I agree with Cole and Ohanian that the NIRA aborted a promising recovery after July 1933. I disagree with Paul Krugman on this issue. And unlike most Keynesians, I don’t think the recovery from the Great Depression under FDR was very impressive. Much of the recovery was due to productivity growth (until 1941.)
And yet I find myself once again to be very irritated by an argument against the demand-side view put forward by Cole and Ohanian:
The main point of our op-ed, as well as our earlier work, is that most of the increase in per-capita output that occurred after 1933 was due to higher productivity – not higher labor input. The figure [at the link] shows total hours worked per adult for the 1930s. There is little recovery in labor, as hours are about 27 percent down in 1933 relative to 1929, and remain about 21 percent down in 1939. But increasing aggregate demand is supposed to increase output by increasing labor, not by increasing productivity, which is typically considered to be outside the scope of short-run spending/monetary policies.
I originally read this quotation over at MR, and immediately thought; “When has a Keynesian ever argued that there was a robust demand-side recovery from 1933 to 1939?” I’ve read just about everything ever written on the subject, and I’ve never heard that argument made. Instead, Keynesians argue that demand stimulus led to a fast recovery during 1933-37, and then tight monetary and fiscal policies caused a severe relapse in 1938. So why would Cole and Ohanian pick those dates?
As soon as I clicked over to the Stephen Wiliamson post where Tyler found the argument, I immediately knew the answer. Cole and Ohanian present a graph that strongly supports the AD view of the recovery from the Great Depression. Hours worked went from being 27% below normal in 1933, to only 17% below normal in 1937, the cyclical peak. That means an extra 2.5% per year. Using Okun’s Law, I’d guess that gets you about 5% RGDP growth per year. Now the actual rates were substantially higher during 1933-37, as productivity also grew briskly. But the hours worked finding basically follows the predictions of AD models. Even Keynesians believe the economy was still far from full employment in 1937.
Then hours worked plunged between 1937 and 1939, in response to the sharp fall in AD (as measured by NGDP) during 1938. Again, this is perfectly consistent with demand-side explanations of the 1930s. Indeed it’s the standard view. BTW, I happen to think a massive adverse supply-shock also reduced hours worked and output during 1938, so my position is actually intermediate between C&O and the Keynesians. Looking at the entire period from 1929 to 1939, the blue line (hours worked) is highly correlated with changes in AD (i.e. NGDP.)
I think aggregate supply mattered a lot in the Great Depression. But none of the data presented by C&O refutes the argument that demand played a major role in the Depression, indeed it strongly supports that view.
PS. I’d be interested in whether the C&O data include hours worked on government jobs programs. Official government unemployment data from that period is highly inaccurate, as they treat millions of WPA/CCC workers as “unemployed.”
PPS. In case anyone wonders why I view the 1933-37 recovery as disappointing, despite high RGDP growth rates, consider that industrial production grew 57% between March and July 1933, due to dollar devaluation. Then FDR raised nominal wages by 20% in late July, as part of the NIRA. Monthly industrial production data fell immediately, and didn’t regain July 1933 levels until after the NIRA was declared unconstitutional in May 1935. This led to rapid growth in late 1935. Because of the way annual GDP data averages over entire years, the RGDP growth from 1933-35 looks deceptively steady and impressive. It wasn’t.
Update: I just noticed that Matt Yglesias is just as puzzled as I am by their chart.