Friday, April 1, 2011

Krugman on the 1921 Depression

My mind has been on title insurance and engineers lately - it's been a while since I've thought about the 1920-21 depression. Today, though, Krugman has a great post reminding us of the lessons of the episode.

My article on it is here. Not sure when it'll come out - maybe by the summer.

Everything I've ever written on 1920-21 on this blog is here. This was a truly fascinating episode in American history that I hope to revisit in the future. Krugman's argument is fundamentally sound as to what it has to tell us today. But I think it's more important than that for historical reasons. This marked a real turning point in macroeconomic policymaking in America. It was the first time (I know of) that fiscal authorities started talking seriously about tracking fiscal policy and using it as a tool to impact the economy. In the aftermath of the depression, discussions and arguments within the Fed lead to a fundamental change in how we do monetary policy (I had to cut this from the paper in the interest of length). It was an important period and it deserves more attention.

UPDATE: Brad DeLong adds a good thought too. I just emailed Paul Krugman and let him know about my article... I have no clue if he'll take interest or if he's too busy to pay attention. We shall see.

UPDATE 2: Krugman has more, basically elaborating on Brad DeLong's point. This is pure gold: "My bottom line is that the Harding recession and recovery is to the pain caucus what Chile’s retirement system was to Social Security privatizers: a tale of a faraway country of which we know nothing, which falls apart once you look even a bit at what actually happened." It's so exciting to see these guys taking note of this one. I should also add, this is why it's so important to have a good sense of economic history when you do economics, otherwise you're likely to misdiagnose things and draw false equivalences the way much of the commentary on 1920-21 has done. Whatever the merits of the programs that passed me over, I'm very glad to be going to a doctoral program that values and requires coursework in both economic history and history of thought.

UPDATE 3: One more update on a point that I think a lot of people ignore about 1920-21. A lot of people talk about this downturn as if it was quick. I think the reason for that is that because on some indices it was so deep, it looks like a fast in-and-out V recession, simply by virtue of the ratio of its amplitude. The thing is, it wasn't quick. It's clocked at 18 months by the NBER. If you look at all the recessions we've had that started since the creation of the Fed, 1920-21 was tied as the second longest, after the Great Depression. And what is it tied wtih? The current recession, of course! Now, we are struggling with a jobless recovery of the sort that they didn't have to deal with in the 1920s, but the point still remains - if you hear chatter in the blogosphere about how this was a short downturn, don't buy it. I have a longer post on this point here. It was not a pleasant one - and as Krugman, DeLong, and I have pointed out (for my part - NUMEROUS times), it was a qualitatively different downturn from the one we are experiencing now.


  1. I noticed you were mentioned on Paul Krugman's blog this morning. Congratulations you made the NY Times!!! At least the blog section anyway.

    Have you shown Paul this?

    I think Lord Keynes has a pretty good run down of it.


  2. Chile's retirement system has fallen apart? Since when?

  3. Anonymous - Lord Keynes does do a great job and as is EXTREMELY thorough for a blogger. I hihgly recommend that post to anyone that hasn't read it yet.

    Gary - Ya, I'm not too familiar with the reference or what his critique of it is, but I obviously think he's right on with 1920-21.


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