Krugman vs. Hamilton/Cole/Ohanian on FDR’s high wage policy

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There’s been a lot of recent debate about Cole and Ohanian’s claim that FDR’s New Deal slowed the recovery.  Here I’ll focus on his high wage policies, which Krugman argues could have actually increased output (as the AD curve may slope upward in a liquidity trap.)  While there are lots of sophisticated econometric studies (often using highly misleading annual data), I don’t know of anyone else who has simply looked at the monthly industrial production data around each wage shock.

There were actually five wage shocks, four of which are easily dated.  As part of the National Industrial Recovery Act, FDR ordered an across the board 20% hourly wage increase in late July 1933, and then further increases in the spring of 1934.  At the same time the workweek was reduced about 20%.  The NIRA was declared unconstitutional in 1935, but a minimum wage was instituted in November 1938, and raised a year later. To say the IP data is bad for the Krugman interpretation would be an understatement.  These numbers are horrendous:

Table 12.2: Four month (nonannualized!) growth rates for industrial production

Before        After
July   1933 wage shock   +57.4%     -18.8%
May   1934 wage shock   +11.9%    -15.0%
Nov.  1938 wage shock   +15.8%     +2.5%
Nov.  1939 wage shock   +16.0%     -6.5%

You’ll notice that I left out the fifth wage shock, but its no better for Krugman’s view, just messier.  Historians argue that the huge union drives of late 1936 and 1937 were due to both the Wagner Act and FDR’s massive election victory.  Whatever the cause of the union gains, they led to rapid wage increases in late 1936 and much of 1937.  This time, monthly industrial production did not fall immediately, as prices were also rising fast in late 1936 and early 1937.  But when prices stopped rising, industrial production began falling sharply under the burden of high wages.

Progressives like to portray opponents of the New Deal as reactionaries.  Parts of the New Deal (such as dollar devaluation) were very helpful.  But FDR’s high wage policy was a disaster.  As James Hamilton said (in defending his criticism of programs like the NIRA and the AAA):

I openly confess to believing that government policies that were explicitly designed to limit manufacturing, agricultural, and mining output may indeed have had the effect of limiting manufacturing, agricultural, and mining output.


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16 Responses to “Krugman vs. Hamilton/Cole/Ohanian on FDR’s high wage policy”

  1. Gravatar of When is government policy most effective? at catallaxyfiles When is government policy most effective? at catallaxyfiles
    26. February 2009 at 16:51

    […] When it sets out to destroy the economy: http://blogsandwikis.bentley.edu/themoneyillusion/?p=48 […]

  2. Gravatar of Quidam Quidam
    3. March 2009 at 18:06

    I always enjoy simplified explanations. Wages go up…production goes down. They must (obviously) be related.

    A decrease in production couldn’t be related to, oh, I don’t know… say falling demand?

    In the last few years we’ve had wages going down (relative to all other relevant indexes) and yet, production is also going down. How could that be?

  3. Gravatar of ssumner ssumner
    5. March 2009 at 12:29

    Quidam, If you regress industrial production on nominal wages and wholesale prices separately, you get the same result for the post 1933 period. Higher prices boost output AD, higher wages reduce them. For the 1920s and early 1930s, when there were no artificial wage shocks, there is no correlation between W and IP. What happened after 1933?

  4. Gravatar of TheMoneyIllusion » The Lionel Robbins lectures TheMoneyIllusion » The Lionel Robbins lectures
    16. June 2009 at 17:45

    […] the economy, and even might have helped the recovery.  For my evidence, check out this data from a very early post, which some of my more recent readers might not have noticed: There were actually five wage shocks, […]

  5. Gravatar of TheMoneyIllusion » Dr. Krugman and Mr. Keynes TheMoneyIllusion » Dr. Krugman and Mr. Keynes
    16. July 2009 at 16:59

    […] during periods of near zero interest rates and very rapid economic growth.  And as I showed in this post, each time the policy brought promising recoveries from the Great Depression to a screeching […]

  6. Gravatar of Dr. Krugman and Mr. Keynes Dr. Krugman and Mr. Keynes
    16. July 2009 at 23:49

    […] during periods of near zero interest rates and very rapid economic growth. And as I showed in this post, each time the policy brought promising recoveries from the Great Depression to a screeching halt. […]

  7. Gravatar of Scott Sumner on Krugman at catallaxyfiles Scott Sumner on Krugman at catallaxyfiles
    17. July 2009 at 15:44

    […] has looked at ‘high wage’ policies during the Great Depression – this is an experiement FDR tried five times. There were actually five wage shocks, four of which […]

  8. Gravatar of TheMoneyIllusion » Krugman vs. Eggertsson TheMoneyIllusion » Krugman vs. Eggertsson
    14. December 2009 at 19:26

    […] that high wage policies can actually help the economy during a Depression.  This is from one of my first posts: Table 12.2: Four month (nonannualized!) growth rates for industrial […]

  9. Gravatar of Should we cut the minimum wage? « Daniel Joseph Smith Should we cut the minimum wage? « Daniel Joseph Smith
    16. December 2009 at 12:42

    […] If you prefer specific facts to textbook arguments, see Scott Sumner’s legendary Table 12.2 on wages and the Great […]

  10. Gravatar of 三つの10月 by Scott Sumner – 道草 三つの10月 by Scott Sumner – 道草
    11. February 2011 at 17:04

    […] 2.  第二の要素はFDR（ルーズベルト大統領）による5つの賃金ショックのうち第3のもので、5つ中では政府の政策との関係が薄いものだ。1936年の終わりから1937年の大部分の期間を通じて労働組合の加入者が急増した。1935年のワグナー法によって組合の組織が容易になり、1936年にはFDRが大統領選で圧勝したため、組合の指導者たちはワシントンは自分達の味方だと確信しするようになった。これにって賃金ショックが起こった動きはWPIのバブルの動きと似ており、時間的には半年後ろにずれていた。賃金はWPIを追いかけて上昇し、追いかけてピークに達し、追いかけて下落した。 […]

  11. Gravatar of TheMoneyIllusion » Links to my views on money/macro TheMoneyIllusion » Links to my views on money/macro
    29. September 2011 at 09:00

    […] Why the Keynesians are wrong about FDR’s high wage policy […]

  12. Gravatar of TheMoneyIllusion » FDR, without the monetary stimulus TheMoneyIllusion » FDR, without the monetary stimulus
    13. February 2013 at 08:46

    […] tried to artificially raise the nominal wage rate 5 times during the 1930s.  Each increase was followed by a sharp slowdown in industrial production […]

  13. Gravatar of Minimum Wage and Monetary Policy « J.uris D.ebtor Minimum Wage and Monetary Policy « J.uris D.ebtor
    13. February 2013 at 12:09

    […] unveiled last night, and has some concerns. FDR tried to artificially raise the nominal wage rate 5 times during the 1930s.  Each increase was followed by a sharp slowdown in industrial production […]

  14. Gravatar of Bernard Bernard
    14. March 2013 at 06:28

    The problem with this debate and with the literature on the NIRA in general is that it is taken out of context. FDR and the Brains Trust are made out to be raving lunatics, raising wages in some Frankensteinian experiment.
    The truth of the matter is that the higher wage provisions of the NIRA were based on the generally-accepted view that productivity gains had exceeded wage gains throughout the 1920s and was one of the chief causes of the Great Depression. Heck, Henry Ford doubled wages in 1914! Did employment at Ford go down? No!!!!
    It bears reminding that trade associations, unions, and investors, not to mention the U.S. Chamber of Commerce and the National Association of Manufactures, all supported the NIRA.
    The problem, as I see it, is the facile and misleading nature of Walrasian analysis.

  15. Gravatar of Did I Not Call It? Sumner Against Raising the Minimum Wage | Last Men and OverMen Did I Not Call It? Sumner Against Raising the Minimum Wage | Last Men and OverMen
    22. February 2017 at 10:40

    […] “FDR tried to artificially raise the nominal wage rate 5 times during the 1930s. Each increase was followed by a sharp slowdown in industrial production […]

  16. Gravatar of Scott Sumner, the GOP and the Minimum Wage Laws | Last Men and OverMen Scott Sumner, the GOP and the Minimum Wage Laws | Last Men and OverMen
    19. April 2017 at 05:51

    […]     http://www.themoneyillusion.com/?p=48 […]

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