Cowen on Great Depression
By David Henderson
I work as little as possible on my birthday (November 21), which is why I didn’t post yesterday. Tyler Cowen’s column in yesterday’s New York Times is excellent and I want to note some highlights, with my additional thoughts, and two criticisms.
Tyler points out what we know about the causes of the Great Depression and what ended it. He highlights the monetary contraction, which Milton Friedman and Anna Scwhartz did such a great job of explicating in their classic, “A Monetary History of the United States.” Incidentally, remember how Mark Twain defined a classic: a book that everyone wants to have read and nobody wants to read. I recommend reading or rereading the approximately 100-page chapter in their book on the Great Depression. Tyler highlights more-recent work by Christina Romer that showed that expansionary monetary policy was one of the keys to getting out of the early years of the Depression. And, of course, as Friedman and Schwartz noted, the doubling of reserve requirements in 1937 decreased the money supply yet again, bringing the economy to a double dip.
Tyler points out that Roosevelt made things worse by cartelizing industries, giving unions the power to monopolize parts of the labor force, and subsidizing agriculture. Indeed the Supreme Court saved his bacon (pun intended) and helped him win the 1936 presidential election by finding the NRA unconstitutional. That led output in many industries to expand and prices to drop as industries “de-cartelized.” For a more complete coverage of all these issues and more, done succinctly, see Gene Smiley’s “Great Depression.” The relevance today? Tyler doesn’t mention this, but even sometimes-free-market Martin Feldstein has advocated that the government prop up housing prices. Also, the grossly misnamed Employee of Freedom of Choice Act, which will certainly make its way through Congress next year, would make it easier for firms to unionize in the face of opposition by workers and thus drive wages up and employment down in newly unionized workplaces.
Now the criticisms. First, Tyler doesn’t mention the Smoot-Hawley increase in tariffs, a major contributor to the decline of trade between America and other countries. Second, Tyler writes, “The good New Deal policies, like constructing a basic social safety net, made sense on their own terms and would have been desirable in the boom years of the 1920s as well.” In other words, Tyler is defending a welfare state.