No Mr. Stiglitz, Ben Bernanke does not agree with you

Joe Stiglitz has a new article, where he continues to develop his rather unconventional view of business cycles.  Is his theory a real theory or a demand side theory?  I can’t quite tell, maybe one of my commenters can help me out.

Of course the most important stylized fact of the Great Depression was the horrific collapse in industrial production between 1929 and 1933.  And what caused this collapse?  Apparently productivity improvements in the farm sector.  Productivity gains that were also occurring in the booming 1920s.

And how does Stiglitz know this?

At the beginning of the Depression, more than a fifth of all Americans worked on farms. Between 1929 and 1932, these people saw their incomes cut by somewhere between one-third and two-thirds, compounding problems that farmers had faced for years. Agriculture had been a victim of its own success. In 1900, it took a large portion of the U.S. population to produce enough food for the country as a whole. Then came a revolution in agriculture that would gain pace throughout the century—better seeds, better fertilizer, better farming practices, along with widespread mechanization. Today, 2 percent of Americans produce more food than we can consume.

Interesting, but this has been going on for 120 years.  So why was the economy booming in 1929, and flat on its back in 1932?  And why doesn’t Stiglitz discuss what happened to the incomes for the other 80%, the people not in farming?  It turns out that their incomes also fell “between one-third and two-thirds,” indeed nearly 50% by the fourth quarter of 1932.   So nothing particularly interesting was going on in farming, and yet this somehow explains the far greater collapse in output in manufacturing, mining, and construction.  There may be a model there, but I don’t see it.

What about the conventional explanation, that it was an adverse demand shock?  The view that errors of omission or commission by the Fed explain the 50% fall in NGDP:

Many have argued that the Depression was caused primarily by excessive tightening of the money supply on the part of the Federal Reserve Board. Ben Bernanke, a scholar of the Depression, has stated publicly that this was the lesson he took away, and the reason he opened the monetary spigots. He opened them very wide. Beginning in 2008, the balance sheet of the Fed doubled and then rose to three times its earlier level. Today it is $2.8 trillion. While the Fed, by doing this, may have succeeded in saving the banks, it didn’t succeed in saving the economy. Reality has not only discredited the Fed but also raised questions about one of the conventional interpretations of the origins of the Depression. The argument has been made that the Fed caused the Depression by tightening money, and if only the Fed back then had increased the money supply—in other words, had done what the Fed has done today—a full-blown Depression would likely have been averted. In economics, it’s difficult to test hypotheses with controlled experiments of the kind the hard sciences can conduct. But the inability of the monetary expansion to counteract this current recession should forever lay to rest the idea that monetary policy was the prime culprit in the 1930s.

.   .   .

Monetary policy is not going to help us out of this mess. Ben Bernanke has, belatedly, admitted as much.

Readers of Vanity Fair are being led to believe that Bernanke went into this downturn thinking that monetary stimulus was the answer to depressions, and then had a sort of epiphany that monetary stimulus doesn’t work.  Is this really true?  Has Bernanke suddenly become an adherent to the view that the Fed is out of ammunition?  Or that they have ammo, but that nominal growth can’t solve real problems (as RBC adherents believe.)  I’ll pay $100 to the first person who can convince me that Bernanke believes monetary policy can’t boost AD, or that he believes AD can’t boost output.  (I should offer $10,000, but proportional to wealth my offer is just as generous as Mitt Romney’s.)

Stiglitz is a distinguished Nobel Prize winner.  But he didn’t win for business cycle theory.  I doubt even his fellow progressive Paul Krugman could make heads or tails out of Stiglitz’s essay.  That doesn’t make Stiglitz wrong (I’m also a contrarian.)  But if you are going to make that sort of argument, you need more evidence than farm incomes falling during the Great Depression.

Paul Krugman likes to show a graph indicating that each country began recovering from the Depression right after it adopted expansionary monetary policies (i.e. currency devaluation.)  If Stiglitz has an explanation for that, I’d love to hear it.

Back in the 1930s many people thought the Great Depression was caused by too much output.  This led FDR to adopt programs aimed at reducing output (such as the AAA and the NIRA.)  They “worked.”  Today economists tend to scoff at such ideas, as falling output is essentially the definition of a depression.  But not Stiglitz:

Throughout the 1930s, in spite of the massive drop in farm income, there was little overall out-migration. Meanwhile, the farmers continued to produce, sometimes working even harder to make up for lower prices. Individually, that made sense; collectively, it didn’t, as any increased output kept forcing prices down.

HT:  Gregory Barr, Larry

Update: I see Ryan Avent is equally puzzled by Stiglitz’s model.  And so is Nick Rowe.  Will Krugman give Stiglitz the Fama/Lucas/Cochrane treatment?



43 Responses to “No Mr. Stiglitz, Ben Bernanke does not agree with you”

  1. Gravatar of John John
    13. December 2011 at 17:51

    Nobel prize or not, anyone that tries to blame economic problems on productivity improvements should get immediately pushed out of any discussion.

  2. Gravatar of Benjamin Cole Benjamin Cole
    13. December 2011 at 18:10

    This is a horrible state of affairs. These are top economists? It is like listening to astrologists confidently conclude that Jupiter in the Cancer sky caused Bush jr to invade Iraq.

    The more NGDP is talked about and dissected and attacked, the better it looks. Other expansions and solutions to the Great Recession look increasingly feeble. And are proving out so.

    Somehow, we have to drive home the NGDP targeting argument to the Fed.

    And please, can we kick the anti-inflation nuts really hard in the balls and get this economy going again?

    The USA economy expanded handsomely from 1982 to 2007. Industrial output doubled! All the while inflation ran from 2 percent to 6 percent. We prospered with mild and varying inflation.

    Why the obsession with 2 percent inflation now?

  3. Gravatar of TylerG TylerG
    13. December 2011 at 18:13

    ‘But the inability of the monetary expansion to counteract this current recession should forever lay to rest the idea that monetary policy was the prime culprit in the 1930s.’

    Yeah, and no need to mention the well-known fact that interest-sensitive spending was the first thing to turn around after currency devaluation and monetary stimulus in April 1933 broke deflationary expectations. Car sales, fixed real investment, and consumer spending on durables surged after the Summer of 1933. Stay classy, Stiglitz!

  4. Gravatar of Becky Hargrove Becky Hargrove
    13. December 2011 at 18:18

    Wouldn’t it be nice if the essay by Stiglitz gave incentive to Bernanke to say what he means, since he is so handily being undermined on all sides.

  5. Gravatar of Jj Jj
    13. December 2011 at 18:34

    Easiest $100 ever! But maybe you should send the $100 to the guy who came up with the proof, here:

    Only one vote against… So you must either agree with Stiglitz that Bernanke believes “monetary policy is not going to help us out of this mess”, or propose that Bernanke does not want to get out of this mess.

  6. Gravatar of ssumner ssumner
    13. December 2011 at 18:39

    John, Ben Tyler, Becky, I agree.

    Jj, There is no “mess” according to Bernanke. But if a mess develops, he’s hinted that QE3 will be provided to clean it up.

    BTW, why do you think he did QE2, and operation twist, and promising to extend low rates for two more years?

  7. Gravatar of ssumner ssumner
    13. December 2011 at 18:40

    Jj, I should probably clarify that he’s saying the mess isn’t big enough for the Fed to move right now.

  8. Gravatar of George Selgin George Selgin
    13. December 2011 at 18:41

    Like all-too-many Bank of Sweden prize winners, Professor Stiglitz appears to suffer from Laureate Syndrome, a neuro-psychiatric disorder in which the afflicted, having been commended for expertise in one specific field, cannot resist blurting out opinions–sometimes obscenely ill-informed–concerning completely unrelated subjects.

  9. Gravatar of Nick Rowe Nick Rowe
    13. December 2011 at 19:08

    Yep. I had a go at it too.

  10. Gravatar of ZG ZG
    13. December 2011 at 19:32

    The way I read Stiglitz’s essay, is that increased productivity and falling prices, lead to a decrease in the Wicksellian Equilibrium interest rate.

    The central banks of the world of the world failed to ease monetary policy in response and if anything tightened it. The result was the Great Depression.

    Is that a fair analysis?

    Whether you blame the falling prices for the change in equilibrium rate or the central banks for falling to match seems like semantics to me…

  11. Gravatar of ssumner ssumner
    13. December 2011 at 19:32

    George, That’s one disease I’ll never have. (Of course some would say I already suffer from “successful blogger syndrome.”)

    Nick, Yes, your post is much more elegant. While I focused on all the noise, you got right to the heart of the theoretical confusion.

  12. Gravatar of ssumner ssumner
    13. December 2011 at 19:38

    ZG, No I don’t think that’s what he intended, and it wouldn’t fit the facts if it was. The US did not have a low Wicksellian real interest rate in the 1920s. And prices were stable.

    Stiglitz specifically denied the monetary view (and Wicksell’s model is certainly a monetary model.) He has some sort of “demand” concept that’s completely unrelated to AD in the Keynesian sense. At least as far as I can tell. If you asked Stiglitz to talk about NGDP I think his head would explode.

    By the way, fast growing productivity usually raises interest rates.

  13. Gravatar of W. Peden W. Peden
    13. December 2011 at 19:59

    Tyler G,

    I did not know that. It’s one of those economic history facts that should help settle a few debates.

    George Selgin,

    I think I could write a dull but occasionally amusing essay about that, going through a series of Nobel Laureates. It would be hard to disentangle from “lazy old professor” syndrome; for instance, after about 60 years as a professional economist Friedman seemed to give up on trying to persuade everyone and just threw the word “socialist” around to describe just about any fiscally left wing view. I suppose we don’t begrudge a plumber for losing interest in their old age, but most plumbers also have the good sense to retire.

    It seems to me that one of the good things about the Mont Pelerin society is that it gives retired right-wing economists the opportunity to engage in the debates that still interest them (Hayek was still talking shop through the 1980s) without having to bother with starting from scratch with people who would take 20-30 years to fully persuade anyway.

  14. Gravatar of W. Peden W. Peden
    13. December 2011 at 20:01

    (A similar intellectually-stimulating and ideologically uniform retirement home for those fed up of being persuasive would benefit Stiglitz. They could communicate with each other through columns on the New York Times…)

  15. Gravatar of Liberal Roman Liberal Roman
    13. December 2011 at 22:13

    In Krugman’s defense, he has criticized Stiglitz’s ventures into macro before.

    However, I do think that this crazy theory of his totally plays into how many liberal economists think. They relish embracing theories that go against common sense. How on earth would productivity improvements be BAD for anyone??? Only the wise Stiglitz knows.

    I remember reading a profile of Krugman where he said that he loved Isaac Asimov growing up. He specifically cited a book where a few wise men do some calculations and determine the world is headed for irreversible decline unless certain steps are taken. Here is the exact quote:

    “The story is about these people, psychohistorians, who are mathematical social scientists and have a theory about how society works. The theory tells them that the galactic empire is failing, and they then use that knowledge to save civilisation. It’s a great image. I was probably 16 when I read it and I thought, “I want to be one of those guys!” Unfortunately we don’t have anything like that and economics is the closest I could get.”

    This passage explained so much to me. That’s exactly how all these guys think (Krugman, Stiglitz, Reich, DeLong, etc.) This is who they picture themselves to be. In their minds, they are wise men who can figure out the right policies to tinker with to save the world. Or more specifically, the right incentives to put in place and the right resource allocation regime to maximize benefit to society.

    Your idea of “The End of Macro” with the introduction of NGDP targeting horrifies them, even if they won’t admit it.

  16. Gravatar of TylerG TylerG
    13. December 2011 at 23:48

    W. Peden,

    You would think those facts would settle some debates. Namely, the myth that WWII solely brought us out of the Great Depression. But alas, Stiglitz:

    ‘But it was not until government spending soared in preparation for global war that America started to emerge from the Depression. It is important to grasp this simple truth: it was government spending—a Keynesian stimulus, not any correction of monetary policy or any revival of the banking system—that brought about recovery.’

    In my opinion, Scott and other serious scholars of the Great Depression should be almost as outraged by the above claim.

    I do like your retirement home thought. Krugman and Stiglitz would make perfect room mates. I’m thinking of Statler and Waldorf from the The Muppet Show, only instead they self-servingly heckle anything they perceive as remotely right-wing.

  17. Gravatar of Ashwin Ashwin
    14. December 2011 at 04:09

    Scott – just cross-posting my comment on Nick’s post:

    In the long run, productivity growth causes consumption to shift to new products, not simply increased quantities of existing products. These new products do not create themselves. They need to be found via exploratory investment in product innovation.

    Stiglitz’s argument is simply a technological variant of Post-Keynesian theory where employment falls due to too much process innovation and too little product innovation. If you want to read an incredibly detailed version of this thesis as applied to the Great Depression, try Rick Szostak’s book ‘Technological innovation and the Great Depression’ where he analyses empirical evidence that goes much beyond agriculture.

    He also makes the point that a fall in nominal wages will make things worse in such a framework, again a point that many have made including Keynes and Tobin. It is also his emphasis on an investment-led recovery that puts him in firmly Post-Keynesian territory. I don’t agree with his assertion that govt investment is the way forward and his thesis that we are making a transition from manufacturing to services is too simplistic. But the thesis that process innovation has accelerated and product innovation has stalled is entirely consistent with the ‘Great Stagnation’ thesis. In a Post-Keynesian reading, the increased household leverage of the last 30 years has simply postponed the inevitable structural problem.

    I have written a much longer-form version of this argument applied to post-WW2 economic history from a more neo-Schumpeterian perspective here

  18. Gravatar of MMJ MMJ
    14. December 2011 at 04:33


    Have you read this book? And if so, what are your thoughts on it? Would seem there is some overlap with Stiglitz’s arguments.

  19. Gravatar of Joe2 Joe2
    14. December 2011 at 04:44

    Stigliz could not have written this sludge. IT must be a fraud as I can’t imagine anyone with a degree in economics let alone a Nobel would do so.

  20. Gravatar of jj jj
    14. December 2011 at 05:58

    Scott, we essentially agree; Bernanke is playing it safe, doling out only enough ammo to keep the great recession from turning into a great depression. And I think it’s political ammo he’s afraid of running out of, not monetary ammo.

  21. Gravatar of Floccina Floccina
    14. December 2011 at 06:46

    And please, can we kick the anti-inflation nuts really hard in the balls and get this economy going again?

    When you have a government run monetary system you have the median voter running the monetary system. Under free banking the bankers need to know how their business works and nobody needs to know how the monetary system works but in a government run monetary system the median voter needs to know how the monetary system work. I ain’t gonna happen.

  22. Gravatar of Benjamin Cole Benjamin Cole
    14. December 2011 at 08:34


    I wonder about your commentary. Usually, right-wingers accuse democratic governments of being “too easy” on the money supply, as voters want instant prosperity, even at the cost of long-run good results. This does not explain the Bank of Japan, or the Fed currently.

    Frankly, I contend that 90 percent of voters could not identify Ben Bernanke in a police line-up of Santa Claus’s. They don’t know a money supply from a paycheck.

    I contend the Fed could install a NGDP targeting program, with zero political risk. Really? If the Fed announced it was targeting NGDP, there would be riots in the streets?

    Right now, I suggest the only backlash would be from right-wingers fearful that NGDP targeting would work–and ensure an Obama re-election. I strongly suspect John Taylor is in this camp.

    I am no Obama fan, but whether a big-spending warmonger is President, or a big-spenging liberal, the monetary policy we choose should be the right one.

    Ergo, I am a proponent of Market Monetarism at this time–and always.

  23. Gravatar of Wimivo Wimivo
    14. December 2011 at 10:33

    I made this comment at MR but it seems appropriate for here,

    Both, in fact, were concerned by something the President had said in a morning briefing: that he thought the high unemployment was due to productivity gains in the economy. Summers and Romer were startled.

    “What was driving unemployment was clearly deficient aggregate demand,” Romer said. “We wondered where this could be coming from. We both tried to convince him otherwise. He wouldn’t budge.”

    Guess we know where it came from now, huh?

  24. Gravatar of johnleemk johnleemk
    14. December 2011 at 11:04


    Well, Obama did try to model himself after FDR in some ways…

  25. Gravatar of o. nate o. nate
    14. December 2011 at 12:07

    Maybe Stiglitz’s story isn’t the whole story, but couldn’t it be part of the story? Differences in marginal propensity to spend and/or increased demand for leisure and/or savings by those with increased real incomes, plus other structural rigidities, could conceivably lead to effects along the lines of those Stiglitz proposes. You can hardly fault him for not spelling out in detail all of his assumptions in an article for a non-specialist publication.

  26. Gravatar of johnleemk johnleemk
    14. December 2011 at 13:27

    o. nate,

    The problem I think is that Stiglitz makes some sweeping statements which the article isn’t in a place to back up, e.g.:

    “But the inability of the monetary expansion to counteract this current recession should forever lay to rest the idea that monetary policy was the prime culprit in the 1930s.”

    Milton Friedman and many other well-regarded macroeconomists have written countless books and academic articles to support the belief that monetary policy was a key driver of the Great Depression; it’s the accepted wisdom of macro by now, and it’s what’s taught to anyone taking Macro 101. Nothing against Vanity Fair, but if Stiglitz wants to debunk the accepted macroeconomics (macro being a field he does not have particular expertise in, beyond a generalist economic education), he needs a lot more space and less layman-friendly language than he’s ever going to get in a Vanity Fair article.

    This is pretty much like someone arguing in Vanity Fair that he’s debunked anthropogenic climate change. Arguing convincingly against the accepted wisdom of an academic field in a layman publication is doable, but it’s difficult to do — and Stiglitz didn’t do it.

  27. Gravatar of o. nate o. nate
    14. December 2011 at 14:36

    A quick search of the internet turns up some more substantive papers, such as: “Rethinking Macroeconomics: What Failed and How to Repair It,” Journal of the European Economic Association, 9(4), pp. 591-645

    Maybe the answer isn’t there either, but I regard the VF article as basically a teaser for the more substantive work published elsewhere.

  28. Gravatar of Mike Sax Mike Sax
    14. December 2011 at 15:00

    o. nate, I’m with you

  29. Gravatar of johnleemk johnleemk
    14. December 2011 at 15:20

    o. nate,

    Did you read the paper? Looking over it, Stiglitz nowhere comes near justifying the argument that the Great Depression was not fundamentally driven by poor monetary policy; the paper reads as a critique of lacunae in modern macro, but doesn’t address monetary policy by and large, and certainly says nothing about whether it is what caused/lengthened the Great Depression.

    It’s unnjustifiable, especially for an economist of his stature, to state that textbook macro is flat out wrong, without even passing reference to an academic justification.

  30. Gravatar of Bob Murphy Bob Murphy
    14. December 2011 at 15:52

    Scott wrote:

    I’ll pay $100 to the first person who can convince me that Bernanke believes monetary policy can’t boost AD, or that he believes AD can’t boost output.

    Scott, that’s a pretty safe bet for you to make, since we all know nothing will “convince” you that you’ve been wrong. However, I think it would be quite easy to convince a neutral referee that Bernanke doesn’t think he can boost real output, certainly not in the medium run. I would just quote his numerous statements to the press–you know, the ones you throw out because you can’t make sense of them.

  31. Gravatar of Mike Sax Mike Sax
    14. December 2011 at 16:56

    As to the above link please be aware that Nick Rowe has kindly offered a correction.

  32. Gravatar of ssumner ssumner
    14. December 2011 at 18:46

    W. Peden, I’m looking forward to being a “lazy old professor” soon.

    Liberal Roman. Interesting comment. I understand the appeal of trying to control the world with invisible strings. I suppose some could accuse me of doing the same. But I do favor decentralized institutions, which would allow decisions to be closer to the people, and further away from expert control.

    Ashwin, That “churning” or “creative destruction” argument has zero predictive power, as it was going on like crazy all through the 1920s. It doesn’t cause output to fall, it cause some industries to decline as others boom. That’s what happens unless the Fed allows NGDP to collapse. If NGDP keeps growing at 3% after 1929 there is no Great Depression, regardless of technological change.

    I have nothing to say about Post Keynesian econ, except they are totally wrong about monetary theory. Indeed they really don’t even have a theory of money, they have a theory of credit markets.

    MMJ, No, haven’t read it.

    jj, Yes, and what’s so frustrating is that he’s wrong on the politics too. He reminds me of someone who goes into cold water one inch at a time, thinking it will be less painful than jumping in. If they had stimulated in 2009 they’d be way less Fed bashing today.

    Wimivo, Very interesting.

    o. nate, The reasoning he does supply is horrible–read Nick Rowe. The evidence he provides doesn’t even show what he thinks it shows (i.e the 50% fall in farm incomes). If you have a long article, you must make you case–not claim there’s a case to be made elsewhere. I don’t think he even has part of the story. Why couldn’t the boom of 1929 have continued. Farming was doing poorly in the 1920s, that doesn’t stop rapid growth.

    Bob, Find the statement where Bernanke says monetary stimulus can’t boost output in a depressed economy and the $100 is yours. If I don’t pay up I look like a fool in the blogosphere. I’d rather pay $100 than look like a fool.

    Bernanke doesn’t seem to think there is a “mess” needing fixing.

  33. Gravatar of Bogdan Bogdan
    14. December 2011 at 21:23

    I might need to re-read the article of Joseph Stiglitz, but his theory sound very much like the emergent-markets productivity shock driven “savings glut” theory given by Ben Bernanke as an explanation for the current recession, without the industrial policy prescriptions for getting out of it. :)

  34. Gravatar of AllenM AllenM
    15. December 2011 at 10:52

    Once again, folks think they are right with no reference to research.

    The US data is not easily available online that I did a very nice paper on in 1995, but Statistics Canada is on the job:

    The massive compendium page so you can raw data whack to your hearts content:

    I would make it easy on you guys- farm income Canada:

    Nice cliff starting in 1928 on Farm Cash Receipts.
    I would note that corresponds to roughly 1926 here in the States, because Canada had contracts for longer term commitments to Great Britain, it most likely reflects those last payments.

    Even better data showing the wheat production going sky high before the first world war as machinery takes over in the fields:

    Then you see that cliff of the bumper 1928 crop that was just not absorbed into commerce without a hiccup.

    Farm income plummeted from that point on during the depression.

    Hmm, old Joe S doesn’t look so stupid, and remember Canada was an imperial preference imported to Great Britain, so they had a market ready made for their crops. The United States data takes a dive starting in 1926 due to the free markets.

    Wheat tells an interesting tale of the times, and how problems started much earlier than the crash of 1929.

    BTW Real farm gross income did not recover the 1928 high in Canada until 1942.

    Enough data, or do you say uncle yet?

  35. Gravatar of o. nate o. nate
    15. December 2011 at 13:23

    I’m working my way through the paper. This quote seems relevant: “But more generally, distribution matters: if prices of agricultural goods fall rapidly, farmers reduce their spending by more than urban workers and rentiers increase their spending. Aggregate demand thus falls. More generally, with both supply and demand concave functions of firm equity, there are real, and potentially large, consequences to such redistributions.” You’d have to read elsewhere in the paper to see what he means by “concave functions of firm equity”, but basically he is talking about “accelerators” which can produce large effects from relatively small changes in prices and/or expectations. So basically he’s talking about bubble dynamics in which a bubble inflates slowly but pops suddenly. It’s hard to say why the constraints suddenly start to bite at that moment, but that doesn’t mean the constraints aren’t real or should be ignored. He goes through this in detail in the paper.

  36. Gravatar of Sumner on Stiglitz Sumner on Stiglitz
    15. December 2011 at 14:23

    [...] Here’s Scott Sumner on Joe Stiglitz’s strange argument that the prime culprit in sparkin….  And Nick Rowe on the same.  (HT Arnold Kling) 0 Comments Cancel reply [...]

  37. Gravatar of W. Peden W. Peden
    16. December 2011 at 00:47


    From what I’ve seen, professors geneally seem to end up working much harder academically after retirement. They don’t have to worry about admin & teaching and yet they’re still interested in their subject.

  38. Gravatar of reaction to Joseph Stiglitz’s views on how to avert a depression « Thought du Jour reaction to Joseph Stiglitz’s views on how to avert a depression « Thought du Jour
    16. December 2011 at 03:06

    [...] Sumner, “No Mr. Stiglitz, Ben Bernanke does not agree with you“,  The Money Illusion, 13 December [...]

  39. Gravatar of Claudia Sahm Claudia Sahm
    16. December 2011 at 06:42

    Scott, to further support your arguments, here is a recent speech from Chairman Bernanke on “The Effects of the Great Recession on Central Bank Doctrine and Practice”:

    A quote from his speech:

    “My guess is that the current framework for monetary policy–with innovations, no doubt, to further improve the ability of central banks to communicate with the public–will remain the standard approach, as its benefits in terms of macroeconomic stabilization have been demonstrated. However, central banks are also heeding the broader lesson, that the maintenance of financial stability is an equally critical responsibility. Central banks certainly did not ignore issues of financial stability in the decades before the recent crisis, but financial stability policy was often viewed as the junior partner to monetary policy. One of the most important legacies of the crisis will be the restoration of financial stability policy to co-equal status with monetary policy.”

  40. Gravatar of John Papola John Papola
    16. December 2011 at 12:42

    Well, I suppose this is how far out into weirdoland one can get when they have absolutely no concept of how the market economy grows and how increasing production per worker increases real incomes and thus gives rise to all new opportunities. Falling prices on farm output due to rising productivity means every consumer of food has higher real incomes AND there are now more people who can leave farming and go about finding other things to make.

    Say’s law works. If only Joe had ever heard of it for real (not the fake “supply creates its own demand” hack version put forward by Keynes).

  41. Gravatar of ssumner ssumner
    16. December 2011 at 13:42

    Bogdan, Bernanke never claimed the savings glut caused the recession, did he? I thought he argued it fed the housing boom.

    Allen, We all agree that farm income plummeted, and that farmers did poorly in the 1920s. That data has no bearing on anything I said in the post. The economy was booming in mid-1929

    o. nate, What’s his theory of NGDP? Why did that fall in half?

    W. Peden, That makes sense.

    Claudia, Thanks, it’s too bad he doesn’t see the problem with monetary policy.

    John, Yes, that’s what economic theory says, and of course you are right. But many people prefer to come up with their own novel theories.

  42. Gravatar of Allen Allen
    16. December 2011 at 14:19

    You missed my point, or your response was off- I don’t know which. I disagree with Stiglitz that it was simple farm productivity, but instead productivity, combined with the loss of export markets due to both increased european farm productivity as the war damage was unwound, that lead to a situation of world overproduction and crash.

    The point I was making was that farm gross income fell, and net income was destroyed from 1926 onward in both the US and Canada- and as Stiglitz points out, the agricultural proportion of the economy is massive, and there was no monetary support provided in significant terms of government deficit spending until after 1933. Now the proximate causes for that farm income collapse stem from the world prices of grain collapsing, and exports collapsing along with the recovery in europe of farming productivity.

    The irony is, Canada was more protected in the Commonwealth system than the US which had sharper drops because of the loss of export markets. Even so, in both countries, various price support schemes were tried, including crop destruction to maintain prices and incomes as what was already, as seen in the data, a very low level.

    Further, without banking system guarantees, even the prudent were further decimated when rural banks started in failing post 1926-8.

    With the loss of a significant portion of the economy, and the inability to export out of the depression, agriculture shows in Canada extremely depressed returns until the beginning of the war in 1939. I weep for how hard I had to work to extract the data that is clearly presented, for free, in those links from Statistics Canada, after having to compound similar data for the US from old books.

    Look at the data, as I pointed it out. Look at the magnitude of that collapse.

    Money not earned from export premia is money not earned, period. Instant smaller economy, with all that Stiglitz just pointed out as natural consequence.

    BTW- my econometrics professors comment on the paper was- Very Nice Work, but you can never get it published, because it contradicts a significant portion of the Friedman Schwartz work in terms of significance. I was out the door anyway at that point, and no longer cared about publish or perish, having chosen work over perish.

  43. Gravatar of ssumner ssumner
    16. December 2011 at 14:26

    Allen, I’m not sure if this is directed at Stiglitz or me. I agree that farm income fell, but the US economy continued to boom, so obviously that wasn’t the problem. Farm labor moves to the cities, where manufacturing was booming. The Depression was associated with a collapse of industrial production, real farm output didn’t fall very much. You have to explain manufacturing, and that requires explaining the huge fall in NGDP. Farming is not the main story.

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