How can so many people be so confused?

Economist’s View: “Stop Lying about Roosevelt’s Record”

Here is my (likely incomplete and confused) summary of the current state of knowledge about the Great Depression.  I am not a macro-economist, but, I did learn some macro.  There is no consensus on how important the New Deal was at reducing the severity of the Great Depression.

The basic Keynesian story on the labor side is that wages were too high during the Great Depression, because money wages did not drop enough.  Hence, inflation could be helpful because inflation reduces real wages and so increases employment.   Keynes himself thought that FDR did not have big enough spending programs for fiscal policy to get us out of the Great Depression.  The Japanese tried to do some of that during their ‘lost decade,’ but it didn’t solve their problems.  Nor did monetary policy.  But the Japanese did keep insolvent banks making unproductive loans for a long time (Zombie Banking).

My opinion is that the current crises invalidates most current academic new-Keynesian models.  Those models don’t say very much about financial intermediation, but rather are all about how inflation has short-term real effects.  And few of them have much to say about fiscal policy.    We need models in which leverage and financial intermediation matters.  Most current neo-classical models have the same issues.  You might make a weak case that policy uncertainty is an important part of the current crises, and that kind of shows up in the current models.

Bernanke argued that real investment wasn’t working right, because we lost of all the financial institutions’ abilities to make profitable real investments.  Hence Bernanke is behind the current propping up of the banks.  The tricky issue is going to be how to figure out which financial institutions can make profitable real investments, and which are simply good at making profits from financial or paper investments.  Good luck.

The current neo-classical story by Cole and Ohanian is that product markets were screwed-up during the Great Depression because of the cartelizations–which screwed consumers and any worker not in the cartelized sectors, unemployed or not.   Other recent work by Cole and Ohanian seems to suggest that the financial sector has some importance in the initial crash,  but that channel has not been quantified, nor is it well-understood.

I don’t think that unions are viewed as a big issue in the Great Depression by most mainstream economists.  Nor could they be a big issue now, given the small current size of the unionized sector.

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