Tabarrok on the Great Depression
By David Henderson
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.