The Great Recalculation?

A recent Arnold Kling post discusses how the Great Depression can be seen as an example of recalculation.  Kling provides the following quotations from an article by Bruce Greenwald:

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.



17 Responses to “The Great Recalculation?”

  1. Gravatar of woupiestek woupiestek
    28. November 2009 at 00:00

    Too much debt in the private sector slows down the absorbtion of new workers?

    You got me confused, because I see now that debt is ‘too much’ because of a shift in the expected path of the economy. Maybe the economy is more sensitive to expectations when debts are as deep as they are now, but that is besides the point. Had the central banks done level targeting, additional inflation would slow down deleverage.

  2. Gravatar of Doc Merlin Doc Merlin
    28. November 2009 at 00:21

    “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.”

    Agreed. I’ll even take it one step further, I don’t believe government can accurately say which is dying and which isn’t. Also any attempt at subsidy will just go to politically favored groups.

  3. Gravatar of StatsGuy StatsGuy
    28. November 2009 at 09:28

    “shouldn’t urban output have risen if workers were flowing into the cities?”

    That is precisely the point. If Kling is a believer in economics as a field, then he ought to believe that incentives matter. And if he believes incentives matter, then it ought to be easier to get people to cities if they think they’ll have jobs.

    For Kling to argue that the Great Depression was “functional” or even “virtuous” is like reading Grapes of Wrath, and at the scene where the starving farmworkers learn that the farmers are destroying produce (dumping it into the sea instead of feeding it to people), just nodding and saying “yep, that makes a lot of sense”.

    Has Kling responded yet to the observation that employment in virtually every sector – even “growth” sectors – plummeted between 0ct 08 and April 09?

    Or at least admitted something like “Too much Recalculation at once is a bad thing” or even “Recalculation is faster on a full stomach”.

    (AND WHY are we trying to get people INTO healthcare when we are trying to CUT healthcare expenses and shrink growth of that sector?)

    Pray tell, why do people give Kling the amount of respect he seems to get? The only rational reason I can see Kling making these arguments is because he’s aiming for notoriety, which is more rewarding in the economics field than accuracy.

  4. Gravatar of ssumner ssumner
    28. November 2009 at 12:58

    woupiestek, Sorry, I don’t see the connection to this post. Who said there is too much debt?

    Doc Merlin, I strongly agree.

    Statsguy, I think Kling has lots of excellent posts. But I don’t agree with his recalculation model, and I strongly disagree with applying it the the Great depression. I don’t see how it even comes close to matching the stylized facts.

    But Kling is often very insightful on other topics, I just don’t like his business cycle theory.

  5. Gravatar of TGGP TGGP
    28. November 2009 at 13:55

    I couldn’t comment at EconLog because I’m banned. I wanted to point out that Sweden & Switzerland did very well with their neutrality policy. Ed Glaeser argued that Argentina fell behind for reasons of education here:

  6. Gravatar of ssumner ssumner
    28. November 2009 at 15:41

    TGGP, Yes, but also note that it was about as well educated in 1900 as Italy. Italy is far richer today because it has been far more open througout most of the 20th century. But I do agree, education explains a lot of the wealth of nations.

  7. Gravatar of Alan Alan
    29. November 2009 at 02:29


    Regarding your comment:

    “Has Kling responded yet to the observation that employment in virtually every sector – even “growth” sectors – plummeted between 0ct 08 and April 09?”

    I think Tyler Cowen addresses some of these points:

    See also the links within Cowen’s blog post

  8. Gravatar of StatsGuy StatsGuy
    29. November 2009 at 07:28


    Did you mean Cowen’s link to Kling?

    I think this response is more about Krugman’s observation that resource-shifting booms don’t create unemployment like resource-shifting busts… This seems a fair point (that incentive-pull resource reallocation is faster than unemployment-push resource reallocation). To which Kling says “asymmetry”.

    The tautological nature of his answer aside, he’s responding to a different question.

    Regarding the universal increase in unemployment, one can imagine the resource shift happening more slowly due to asymmetry, but it SHOULD be happening. Yet until the Fed finally eased (but not enough) in March 09, we had nearly across-the-board payroll contraction in every sector and profession.

    Ssumner posted on that here:

    But Kling has yet to take this seriously. Instead, we get more children’s parables about Recalcultion.

    Kling’s arguments seem to increasing stretched and incredulous, to which I observe that the more crazy the stuff he says, the more links he seems to get. His personal reward function seems to be incentivizing him toward notoriety rather than accuracy… (OK, so maybe he does believe in incentives after all.)

  9. Gravatar of Scott Sumner Scott Sumner
    29. November 2009 at 14:22

    Alan and Statsguy, In the post Statsguy links to, Kling noted (correctly) that the housing boom was gradual, and the collapse was sudden. But isn’t that a powerful argument against the farming reallocation story? The demand for food is stable. Consumers don’t speculate in food. So how could there have been a food bubble? Yes, technological change reduces demand for labor in farming, but that is a very gradual process, which occurred over 100 years. How dies that cause a sudden decession in 1929? Even Kling’s own analysis of the housing bubble seems to argue against the mechanism necessary for farming to have caused the Great Depression. So I still don’t see any farming “shock”

  10. Gravatar of Doc Merlin Doc Merlin
    29. November 2009 at 18:44

    Um, Scott, there was a food bubble. It peaked in 1919 and led to the 1921 recession.

    Nor about our current recession:
    We were also in a huge basic commodity food price spike immediately before this current recession. Here is the data for Wheat, the price for Rice and Corn was even more severe, but I don’t have the data on hand right now. Rice was particularly bad and resulted in food riots internationally. The wheat and corn price increases also caused food riots in Mexico.

    DATE Price USD
    2005/06 3.13
    2006/07 4.14
    2007/08 7.23
    2008/09 6.01

    2006/07 4.43
    2007/08 9.92
    2008/09 10.00

    The above data is why CPI/PPI worth of bucket of warm spit. We had massive commodity inflation from 2006 to the end of 2008. Gold, wheat, corn, rice point to 20%+ inflation during that time, but the CPI was almost flat.

    Anyway, in terms of recalculation and commodity prices what we are experiencing is a lot more like the 1921 recession, but in terms of politics and people trying to “do something about the problem” it seems more like the 1929 one.

  11. Gravatar of Doc Merlin Doc Merlin
    29. November 2009 at 18:45

    Sorry, that should read, “Now about the current recession.”

  12. Gravatar of woupiestek woupiestek
    30. November 2009 at 03:22

    I started reading various economist blogs in hopes of gaining an understanding of the crisis. At first I learned a lot form Steve Keen, who emphasizes the role of debt in this crises. So when Arnold Kling brought up his recalculation theory, I thought that the best explanation for the absence of a substitution effect, was too much debt.

    I find you’re arguments quite convincing… at least, whenever I understand them. Can you at least tell me if I get this right? That too much debt is a question of expectations?

  13. Gravatar of Scott Sumner Scott Sumner
    1. December 2009 at 07:05

    Doc Merlin, Good points, but in 1919 there were special issues such as a major inflation affecting many commodities. Perhaps there were also supply issues, I am not sure. But a rise and fall of food prices could easily reflect supply fundamentals, and need not indicate a bubble. In your favor is that fact that the third world boom was increasing meat demand in 2007-08, and this contributed to higher prices, so demand was involved I suppose. But that wasn’t a factor in 1929, because food prices were also weak during the later 1920s.

    Thanks woupiestek, Purely domestic debt is a zero sum game, one person’s liability is another’s asset. I suppose most people are worried about our debt to Asians (i.e the current account deficit.) I don’t think this is the sort of problem that can cause a sudden business cycle, indeed after the real estate peaked in 2006, there was an increase in US exports as we tried to gradually reduce the CA deficit by reducing housing and increasing manufacturing. I think that is the best way to address the issue. The sharp fall in NGDP in late 2008 made the CA deficit even smaller, but the cost in lost jobs is too great. The way to reduce our debt is not to produce less. We should consume a bit less but produce more. If your family had a debt problem would you becoming unemployed solve that problem?

  14. Gravatar of D. Watson D. Watson
    2. December 2009 at 11:46


    As I understand it, the CPI focuses on final goods, not commodities. Cereal prices skyrocketed, yes, but so much of our food dollar is spent for marketing and processing that our food prices rose very little. If 15-20% of a household’s expenditures increases by 5%, I’d only expect a 1% uptick, and that’s essentially flat compared to the tripling of food prices. So it did what it ought to have done. I’ll take the CPI over spit any day.

  15. Gravatar of Doc Merlin Doc Merlin
    3. December 2009 at 23:34


    Agreed, but not just the third world meat eating boom, also the huge biofuels bubble that diverted food producing land to fuel production. Both have popped however, and at least in the case of ethanol production with hilarious legal implications that remind me of Cnut the Great.

    @D. Watson

    I guess in my vitriol and hate of CPI I didn’t properly explain why I hated it.

    It doesn’t take into account the distribution of prices which is as important (If not more) than the total price. As we get richer and more technologically advanced, more of our income becomes devoted to technological/informational goods. However, because of the productivity norm in these goods is very high, these goods tend to naturally deflate in price very quickly. What CPI does is mask these effects. For example, all through the last decade we had massive deflation in technological goods and information. Overall, though, CPI measured very small inflation, because commodities, housing, medical care, education, and non-technological recreation all were skyrocketing in price.
    So, most of the market was experiencing significantly larger than GDP growth levels of inflation, but MASSIVE deflation in a few sectors hid the problem. So, instead of us doing things that made sense, we put our money into asset bubbles and racked up huge educational debt.

  16. Gravatar of ssumner ssumner
    6. December 2009 at 10:55

    Doc Merlin, I agree about biofuels. But would you agree there was no food bubble in 1929?

  17. Gravatar of “Recession Is a Time of Harvest” | J. W. Mason “Recession Is a Time of Harvest” | J. W. Mason
    14. May 2015 at 08:58

    […] It appears that Stiglitz’s coauthor Bruce Greenwald came up with this first, and it was adopted by right-wing libertarians like Arnold Kling […]

Leave a Reply