Ohanian vindicates Rothbard

Joseph Salerno brings our attention to a National Bureau of Economic Research working paper on the Great Depression that is almost hardcore Rothbardian.

Salerno writes:

In writing his article, "Who — or What — Started the Great Depression," UCLA economist Lee E. Ohanian spent four years poring over wage data and culling information from sources related to Hoover and his administration. . . .

Ohanian contends that Hoover's policy of propping up wages and encouraging work sharing "was the single most important event in precipitating the Great Depression" and resulted in "a significant labor market distortion."

Thus, "the recession was three times worse — at a minimum — than it otherwise would have been, because of Hoover."

The main reason is that in September 1931 nominal wage rates were 92 percent of their level two years earlier. Since a significant price deflation had occurred during these two years, real wages rose by 10 percent during the same period, while gross domestic product (GDP) fell by 27 percent. By contrast, during 1920–1921 — a period that was accompanied by a severe deflation — "some manufacturing wages fell by 30 percent. GDP, meanwhile, only dropped by 4 percent."

As Ohanian notes, "The Depression was the first time in the history of the US that wages did not fall during a period of significant deflation." Ohanian estimates that the severe labor-market disequilibrium induced by Hoover's policies accounted for 18 percent of the 27 percent decline in the nation's GDP by the fourth quarter of 1931.

In America's Great Depression, Rothbard criticized Hoover for public works, tax increases, and the Smoot-Hawley tariff. But Hoover's greatest blunder, according to Rothbard, were his efforts to keep wages from falling [i.e., he prevented the downward-adjustment of nominal wages] during a period of severe price deflation.

Rothbard's explanation for the severity of the depression runs counter to the widely-accepted view of Milton Friedman and Anna Schwartz, as expounded in their classic work A Monetary History of the United States, 1867–1960. "The Friedman-Schwartz view came to dominate mainstream macroeconomics after the collapse of the Keynesian consensus in the 1970s. Indeed, it is today the conventional explanation of the Great Depression, which Bernanke holds to and which governs the policy response of the Fed to the current financial crisis."

Bernanke, as we've witnessed, is making sure "it" doesn't happen here.