley than the NIRA, which occurred during a period of rising AD.

Todd, I'm not sure, nor do I know how accurate the data is that far back

.Edward Mills writes:

I am hearing impaired so have not yet watched the video (I have a program to augment the sound) but I have done a lot of work on the Great Depression for a book I am working on, "How Bill Clinton and the Federal Reserve Caused the Housing Crisis and Great Recession" ( I may shorten by dropping the housing crisis).

However, from other readings, too little attention has been paid to the severity of the deepening depression in agriculture. World War I was fought on the farmlands of Europe. In response, American agriculture greatly expanded at premium prices. As European agriculture recovered a glut of farm products flooded the market.

To make matters worse, thanks to the influence of Thomas Jefferson and Andrew Jackson the U.S. banking system was dominated by rural community banks. As bankruptcies hit the agricultural communities funds began flowing out of the banking system. The banking crisis spread from the rural areas to the cities.

Both the Smoot-Hawley and the 1922 Fordney-McCumber tariff acts were intended to help Agriculture but other groups hung their own ornaments on the tariff trees.

The impact of the 1922 tariff act was somewhat muted by Federal Reserve policy to hold down interest rates on export loans to other countries but lower interest rates did, of course, encourage an excessive buildup of domestic credit, including margin credit.

Edward Mills' JD, MBA, CFA

Todd Kreider writes:

I'm not sure, nor do I know how accurate the data is that far back

Gregory Clark once wrote that Maddison's pre-1800 was a fiction but didn't criticize late 1800s data.

Andrew_FL writes:

@Todd Kreider- there have been a number of studies done on pre-1929 (ie, pre official commerce department GDP figures) output and Balke and Gordon's estimates appear to depend on some particularly restrictive assumptions.

For what it's worth, if I take Johnston & Williamson's GDP per capita series, and fit an exponential function to the years 1920-1929, that exponential function has an annual rate of increase of about 2.7% (actually 2.8% if I round to the nearest tenth)

Assuming this data set is correct, does Sumner, Henderson or anyone else, have an idea why growth was so smooth from 1871 to 1891 before suddenly entering a period of high volatility?

Regarding this question, again for what it's worth, Bordo and Reddish found the vast majority of output volatility in Balke and Gordon's series pre-1914 were "supply shocks"

Ethan writes:

Would someone mind offering a quick explanation of why deflation of 10% causes real debt to increase by 11%?

David R. Henderson writes:

@Ethan,
Would someone mind offering a quick explanation of why deflation of 10% causes real debt to increase by 11%?
I don’t mind.
Imagine that your debt at the start of the year is $100. Then, deflation for the year is 10%. So the real debt at the end of the year is $100/0.9 = $111. That’s an 11% real increase.
If that’s hard for you to see, take a more extreme example. Deflation is 50%. Real debt does not increase by 50%. Instead, real debt is $100/0.5 = $200. So debt has increased by 100%.
Get it?

POST A COMMENT




Return to top