What a Depression Means

I ran across this bit in a posting by Brad DeLong:

Average wages in manufactuing stood at $0.55 in 1930, at $0.51 in 1931--an 8% cut--and $0.44 in 1932--a 20% cut. Coal miners' hourly wages went from $0.66 in 1930 to $0.63 in 1931 to $0.50 in 1932--a 25% cut. Skilled male manufacturing workers' wages went from $0.66 an hour in 1930 to $0.63 in 1931 and $0.56 in 1932. You had the same 20% cut in nominal wages over 1930-1932 as you had over 1920-22 (but a 50% decline in industrial production in the 1930 and only a 30% decline in industrial production in the 1920s).

Add to the above the fact that unemployment hit a 25% rate:


This gives an appreciation for an activist government like Obama's. One that is leaning into the wind by spending, stimulating, bailing out, and coming up with 'cash for clunkers' gimmickry. The Republicans may rant that there is "too much government" but compared to the devastation of the 1930s, this re-enactment of the Great Depression has been much more mild exactly because of so much government action. The Republicans made a disaster of the Great Depression I, thank goodness they didn't get a chance to do a repeat performance with Great Depression II.

By the way, the blip up in unemployment in the above graph occurred because Roosevelt listened to his conservative critics and decided to rein in spending and balance the books of government. He got a mini-depression inside the Great Depression. This very impulse worries modern economists. Obama is under a lot of pressure from Republicans to rein in the projected $9 trillion debt. But this may trigger a mini-depression like the one Roosevelt experienced.

As for those conservative economists who want to blame "activist" government for causing the Great Depresion and argue a laissez faire approach to deflation, DeLong proposes a thought experiment:

Ask yourself: if everybody's salary in America were to be cut right now by 25 percent -- but everyone's mortgage payment, everyone's credit card balance and interest payment, and every corporation's debt interest payments remained the same--would we see a recovery or another chain of financial bankruptcies that would push the economy down further?

Economies are not "self-correcting" and don't have an "optimal set point". They are dynamic entities that can go up or down and settle at many different local minima. The argument for an activist government policy is to encourage the economy to settle at a better set point than a worse one. We've seen what a "hands off" deregulationist government can do to wreck an economy (George Bush). Why don't we give the alternative a decent go at it, say eight year, and then decide which is better.