Basically, in the Depression a huge sector of the economy that everyone had always regarded as central, died. And it dies for an almost virtuous reason.
That sector of course is agriculture.
. . .
The reason why World War II got us out of the Depression, and the reason that Argentina suffered because it didn’t participate, is that it is actually industrial policy that gets everybody off the farms. . . .One of the great concerns at the end of WWII was that everyone thought we were going to go back to the Great Depression. In Argentina, of course, that happened. In the US and everyplace else, everyone was surprised and relieved. But the reason is that you’ve gotten everyone off the farms and into the cities. It was through both the war industries and in the army.
. . .
The problem from the perspective of the US is that if we are importing 9% more of our GDP than we are exporting, it is very difficult to sustain full employment. You basically have to have a zero saving rate or a bubble in the internet or housing. But you have to have some substitute demand. . . .The long-term solution is you have to get people out of manufacturing – and governments have to cooperate in this effort – and get them into industries like health care…
The services people have to buy are lots of health care, custodial services for old people, college education and graduate education, and housing. They are big lumpy expenditures, and the government has to help finance them.
At the end of the remarks by Greenwald, Kling makes the following observation:
I was with Greenwald until the last sentence.
Greenwald lost me at the very first sentence. People have been gradually moving out of agriculture for over 100 years. The farm sector was also very depressed during the Roaring 20s. And shouldn’t urban output have risen if workers were flowing into the cities? How does a flow of workers from the farm to the cities cause industrial production to fall in half? (Actually, manufacturing is the sector that “died” in the early 1930s, not farming.) Obviously I don’t understand something here, perhaps someone can explain.
I have an alternative explanation for unemployment. Nominal GDP fell in half between 1929 and 1933, and nominal wages were sticky, falling by much less than spending.
I do agree with Kling on one point; it is not obvious why the government should subsidize the movement of workers from dying industries into growing industries.