This session was part of the CFR Symposium on a Second Look at the Great Depression and the New Deal, cosponsored by Dean Thomas Cooley of the Leonard N. Stern School of Business, New York University, and supported by a special grant from the Ewing Marion Kauffman Foundation.
JOHN TAMNY:† Okay.† Welcome back to today's Council on Foreign Relations meeting.
Two quick housekeeping issues.† Please turn off all cell phones and BlackBerrys for now.† And also, I'd like to remind everyone that this meeting is on the record.
My name is John Tamny, and I'm with Real Clear Markets.† And I am moderating the labor panel today.
I think there's probably general agreement in the room that all economic growth has its origins in productive work effort.† And so the question is, what happened in the Great Depression that seemingly people were working less?† And we've got this distinguished panel here, including Richard Vedder of Ohio University, Lee Ohanian of UCLA, Peter Temin of MIT and Price Fishback of University of Arizona to discuss why people are working less and why that led to lower output.
Now, I'm going to begin with Richard.
Richard, in one of your papers, you pointed out that there is universal agreement among economists that demand matters, specifically when the cost of a good rises, all else being equal, demand fails.† Then in one of your papers, you noted that during the Great Depression, you feel that government policies artificially drove up the cost of labor and this led to unemployment.† So I just wanted you to expand on that.
RICHARD K. VEDDER:† Okay, thanks, John.† As John says, the most universally accepted proposition in economics is that as prices go up, people demand less of something.† If I may use a little West Virginia Power Point here, here's the demand curve.† (Laughter.)† And at lower prices, people want to buy more.† But the law of demand applies not only to consumer purchases but also the sale of resources as well, both labor resources and capital resources.† And we are, of course, talking today about labor which is by far the most important factor of production.
The price of labor, which we could call the wage rate, is set where roughly the -- (inaudible) -- by employers equals the quantity supplied, allowing for a certain amount of what we call frictional unemployment, people between jobs and so forth.† So there's a natural rate of unemployment.† And we could talk about a natural wage rate as well, just as we talk about a natural rate of interest or at least -- (inaudible) -- excelled in.
So business cycles occur whenever the price of resources are sort of shocked away from their natural rates.† Sometimes the shocks are human shocks.† They're all human shocks brought about by businessmen and private sector behavior.† Sometimes they're brought about by the consequences of government policies.
Now, let's talk about the Great Depression.† I know of no episode in American economic history that has been so misinterpreted as the Great Depression.† For much of the post-Depression history, it was generally considered to be a consequence of market failure arising out of the speculative excesses of the 1920s, inadequate spending because of the psychologically crushing effects of the 1929 stock market crash, things of that nature.
By contrast, I would contend that the price of resources deviated significantly from their natural rates throughout the 1930s, and this was the major culprit explaining both the severity and the longevity of the decline.† The problem was in a corporate monetary and fiscal policy perhaps, but much more important even with the statutory, regulatory and administrative actions of the federal government.
In our book "Out of Work," Lowell Gallaway and I demonstrate in a very simple model that emphasizes the price of labor can explain most of the variation in the rate of unemployment in the 20th century, meaning it can also explain business cycle fluctuations and that (clearly determine actually ?) the price of labor, which we call the adjusted real wage, and those are money wages, the price level and labor productivity growth.
Here's what we think happened.† In the fall of 1929, the economy turned downward in seemingly a routine business cycle fluctuation, perhaps triggered, as the Austrian business cycle theorists suggest, by Federal Reserve-induced robust monetary expansion that had lowered interest rates below their natural rate.† This led to overinvestment that ultimately led to the 1929 stock market decline, which is not entirely dissimilar to our recent housing overinvestment and the subsequent housing price decline that also triggered a financial crisis last year.
In 1929, the activist President Herbert Hoover almost immediately started jawboning businessmen not to cut wages as sales declined.† They obeyed.† As the demand for labor softens, wage rates normally fall.† But that did not happen.† We estimate that in 1930, wages were 8 percent higher than they would have been normally, given the economic conditions of the time.† This devastated profits and corporate balance sheets, which, in turn, lowered business ability to pay back loans.† This sharply lowered the true net worth of banks.† Nervous bank stockholders and depositors started withdrawing funds, creating the banking crisis.† And then the Fed's disastrous response to that that forms the basis of the magisterial work of Friedman and Schwartz.
Just as companies started to ignore the high-wage policy of Hoover in 1931, unanticipated deflation caused by the banking crisis raised real wages.† Money wages fell but less than prices; thus, unemployment continued to go up in 1931 and '32.† Another cause of the excessive real wages was the Smoot-Hawley tariff which reduced competition from foreign labor.
The bottom came in March 1933 when unemployment rates reached roughly 28 percent.† For several months thereafter, recovery was seemingly pretty good.† Unemployment fell to nearly 23 percent by June.† But just as we started to see light at the end of the tunnel, the government added more tunnel.† (Laughter.)† specifically, President Roosevelt continued Hoover's high-wage policies, first with the National Industrial Recovery Act of June 1933 -- more from Lee about that -- which raised wages and factory employment by about 20 percent over the first six months, which stalled recovery.† By 1935, the NIRA was dead, labor markets finally started to absorb the effects of the wage shocks, so unemployment started to steadily fall as the adjusted real wage fell.† But 1937 in May, the unemployment rate was almost down to 12 percent, and prospects for ending the depression in 1938 seemed bright.
Then the third depression wage shock occurred, occasioned by the delayed effect of the National Labor Relations or Wagner Act of 1935.† It wasn't until 1937 that it was clear the legislation was even constitutional.† The resulting wave of unionization went to another double-digit rise in money wages, reversing the previous unemployment decline.† Unemployment again reached 20 percent by the summer of 1938; thus, the depression persisted until 1941 when unemployment rates finally retreated into the single digits, long before, by the way, Keynesian war-induced stimulus had much impact.
What are the lessons for today?† In some, markets generally work, but government interventions often have adverse, unintended consequences.† Many of the Obama economic initiatives, such as infrastructure funding, health care reform, union card checks, are eerily parallel in some regards to New Deal reforms that were ineffective or delayed economic recovery.† Hopefully, we can learn from history and not repeat the tragic mistakes that we made three-quarters of a century ago.† Thank you.
TAMNY:† Thanks, Rich.
Professor Fishback, I want to go to you now and talk about you point out that the government did good and bad things in terms of job creation during the '30s, and I was hoping you could expand on that.
PRICE V. FISHBACK:† Sure.† So what I've been doing over the last 10 years of my life is collecting all sorts of statistics about what's going on in all sorts of different parts of the country because the experience of the Great Depression varies quite a bit from different parts of the country.† The amount that they spend varies quite a bit in various parts of the country as well.† So we've been trying to use this variation to try to get a sense of how effective these New Deal policies were.
One thing I did notice from looking around at my fellow (pupils on ?) stage today and earlier today is that if you work on the Great Depression, you seem to lose your hair.† (Laughter.)† So you know, it's just a dangerous thing.
But the thing here is, the first thing I'd like to do is talk about something that relates to the modern stimulus package because the way that they dealt with unemployment during this period with 25 percent unemployment was to come up with work relief expenditures.† And so what they did was they put people back to work, first under the Federal Emergency Relief Act, and that was from 1933 to '35, done under the WTA.† And the typical way they did that was that they paid you about half of -- the normal hourly wage might be $1, say, if you were working on a public works things.† But they typically would pay you, if you were on the WTA, was like 50 cents, somewhere in that neighborhood, and they didn't have you working full time.† So it was basically the way that they dealt with this is almost like unemployment insurance.
All right.† So what's the effect of this?† So there have been some studies done by John Wallace and Rob Fleck and a variety of other people before I came along and before I started working with Shawn Cantor, and what they found was is that in some cases it doesn't look like that they had any effect on private employment at all.† It's just that the government employment increased.† Now, Wallace has these estimates that are unpublished right now that suggest that for every government job that was created, you lost basically half a private job because of the extra competition for workers between the government and the private sector.† Now, this seems kind of weird during a period where you have 25 percent unemployment, right?† So if there's ever a period where you expect the stimulus package to work well, it would have been during the 1930s.
So we did some work where we went back and we looked at like 44 different cities.† We looked at the monthly movements in employment and in relief spending and in wages.† And what we found was is that actually you get quite different effects in different time periods during the New Deal.† And so in the first half of the New Deal, up to about half way through 1935 when unemployment rate is 25 percent and you've got the National Recovery Administration which Lee is going to talk about a lot kind of with high wages, the unemployment rates is at such a high level (that you actually ?) get some stimulus out of these public works expenditures.† They actually spend more money, and there's a slight increase.† Like for every eight jobs you create in the public sector with the work relief, you get an additional job in private work because you're stimulating demand and things like this.
Now, once they removed the National Recovery Administration, though, and the unemployment rate started to come back down, you actually start to see crowding out which is a thing that people worry about with the modern stimulus package.† And so in the second half of the decade, you start to see actually when you increase the government jobs or increase work relief by one job, you might lose as much as .3 or .5 private jobs during this time period as you compete.
All right.† So these are new results from this kind of work.† It's (currently revised and resubmitted ?) for the Journal of Economic History.† And so we're waiting to see what all the referees say.† But basically the idea is for the modern stimulus package, we are sitting at 7 or 8 percent unemployment now.† We expect to see more crowding out today than you expect to see back in the 1930s.† And so one of the worries about the current stimulus package is is that they've talked about a big increase in jobs, but it's not clear that you're actually not going to see kind of a decline in private work along with that increase in government employment in these different settings.
Now, there were positive effects from the work relief bill as well.† It turns out that in the course of the decade, say you spend $1 on work relief in some little small town, retail sales in that small town might go up about 50 cents in 1939 relative to what it had been before.
It actually has very positive effects on things like infant mortality.† So, for about every $2 million you spend in modern dollars -- in year 2000 dollars, they've saved an infant's life, was associated with saving an infant's life.† They also reduced deaths from diarrhea, which sounds like a very nasty way to go, and deaths from infectious disease, and some suicides as well.
Now, the other thing about this is, is the tremendous variation across the country leads to a lot of migration across the country as well.† So, like, they spend a lot in the West -- which is where I'm from, and we'd (be) happy to have some of those things.† They didn't spend very much in the South, in terms -- per capita terms.
And so what you see is this migration in the direction of places where they spent public works and relief spending.† And so the estimates that we have suggest that about 15 percent of the migration -- internal migration in the United States was driven by the uneven distribution of the New Deal spending.
So, the final point I wanted to make, then, is that we also get negative effects from other programs like -- we're not talking about the farm programs very much today, but there seems to be evidence that the farm programs, the AAA, where they're paying workers -- paying the farmers not to produce, led to a situation where actually farm workers were worse off.
So, the farmers receiving the benefits tended to make more money, but what they did was they reduced the amount of land that they were producing on, which led to a reduction in the demand for labor, and then to some out-migration among workers in this period, particularly farm workers, and also led to reductions in wages.† But, we're still in the early stages of trying to figure out what's going on there.
Professor Temin, in your paper you, sort of, graphed out that in the Great Depression years there was a fall in the opposition to organized labor, in concert with an increase in union organizing success.† But, what most interested me is that you talked about the National Industrial Recovery Act, and others, and you basically said that just because something's a law doesn't mean that people are actually following this law.
So, I'd be curious to see how this applied to jobs.
PETER TEMIN:† Okay, thank you.
Peter Levy (sp) put that question in a little larger context, that the discussion which tends to, kind of, blame workers, and the public policy toward workers, tends to assume that this is all exogenous -- it's all determined by Roosevelt and his administration, and that it then had these effects on the economy, and it leaves out what actually happens on the ground.† And so things are very complicated, and the paper that was circulated tries to talk about a lot of those complications.
But I think for the present point, the thing is to comment that there was a lot of agitation from workers to get some kind of relief.† And so, even though the National Industrial Recovery Act raised wages but didn't allow for union organization -- led to a great deal of labor unrest.† And (it was ?) labor unrest -- it was really very hard to resist, in the context of a democratic society, and very high unemployment with no unemployment insurance.
Just as an aside, somebody referred to Germany avoiding unemployment.† What the Nazis did was declare it illegal to be unemployed.† You didn't want to be doing illegal things in the Nazi administration.
So, the issue about the growth of unions and the growth of this policy is that it's partly the result of the Depression rather than a cause of the Depression, or a cause of it going along.† And so what that means, in economics terms, is that just saying that high wages caused the Depression, or caused more of the Depression -- a delay in recovery really overestimates the effect, because it's partly the cause, but it's also partly the result of the Great Depression.† So, there's a simultaneity in that.
In addition, the recovery was slowed by many other problems, and so it's not all (wage ?) -- (inaudible) -- particular -- (inaudible) -- about wages, but it needs to be put in the context of all the other things that are going on.
The previous panel talked about the financial system, which was in pretty bad shape.† And it took -- FDIC came in in 1934, as was mentioned, but then the other kinds of support that were taken to help the financial system unrolled over the course of the '30s and took quite awhile to take effect.
Construction didn't recover because of a lot of the detritus from the previous boom, that was mentioned also last time -- a lot of failed plans, a lot of ambiguities about who owns what property, and what the designs were going to be, which also took its toll on recovery.
And the third reason why you shouldn't blame labor -- blame a slow recovery on high wages or unions was the recovery was not slow, and the recovery was really very rapid, as people earlier have said as well.† The rate of growth of GDP, from '33 up -- even counting the recession of '37, '38 to '39, was really higher than it has been at any other comparable time in our history.
But, if GDP rose, why didn't labor come down later?† Unemployment did come down, but it stayed quite high.† And that's a good question, and one of the answers has to be the extraordinary growth in productivity that happened at that time.† So, that's the, kind, of flipside -- that productivity rose, and so you had a recovery where output rose but unemployment didn't rise so much.
So, for all these reasons the story is complicated, which is what my paper was saying, but it's also kind of a ball of wax in which you can't suck one thing out and say that caused everything else, because everything was caused -- not everything, but a lot of things were caused together and they're both cause and effect.
TAMNY:† Thank you.
Professor Ohanian, you argue that the recovery from the Great Depression actually contrasted greatly with neoclassical theory, because you had an economic downturn combined with higher wage -- rising wages.† And so, what government policies do you think make it difficult for labor market clearing in the '30s, such that there was all this unemployment?
LEE E. OHANIAN:† Well, (it really ?), the major question about the 1930's is why hours initially -- (inaudible) -- so much and recovered so little afterwards.
So, for example, by 1939 per capita hours worked had only recovered about 20 percent of their '30 to '33 loss.† So, in other words, hours worked remained 80 percent as depressed in 1939, after six years of recovery, as they had been at the trough of the Depression.
And it wasn't just hours that were depressed, consumption, investment and real output were also depressed.† So, in a couple of -- a couple of discussions it's been mentioned that economy grew quickly.† What we usually like to do is to correct for population growth, and also measure economic variables, relative to the trend.
There is virtually no recovery in consumption relative to trend.† Investment recovered somewhat.† It was down 80 percent in 1933 but remained more than 50 percent below trend at the end of '30s.† So, the Depression very much continued throughout the decade of the 1930s.
And that was really puzzling, because the seeds for a robust recovery were in place.† As Ed Prescott mentioned, productivity growth, which is the primary determinant of living standards, advanced remarkably after '33; liquidity was plentiful; deflation had been eliminated; and the banking system was stabilized.† You know, so the question is, you know, why didn't we recover?
And this question and related questions about other major economic crises are now being addressed using some relatively new developments in economic theory and methodologies.
And this is why economics more easily identify causal factors, and also to quantify the relative importance of those factors.† And one single theme emerges from this body of research, which is that the most severe crises -- those that have the deepest declines and the most protracted declines, tend to be significantly caused by government policies, policies that I'll call "crisis management" policies.† Policies that are put in place -- whose intent is to cushion the impact of a decline or crisis, but that tend to make things worse by substantially impeding market forces, you know, the normal forces of supply and demand and competition.
And, you know, my work with Harold Cole shows that President Roosevelt -- and some recent work of mine says that President Hoover, both presidents adopted policies very much along these lines, and that these policies are central for understanding why the labor market seemed so distorted in the 1930's -- why hours worked fell so much and why they didn't recover very much.
And the most convincing evidence as to how -- (inaudible) -- about this, is really two facts:† One is that the sectors that were impacted most -- (inaudible) -- by these policies, which are the industrial manufacturing sectors, were the most depressed sectors, and also were sectors in which real wages were high, and, in fact, goes even further as the 1930s went on.
In contrast, sectors that weren't impacted so much by these high-wage policies, such as agriculture, employment didn't fall.† In fact, in the first couple years of the Depression, under Hoover, employment in agriculture rose and real wage in agriculture actually declined.
A second piece of evidence is that, the (textbook view ?) about the Depression, that it was initially a garden-variety recession that only became deep much later on.† But, in contrast, (industrial hours worked, ?) so about, almost 30 percent, just within the first nine months of the Depression -- you know, before the very significant problems in the financial sector, before the banking crises.† You know, any understanding of the Depression really needs to explain why the two sectors behaved so differently and why the Depression was immediately so severe.
Many people have asked me, "Well, the National Industrial Recovery Act was declared unconstitutional in 1935, you know, wasn't that the end?"† And it wasn't.† There was very little antitrust activity after 1935.† The NRA-type policies continued, de facto, up until the end of the decade.† And labor policy was changed significantly, with the passing of the Wagner Act in 1935, which led to large, significant gains in wages.
In fact, in 1937, after the Supreme Court upheld the constitutionality of Wagner Act, wages in many industries immediately jumped.† So, Harold and I looked at monthly wage data, and we have compared wages a month before and a month after the Supreme Court's ruling about the Wagner Act, and in over 16 industries, the average wage increase is about 12 percent just in that time period alone.
Now, what's interesting is that these policies began to change at the end of the decade.† So, Ed Prescott mentioned 1939 was kind of a watershed year.† So, about that time antitrust activity was resumed.† And, in fact, President Roosevelt stated in a speech that the economy had become a "concealed cartel system," and that lack of competition was an important† factor in explaining why we hadn't recovered more.
The sit-down strike, which was used with great success against General Motors in 1936, and the threat of which was used against U.S. Steel at about the same time, was declared unconstitutional.† The sit-down strike was one in which workers actually take over a factory and prevent production.† For a short period of time GM production went to zero.
Wage increases were moderated by the National War Labor Board in World War II, which tied increases to cost of living adjustments.† And, in fact, in a famous -- in a famous ruling, a negotiated wage increase at Bethlehem Steel, via the Steel Workers Union, was struck down by the National War Labor Boards.† And at that point, forward, most wage increases were only cost of living.† And then 1947 the Taft-Hartley Act substantially changed the original Wagner Act and significantly weakened it relative to the unions.
So, the (punchline ?) of this research really is that these policies depressed the economy significantly more than it would have been, and recovery would have been much faster in the absence of these policies.† Some work by Ed Prescott and Tim Kehoe in a recent book indicates that other types of nonmarket policies are also important for understanding very protracted economic crises.
TAMNY:† Thank you.
My first question is to you.† One of the policies you brought up was the suspension of antitrust.† And it seems to me that there would be a lot of good that would come with the suspension of antitrust that, because corporations could naturally merge free of government fetter that that would be, in fact, a capital-attacting job magnet that would blunt some of its more negative effects.† Do you agree, or?
MR.†††† :† Well, what we -- what we tend to see happen with, you know, kind of the de facto suspension of antitrust, is almost kind of the textbook collusion problem that often economists often point to.
So, under the NRA, for example, a number of industries adopted minimum prices, restricted expansion (of ?) new capacity, adopted other kind of collusive elements that tended to restrict the amount of output that was produced.† And, in addition, with high wages that tend to increase the cost of production, these few pieces together worked to keep employment and output low.
So, I'm sympathetic with some of the aspects of your question, but it was almost -- what we really did see was, kind of, classic monopoly at work in this case.
TAMNY:† Professor Temin, you talked about productivity growth as being "a downer" on employment.† But, wouldn't productivity growth itself be -- yet again be a capital magnet, such that it would create jobs ultimately?
TEMIN:† Well, ultimately, yes.† But, the long-run growth of the American economy is really a wonder, and we have done very well, and so on.† But, things in the output of the country increased very rapidly in the world war.
The work looking at the numbers and so on found that a lot of the productivity growth that enabled that to happen took place in the '30s.† So there was quite a delay in getting there, too.
You have to remember -- and it's one of the things to remember about today is that the Great Depression was great in two ways.† One, it appeared to last for a long time; but the other that there was three years of decline at the beginning of it.† And once the economy declined so basically the production goes down by half, the economy's in a big hole.† And no matter what you do, no matter how fast you grow, it takes a long time to get yourself out of this hole.† And then as various people say, factor in productivity growth and population increase and say you don't want to just get out of the hole but want to get back onto the trend that you were going before, then it takes even longer to get from this low point back up.
And so part of the game and part of the game that's going on today.†† See one of the things about the Great Depression, diverted from this when I give lectures about the Great Depression, there were three years of decline, so I say today everybody's panicked, but if you want to make the parallel with the Great Depression, we're only in 1930.† And so you have to think about where the economy is going to go in the next couple of years.† If it continues to go down, then we're going to be in the kind of hole we were in the '30s.
The current administration, which took over much earlier in the decline than the Roosevelt Administration did, is attempting to if not have the economy recover, at least forestall it from collapsing even further.
TAMNY:† Professor Fishback, what we keep hearing or probably don't hear enough is the basic concept in order to stimulate you must, by definition, depress.† And is that somewhat what you found?† I mean, you touched on it earlier in your talk in order to stimulate job growth or creation in one area, it seems like if the government's going to do that, someone must be being taken from and depressed in the process.
FISHBACK:† So -- I've actually never heard that.† (Laughter.)
TAMNY:† I'm hanging with the wrong people.
FISHBACK:† Yeah.† Well, well I guess, the big --
FISHBACK:† -- yeah, sorry about that.† The -- I guess that could come back to the stimulus package.† So the big question about the stimulus package is is that the modern stimulus package is very unusual, I mean, we're up at around 12 percent of GDP which we haven't seen anything like that since World War II.
TAMNY:† Mm hmm.
FISHBACK:† And so we're really in unchartered territories.† Because World War II we were fighting a major war where 44 percent of GNP was associated with fighting the war.
TAMNY:† Mm hmm.
FISHBACK:† And, you know, we're in wars right now, but they're a much smaller share of what's going on.† My worry about it is is that the stimulus package as it stands right now, there are certain things that are going to stimulate right now, but I'm actually reasonably optimistic that we're going to come out of the recession by next year.
TAMNY:† Mm hmm.
FISHBACK:† And a lot of the spending from the stimulus package is going to happen then when we're actually pretty much coming out.† And the main lesson I got from the work that we've been doing is is this notion that we're crowding out.† Because when you've got 7 (percent) or 8 percent unemployment, it's just -- it seems like that's going to have more of a crowding out effect on private activity than it would during the Great Depression.
TAMNY:† Mm hmm.
FISHBACK:† And oddly enough during the Great Depression we actually saw some crowding out, which if you'd told me that before I'd done the research I would've never thought that that would've been the case.
TAMNY:† Mm hmm.† Richard, one of the things that most interested me in your paper that I think will probably fascinate everyone in the audience is that you bring up the basic point that from 1920 to '22, the economy's downturn was actually much greater than what occurred and what people consider the Great Depression years.† And so I was hoping you could comment on that and how the government responded.
VEDDER:† Yeah, I have a sort of counterintuitive view and a counterestablishment view on Warren G. Harding.† From January of 1921, when Harding took office to the date of his death -- and I can't remember now what it was, whether it was -- Dick, maybe you know -- August or September of 1923, industrial production rose 86 percent.† So we had a president who was a carouser, who was a womanizer, who gambled, who had public servants working for him who were corrupt, tea pot dome and a few other things like this.
But industrial production soared.† It soared because nothing was done by the federal government.† Utterly nothing.† And indeed, the '20, '20 -- for the first seven quarters of the '20-'22 downturn, industrial production fell more than in the first seven quarters of the '29-'39 or -- Bob Higgs was in audience -- 1945 depression, and so we had a bigger down turn in '20 -'22, the official unemployment dated, the (Liebergad ?) data show that the unemployment rate never got above 12 percent on an annualized basis, the whole thing was over in three years.
Wilson had a stroke, he was an activist president but he had a stroke, he was immobilized.† So for the first -- last year of the Wilson Administration, nothing happened.† So we went into this downturn which was probably induced by inappropriate monetary policies, so forth, doubling the money supply -- you know, all kind of disturbing shocks to the economy -- and then we got out.† And the model for -- if we had followed that model in '29-'33 under Hoover, I don't think we would've gotten to where we got.
I believe the financial crisis which everyone talks about, and I agree with Professor Prescott, money -- and this is anathema in this room -- but money and banking is 2 (percent), 3 percent of the GDP or something, it's a relatively trivial portion of the GDP.† But since most of you are investment bankers, I'm not supposed to say that.† (Laughter.)† But -- I guess we don't have investment bankers anymore, do we.† (Laughter.)
But the big decline from '20 to '22 was reversed very quickly, '23 and it wasn't '29-'33 because it was the monetary crisis of '31, '32, and Dick Sylla's right, it didn't really begin until the end of '30.† That financial crisis I think was precipitated by the labor market crisis which led to a fall in profits, to negative rates and alarming early '30 and so on.† So I more than answered your question.
TAMNY:† Okay.† Before we go to the audience, I guess I've got one last question for all of you.† The UCLA economist Benjamin Anderson once pointed out that unemployment basically lasts as long as taxpayers will support that unemployment.† And so my question to all of you is isn't unemployment somewhat of a misnomer?† I mean regardless of the laws put in place, people can always get around laws in order to work.† And so the bigger -- why were people unemployed even if we believe that artificial government measures drove it up, that's just a signal for someone to go out and basically work under the table.† And did that not occur in the Depression?† Was unemployment really as high as the government figures suggest?
VEDDER:† My sense is it was actually.† So I -- it was devastating during this time period.† I think that -- I mean, there may have been an underground economy and maybe people were doing things off the books, but I mean -- but my sense was from the time that, when you read the letters to Roosevelt from the people who were receiving relief spending and things like this, they're pretty well describing a really bad situation.
So I guess what that brings me back to is today.† I think Ed Prescott pointed out this point, that, you know that 2008 was really not all that bad a year.† I mean, I think he says 1 percent growth from quarter to quarter.†† Actually I thought it was just even and just stayed the same from the end of that.
But they just -- this was just -- the situation today is just nothing even remotely close to what it was like even in 1931 during the Great Depression and, remarkably, I don't think we're going to get anywhere near that.
TAMNY:† Professor Temin.
TEMIN:† Yeah, well there are many models of the labor market and Professor Vedder referred to one just supply and demand with flexible spending, but if other models with fixed prices have the conclusion that people only hire workers up to where they can sell products, and if the economy's depressed, a lot of businesses are just not hiring.† And so in that case, you have flexible wages coming in but if the firms aren't able to sell the added product that they make, then the firms don't hire more workers.
And you can have that kind of situation and that seems to be the kind of situation that happened in large scale in the '30s and with a lot of derangement of the economy.† It's happening to some extent today in the kind of quick onset exists and the banking problems.† The firms in this case probably are, it's not so much that they couldn't sell the products because the whole economy is depressed because we're nowhere near as depressed as we were in the '30s, but that they can't get loans, they can't get financing.
And so even though wages at the moment are quite flexible and they could hire more people, if they can't sell the product, they won't hire.† And so I think that that's a case in which it's not simply the willingness of workers to work but it's also got to be the willingness of employers to hire them.
OHANIAN:† Great question, for economics is all about incentives and your question goes to the heart of there is people.† Households had -- they had strong incentives to work at that time so why couldn't they find jobs?† And the answer that comes from my work with how is that it appeared these policies were followed fairly close in the sense of in industry, wages did seem to be behind.† You know, were there deals under the table paying lower wages?† I don't know of a lot of evidence of that.† Price would be the person to --
OHANIAN:† Now in our work, you can -- well, you can always go to a sector where these policies aren't so important, say the agricultural sector.† Now people did that, employment in agriculture didn't fall very much, but the return to working agriculture was remarkably low.† So you know, economists -- (inaudible) -- I say at the margin, at the margin one could leave the city and work in that sector.† Was it profitable to do so or hopefully wait around maybe one of these high paying jobs would open up.
In our work, we find that that's essentially what happened.† People can always go off and work at those low wages in agriculture, they're basically indifferent between doing that or hoping that there might be an opening in GM.
TAMNY:† Okay.† And Richard.
VEDDER:† To your -- you ask a very fundamental question.† If people are out of work, they ought to find work doing something, even at a very low wage.† Hoover allegedly said in 1932, I don't know if this is true, someone asked President Hoover, he said what about all the unemployment, he says and a lack of jobs and a declining business, he said there's a lot of new entrepreneurship in this nation, there re people on the streets selling apples.† It's become a big business.† And most people took this as a sign of his insensitivity to the problems but going to John's question, maybe there was -- selling apples was better than selling nothing.† And maybe there was a certain amount of informal activity going on.† But I would have to agree with Price and with Lee and Peter, too.† I think that the evidence that we have, the historical evidence does not suggest -- does suggest there were a lot of people who were truly unoccupied in gainful employment during the early '30s.
TAMNY:† So now we'll go to the audience.
Right there near the post.
QUESTIONER:† Hi, I'm Howard Dickman, Wall Street Journal.† I'd like to ask the panel members, there's a variety of proposals on the table now that have like the card check, the cap and trade, various other budgetary proposals that presumably would have an effect on labor costs, or U.S. labor costs.† And would the panel members like to speculate on whether some of these policies are good or bad or not relevant.
TAMNY:† Start with Richard.
VEDDER:† Howard, if we learned anything from the Depression is that the rise in labor cost was a serious deterrent to recovery and to me the card check provisions just to pick that one as an example is somewhat reminiscent to me of the Wagner Acts in the sense that the goal is to increase unionization and increasing unionization means that the unions are to be effective at all means that increases in wages beyond what would have existed in the absence of the unions.† So unions are attempting to push wage rates above their equilibrium level.
And that can only have adverse effects on employment.† You know, there's an issue of empirical issue how large would unionization in fact grow with the presence of a card check bill.† I have no way of evaluating that.
So but I can only predict the direction of the effects as opposed to the magnitude.† I think cap and trade and other, raising taxes in a down turn is not a winning idea.† Something that -- (inaudible) -- economists monetarists supply siders, vegetarian economists and every kind of economist I know -- (laughter) -- would do this.† I can't see any particular benefit from that, even if you're sort of like Peter has these terrible tendencies to believe aggregate demand for problem which I don't share that affliction but -- (laughter) -- but even if you do, you don't want to raise taxes on people or on businesses which will raise the cost of labor.
OHANIAN:† Probably the closest parallels and the most central for today would be cardcheck and also the increases in marginal tax rates Ed Prescott talked about.† I agree with Richard's comments, cardcheck is meant to facilitate the unionization and raising unionization rates.† You know, it's funny, many years ago it was considered that union jobs were among the safest jobs -- you know, high-paying and very stable.
Unionization today has become a risky enterprise because the world is a much more global place.† The extent to which unions, or any type of non-competitive buyer-seller, can improve their arrangements depends upon how much competition there is in the marketplace.
In the auto industry, for a long time, Detroit car makers faced very little foreign competition.† We've seen what happens when competition opens up and incumbents can no longer compete very effectively.† So cardcheck would tend to facilitate unionization.† As Richard mentioned, it's hard to know how much it would increase.† I suspect, though, that because we are in such a global marketplace where workers are competing not just with the people next door but with people in many other countries, the ability of unions now to extract premium wages is much, much less than it was in the past.
TAMNY:† Yeah.† Peter?
TEMIN:† Well I think that the effect of this on the labor market may help workers.† I think the effect on unemployment and the growth of the economy, however, will be very minor.† I think, in fact, this change is a very small change relative to the changes in policies from the 1930s.† And the bigger problems are getting the financial system working, as the previous panel said, and we'll go ahead.
The thing about cap-and-trade and some of the other policies is that there is an attempt by the administration -- or at least the hopes of the administration -- to shift the composition of output in various directions that they put forward.† Cap-and-trade is part of that, to lower the emissions and help global warming.† That, in itself, is a disorienting activity, which is to move workers from one activity to another activity, and might be disruptive.† But in the sense, then, in Manuel's statement, you know, a crisis is too valuable to waste, may help because the other part of the 1921 recession -- which Professor Vedder talked about -- was that that came after a war.
And a lot of the recession was that the government canceled all its contracts and released all these soldiers into the labor force and it took a little while just turning around to get people back into work.† And so we had a very sharp decline in production and an equally sharp rise in production.† It turned out that that churning around didn't take very long and we could get production reestablished.
We don't know what will happen now but the hope, not from The Great Depression but from the recession of 1921, is that this reallocation may cause some frictions in the short run but won't last very long.
FISHBACK:† My main point about this would be is that -- I read somewhere where someone is saying, well, now is the time to experiment because we're having these crises, but experimentation is not necessarily the best thing because uncertainty -- if you create all this uncertainty about what's going to actually happen -- and there was plenty of uncertainty in the late 1930s -- that actually restricts employment, leads to less investment -- I mean, Bob Higgs (ph) made this point and Annie Slades (ph) made this point in her book as well that creating uncertainty and all sorts of policy changes or whatever can actually make things worse.
TAMNY:† Do we have time?† Straight ahead, right there, oh, he's right behind you.† You had your hand up in the yellow?
QUESTIONER:† Eugene White, Rutgers University.† I suppose everyone comes to these events sometimes to learn new ideas.† And one of the ideas I heard floated was that labor market problems cause financial crises.† So I thought I'd take an opportunity to throw some cold water on that idea because first of all, you can look at it first from the point of financial markets and then from financial institutions.
For that actually to be true, it means that it has to be priced correctly all the time.† There can't be any bubbles.† If there was a bubble in 1929, and there's some evidence -- strong evidence that it's the case, then you get an independent shock coming from the decline in values both on consumption and investment spending.
The other is you have to look at financial institutions and, again, for labor markets to cause financial crises, what you have to have happen is that higher wages would have to cause a failure of -- cause defaults on industrial loans.† Well, that's not the source of bank failures in the early 1930s.† The source of bank failures in the early 1930s are from agricultural loans, from that very flexible sector, because of continuing decline in agricultural prices, and also from the real estate sector because of the decline in real estate.
So that's the generation of it.† So at the end -- really, labor markets -- the financial bank failures and the decline of the stock market are independent impulses which drive the depression onwards.
TAMNY:† Lee, do you want to address that?
OHANIAN:† Sure.† So a couple of responses.† One is that, you know, independent problems in the financial sector would certainly exacerbate the problems that businesses face when they are paying what effectively would be very high minimum wages.† So if financial intermediation is intermediate input into production, if that is rationed or constrained in any way, that reduces productivity and then that drives up unit labor costs even further.† So my one response is The Great Depression at some level seems to be a labor market problem because we have a decade-long period of what appears to be a chronic labor market dysfunction -- a failure of that market to clear.
I don't disagree that other types of problems, such as the ones you mentioned, would exacerbate that even more and there can be some indirect spillovers from the labor market and financial market, as Ed Prescott mentioned.† So I don't think there's necessarily an inconsistency there.
VEDDER:† John, can I respond very briefly to that?† I agree with Professor White that, first of all, that there are other factors and shocks that explain the Depression besides the labor market shock.† But there were $11 in deposit for every $1 of currency in 1929.† There were $4 in bank deposits for every $1 in currency in March of 1933.† People did lose faith in banks and one reason they lost faith in banks -- if you look at the data and trace it through in 1930 and 1931 -- that decline has already started by the fall of 1930.
We are already into a significant amount of problems with loans from the industrial sector.† Look at the cash flow of businesses.† In the second quarter of 1930, businesses are operating at a net zero negative profits.† By the fourth quarter there are a negative cash flow of business corporations.† This has got to have an impact -- maybe a silent impact -- but I do agree with what you say about the agricultural banks.† They were the ones who were the most conspicuous in their earlier failures.
TAMNY:† How are we doing on time?† One more?
TEMIN:† Okay, can I just say a word to support what Professor White said?† There are many problems in the economy, as I've said before, not just the labor markets but the financial markets and also that we're operating in a world situation which went on, which is much in evidence in the comments today.
TAMNY:† Straight ahead, the lady right there?
NANCY KINSNER:† Nancy Kinsner (ph).† Professor Vedder mentioned that unemployment was at its worst at 28 percent at the height of the Depression.† Anecdotally, I recall stories my grandmother spoke about where men would come door to door to work in her home or in houses on odd jobs in return for food.† Food was an alternative currency.† Has there been any attempt to measure that in relation to unemployment, perhaps ameliorating the 28 percent by an alternative for the source of employment?
VEDDER:† I don't know of any scholarly work on that at all.† It is an interesting line of inquiry that's a follow-up on John's earlier question.† It is an interesting line of inquiry as to what extent there were sort of informal labor arrangements inn, call it "the underground economy," to make a term, that previously we haven't measured.
TAMNY:† We're out of time, correct?† Thank you very much.† (Applause.)
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