Policy & Depression

April 4, 2009 in Economics

UCLA Economist Lee Ohanian, who recently published a paper on the role of the New Deal in prolonging the Great Depression (I covered it here), wrote to Professor Mankiw with a preview of his follow-up implicating Hoover's policies as well:

I conclude that the Depression is the consequence of government programs and policies, including those of Hoover, that increased labor’s ability to raise wages above their competitive levels. The Depression would have been much less severe in the absence of Hoover’s program. Similarly, given Hoover’s program, the Depression would have been much less severe if monetary policy had responded to keep the price level from falling, which raised real wages.

The argument regarding wages, in particular, has real impact for the handling of the UAW and CAW in the ongoing GM and Chrysler negotiations.

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