Christopher Hanes on New Deal wage shocks

George Selgin has a couple of new posts on the 1937-38 depression, which are part of his excellent series on the New Deal. I cannot find anything significant with which to disagree. He directed me to a new paper by Christopher Hanes, which studies the impact of New Deal policies on the labor market. Here’s the abstract:

Wage inflation surged in the 1930s though unemployment remained high and output below trend—an anomaly in terms of the usual “Phillips curve” relationship. Proposed explanations include New Deal labor policies, hysteresis in unemployment, downward nominal wage rigidity, and a new Keynesian expectational mechanism through which Roosevelt’s monetary policies would have boosted real activity and created anomalous inflation by raising the expected future price level. I find that labor policies fully explain 1930s wage inflation anomalies. Thus the 1930s United States should not be cited as evidence for the new Keynesian expectations mechanism, hysteresis in unemployment, or downward nominal wage rigidity.

This confirms what I suggested in The Midas Paradox, but Hanes justifies the claim with econometric analysis. This graph from the paper shows the NRA wage shock of late 1933, and then another wage shock associated with the post-Wagner Act unionization drives of 1936-37, relative to the path of wages predicted in the absence of labor policy changes:

Here’s a “cinematic” presentation of the policy implications:

PS. Off topic, David Shor is one of our best political analysts.



16 Responses to “Christopher Hanes on New Deal wage shocks”

  1. Gravatar of Lin Lin
    6. March 2021 at 16:16

    Would you be able to discuss how the Chicago Schools libertarian views reconcile with the inexorable consolidation that occurs with capitalism as a mode of production?

    The consolidation of industry, while efficient and perhaps beneficial to society from a cost perspective, has nevertheless created companies that are larger than nation states. Such power can be used tyrannically to the extent that they become singularly influential in media, politics, culture, music, and form.

    In technology, unlike banking, there seems to be a great deal of interest in forcing society and policy to move towards collectivism. Their entire models are built on data collection, the processing of the data into readable forms, and creating new innovations that revolve around third parties buying that data (i.e., for social credit scores, chip implants now being tested in Denmark, facial recognition, etc). In other words, the more collective we become, the more powerful and profitable the technology companies become.

    I’m interested in the Chicago Schools answer to this rather pertinent problem, and their solution to resolving 21st century issues.

  2. Gravatar of Michael Sandifer Michael Sandifer
    6. March 2021 at 17:38

    I’m glad the minimum wage increase died, as I think it would have caused problems for workers in poorer areas, but why didn’t Democrats just pass a wage subsidy instead? It could be part of a reconcialation bill.

    I’m guessing a lot of Democrats think raising the minimum wage is a free lunch, and I guess they give the seemingly reasonable CBO analysis no weight.

    This is the kind of stupidity that makes it difficult to be a Democrat.

  3. Gravatar of ssumner ssumner
    6. March 2021 at 18:19

    Lin, I’ve advocated reducing IP protections and reducing regulation. Both regulation and IP protection lead to bigness. Big firms find it much easier to deal with regulation than small firms.

    In my view, the biggest monopoly problems come from government monopolies, such as the public school system.

  4. Gravatar of Gene Frenkle Gene Frenkle
    6. March 2021 at 19:01

    The difference between the 1930s and now is that we know what works—just give people dollars and then productive Americans will chase the dollars. So you don’t need convoluted make-work programs to inject dollars into the economy—just fire up ye olde money printing press and get dollars to people that will spend the dollars.

    So reparations has come up several times recently and paying $1 trillion in reparations to descendants of American slaves would be superior stimulus to this $1.9 trillion stimulus because descendants of American slaves just happens to be a group of Americans that have little savings, live paycheck to paycheck, don’t have passports, and have a relatively high birth rate. So paying reparations addresses the concerns Larry Summers has with respect to asset price inflation and childless slacker whites getting dollars they don’t need. So every American that had a Black citizen ancestor in 1960 ages 30-50 would get a lump sum of $40k if they make less than $75k. Those outside that age cohort would get $10k plus free college or an extra $200/month in SS.

  5. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    7. March 2021 at 05:16

    @Gene Frenkle

    Your a racist. Our welfare state has more than compensated the black population. And it was his black brothers in Africa that sold him into slavery in the first place.

    And it is a documented fact that most black people are lazy. Nobody got ahead working a 40 hour week.

  6. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    7. March 2021 at 05:19

    What’s the difference between money products and savings’ products (the “taper tantrum” vs. today)? Answer, the exchange value of the U.S. $.

  7. Gravatar of Laura Laura
    7. March 2021 at 08:53

    Trump came to lead a kind of Tea Party, anti-government revolt against “elites.” It really began in a revolt against Obama and the idea an African-American president and his coalition were going to govern forever as demographic trends accelerated and we became a younger, more diverse, more immigrant nation.

    He was insightful at the start but then not so much. Earlier on he remarks that hispanics are breaking from the progressives. Asians are breaking from the progressives.

    The key demographic trend is the rise of millennials as a political force. That’s David Shor’s generation — formed by Bush v. Gore to resent Republicans bolstered into the protest movement around the Iraq war and amped up with Obama mania. That’s what created the cadre of college educated democratic voter.

    He was in that milieu but he doesn’t see what happened as a flash in a pan.

    But they are voting to “save the country” from being this diverse place that has tolerant values and is open to immigration.

    Not so insightful.

    His reputation is more like a star mutual fund manager. His right calls are less about formal training that they are about having been in the millennial milieu to know the character of it. Hayekian local knowledge, is one guess.

  8. Gravatar of Gene Frenkle Gene Frenkle
    7. March 2021 at 10:28

    Spencer, the group “descendants of American slaves” is no more a racial group than “retired West Virginia coal miners” and “farmers” and “steel magnates” that Trump threw tens of billions of dollars at. Regardless, the group “descendants of American slaves” just happens to be a big enough group with certain financial issues that throwing money at them will lead to optimal stimulus…but if it necessary to include white West Virginians and Native Americans in the reparations (stimulus) in order to pass it then go for it because those groups have very similar financial issues that descendants of slaves have.

    Furthermore, the current welfare system really benefits farmers, Walmart, doctors, hospitals, diabetes clinics, Big Pharma, slumlords etc. WHILE perpetuating a permanent underclass that undermines wages and perpetuates violence. So just as the criminal justice system is broken clearly the current welfare system doesn’t work—so you want to perpetuate a broken system and continue flushing money down a toilet instead of trying something new—that’s insanity.

  9. Gravatar of Bob OBrien Bob OBrien
    7. March 2021 at 10:40

    From Scott:
    “In my view, the biggest monopoly problems come from government monopolies, such as the public school system.”

    I agree with Scott. Note that the dems support public school monopoly while Trump called for school choice.

  10. Gravatar of Gene Frenkle Gene Frenkle
    7. March 2021 at 10:54

    Laura, I agree that 2008 and Obama getting millennials involved in politics is important to understand Trump…but Obama’s stance against the Iraq War wasn’t as important as many made it out to be. By 2008 the entire Democratic Party was united in common goals and all of the major candidates had very similar platforms. Obama needed something to distinguish himself from the field and his campaign team settled on the fact he gave a speech that tens of people heard as his great anti-war bona fides. So Howard Dean was the true anti-war candidate and his campaign fizzled in 2004 and then the Iraq War turned into a complete unmitigated disaster and all Democrats opposed it by 2007.

    In fact two of the big anti-war journalists were Matt Taibbi and Glenn Greenwald and they aren’t anti-Trump at all because they see Trump as more anti-war than most Democrats. In fact Greenwald regularly chides anti-Trump Democrats as people that started following politics in 2015 and don’t remember Bush/Cheney. As someone who opposed the Iraq War from day 1 in the most responsible and civil manner possible and was called a “traitor” on email chains by future Trump supporters (remember the time before Facebook?)…I am at least sympathetic to Taibbi and Greenwald while believing they are a little misguided.

  11. Gravatar of Mark Z Mark Z
    7. March 2021 at 11:06

    Schor made some odd claims in his interview, so I was less impressed. He claims Democrats are most likely going to lose 1 or 2 seats in 2022, but the consensus I believe is that 2022 senate races are going to be tougher for Republicans than Democrats, and betting odds say Democrats are more likely to have control. He offered up no evidence for this claim that goes against consensus. And I think Ponnuru is right that his ideas about urgently adding new states is, well, ridiculous ( If they can’t get a $15 min passed, wage, it’s absurd to think they’ll be able to add a few new states in less than 2 years.

    If he said what Laura above describes him as saying, even less impressive. Trump as the inheritor of the legacy of the ‘anti-government’/Tea Party movement is ridiculous. It’s the kind of thing a leftist would believe about the right, as many believe there’s no meaningful distinction between the ideologies of Ayn Rand and Francisco Franco. I guess if you’re far enough left, from a distance, ‘they’re on the right and they’re angry about something’ all kind of looks the same, but such lack of resolution reflects poorly on the analyst.

  12. Gravatar of Gene Frenkle Gene Frenkle
    7. March 2021 at 11:15

    Mark Z, prior to 2020 elections I always read that 2022 was the year Democrats would most likely take back the Senate. Unfortunately the poor showing for Democrats in the House and state houses means it is highly likely Democrats will lose the House in 2022, so the fact Cedric Richmond chose to join the White House instead of going for a leadership position is evidence he doesn’t believe the Democrats will be the majority party after 2022–so let the 80 year olds keep their jobs. Pelosi, Hoyer, and Clyburn are all 80 if you can believe that!?!

  13. Gravatar of Thomas Hutcheson Thomas Hutcheson
    7. March 2021 at 12:28

    The New Deal new labor policies were a supply shock and the Fed should have temporarily raised it’s inflation target to avoid any downward pressure on sticky prices and wages. They made the same mistake the Fed made in the early months of the pandemic.

  14. Gravatar of Trying to Learn Trying to Learn
    8. March 2021 at 07:43

    Hi Scott,

    Can you explain your post? You seem to show that wages grew after progressive labor policy passed, then you link to the Sinema thumbs down video to show “the policy implications”. Aren’t the implications good if wages grow despite output not increasing substantially? That would seem to be the purpose of a minimum wage increase.

  15. Gravatar of ssumner ssumner
    8. March 2021 at 10:21

    Mark, Good point about Trump’s supposed “anti-government” stance—that certainly was not Trump’s ideology. I like Shor’s analysis of what motivated voters.

    Trying to Learn. In my research on the Depression I found five New Deal wage shocks. Each one slowed the recovery.

  16. Gravatar of Mark Z Mark Z
    8. March 2021 at 20:50

    Gene, I think the senate is far more determined by the map than by popular sentiment, and there are 6 more Republican seats than Democrats up for re-election, and the Democrats with the narrowest margins last election are in states that have been in the trending blue direction in recent years (like Georgia, New Hampshire, Arizona). I believe all 6 retiring senators this term are Republicans, 4 of them in close states, 3 in states Biden won.

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