Author(s): | Bernanke, Ben S. |
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Reviewer(s): | Margo, Robert A. |
Published by EH.NET (July 1, 2000)
Ben S. Bernanke, Essays on the Great Depression Princeton: Princeton
University Press, 2000. vii + 310 pp. $35.00 (cloth), ISBN 0-691-01698-4.
Reviewed for EH.NET by Robert A. Margo, Department of Economics, Vanderbilt
University.
For many years, economic research on the origins and persistence of the Great
Depression bore a striking resemblance to historical research on the causes of
the American Civil War. Both sides to the respective debates talked past one
another, and little, if any, intellectual progress was made. Beginning in the
1980s, the situation began to change, at least in case of the 1930s, because of
a simple methodological innovation. That innovation was to look beyond time
series aggregates for a single country, either at dis-aggregated evidence
within countries or at aggregate outcomes across countries. Both types of
evidence are examined in Ben Bernanke’s new book, a collection of (mostly)
previously published articles. (Currently, Bernanke is the Howard Harrison and
Gabrielle Snyder Beck Professor of Economics, Professor of Economics and Public
Affairs, and Chair of the Economics Department, at Princeton University.)
Essays on the Great Depression is divided into three parts, made up of
nine substantive chapters in total, plus an index. Following a very brief
preface, Chapter 1 (“The Macroeconomics of the Great Depression”) presents the
basic themes of the book. Using a cross-country panel data set, Bernanke argues
that monetary factors, along with the Gold Standard, should be according
primary responsibility for the Depression. Adherence to the Gold Standard
resulted in monetary “meltdown” — the declines in the money stock,
accordingly, were non-neutral, because of negative effects of financial crisis
and sticky nominal wages on output growth. Countries that remained on the Gold
Standard did far worse than countries that abandoned it, and a case can be made
that staying on the Gold Standard was more or less an exogenous event – that
is, a “natural experiment.”
Part Two is made up of three chapters. Chapter 2 (“Nonmonetary Effects of the
Financial Crisis in the Propagation of the Great Depression”) is justly famous.
The paper argues that the US financial crises of the early 1930s had (negative)
effects on the real economy, essentially by driving up what Bernanke calls the
“cost of credit intermediation.” One of two chapters in the book to rely on
aggregate time series data for a single country, Bernanke shows (p. 58) that
including deposits of failed banks and liabilities of failed business in an
otherwise standard time-series regression helps to (negatively) predict output
growth. Chapter 3 (“The Gold Standard, Deflation, and Financial Crisis: An
International Comparison,” written with Harold James) reports a similar finding
using the international panel, while Chapter 4 (“Deflation and Monetary
Contraction in the Great Depression: An Analysis by Simple Ratios,” written
with Ilian Mihov) uses very simple methods (an identity linking the price level
to the nominal money supply, the monetary base, international reserves, and the
quantity and price of gold reserves) to decompose the sources of world-wide
deflation before and after 1931
Part Three, on labor markets, is made up of five chapters. Chapter 5 (“The
Cyclical Behavior of Industrial Labor Markets: A Comparison of the Prewar and
Postwar Eras,” written with James Powell) introduces the second major data set
examined in the book, pre-war monthly data on output, employment, hours, and
average hourly earnings for eight US manufacturing industries. Among its many
findings is the striking observation (p. 175) that prewar employers used
shorter hours to reduce labor during a business cycle downturn, while postwar
employers have relied on layoffs. Chapter 6 (“Employment, Hours, and Earnings
in the Depression: An Analyses of Eight Manufacturing Industries”), perhaps the
most influential of the lot, argues that nominal average hourly earnings did
not decline as much as one might expect during the downturn (that is, nominal
wages were sticky) because average weekly hours fell as well, and workers were
unwilling to accept drastic declines in the former given the declines in the
latter. Chapter 7 (“Unemployment, Inflation, and Wages in the American
Depression: Are There Lessons for Europe?” written with Martin Parkinson), the
shortest in the book at eight pages, examines whether the experience of the US
in the 1930s can shed light on certain features of recent European
macroeconomic behavior; namely, the persistence of high unemployment, and the
apparent lack of any influence of high unemployment on either the rate of
inflation or real wage growth. Bernanke concludes that, while there are some
useful lessons, “there are also large enough differences to make inferences
about policy treacherous” (p. 253). Chapter 8 (“Procyclical Labor Productivity
and Competing Theories of the Business Cycle: Some Evidence from Interwar
Manufacturing Industries,” also written with Martin Parkinson) uses the US
industry data to investigate “short run increasing returns to labor” (SRIRL)
during the interwar period. The key finding is that the degree of SRIRL appears
to have been similar in magnitude to the postwar period, which Bernanke claims
is “troubling for the technology shocks explanation of procyclical productivity
(and thus for the real business cycle hypothesis).” Chapter 9 (“Nominal Wage
Stickiness and Aggregate Supply in the Great Depression” written with Kevin
Carey) considers several econometric refinements to Eichengreen and Sach’s
well-known 1985 Journal of Economic History article on the gold standard
and the Great Depression. It concludes that the refinements do little to alter
Eichengreen and Sach’s findings, and concurs with Eichengreen and Sachs that
nominal wage stickiness was an important mechanism for propagating monetary
declines in the early 1930s.
Overall, Essays on the Great Depression is a mixed bag. Two of the
papers — “Non-Monetary Effects” and “Employment, Hours, and Earnings” — are
certifiable classics, and all the chapters are worth reading (or re-reading, as
the case may be). The quality of the prose is several notches better than the
usual fare in professional economics journals. The empirical analysis
demonstrates a practiced eye for what is important and what is not, attention
to historical and institutional detail, and a willingness to explore
alternative explanations. Conditional on when they were written, the
statistical analyses are state-of-the-art, an order of magnitude beyond what
passed for econometric sophistication in economic history journals at the time.
On the other hand, the value-per-dollar ratio is not particularly high. Eight
of the nine chapters are essentially copied (the type-setting is new and
consistent throughout) from their original sources, and six of these, being
from the American Economic Review, Journal of Political Economy,
and the like, are easily available (indeed, I bet most economists who
considering buying this book will have the originals, or most of them, on their
shelves already). The other two chapters were originally published in NBER
volumes, hardly less accessible except to the most library-challenged. That
leaves the three-page preface, the previously unpublished Chapter 4, and an
index as the new material — not much for the reader’s $35.00. I’m not
questioning Bernanke’s right to reprint his admittedly influential articles,
nor Princeton University Press’s decision to package them in a handsome volume
complete with a striking period photograph on the cover and laudatory blurbs
from Peter Temin, Barry Eichengreen, and Randall Kroszner on the back cover.
However, in the long run, scholarship on the Great Depression, along with
readers’ pocketbooks, would have been better served had these essays been
re-written into real chapters; with a real introduction and conclusion;
regressions re-estimated taking into account new data and new econometric
techniques; and new textual material interwoven throughout — in brief, if
Bernanke had written a real monograph. Even with a proper introduction and
conclusion, such a book, I suspect, would be a good deal shorter than this
volume’s 301 pages of rather small print — there is much unnecessary
repetition, indeed confusion, across the various chapters.
As a case in point, consider the treatment of wage stickiness throughout. In
Chapter 2, using his international panel, Bernanke (p. 31) concludes that
“countries in which nominal wages adjusted relatively slowly toward changing
price levels experienced the sharpest declines in manufacturing output.” Table
9 of Chapter 3 reports first-difference regressions of industrial production
(in logs) using evidently the same data set, noting that (p. 101) “only when
the PANIC variable [the dummy variable for financial distress] is included does
nominal wage growth have the correct (negative) sign … but it is not
statistically significant.” In Chapter 6, Bernanke (p. 236) simulates his US
industry model assuming “perfect wage adjustment to the cost of living.”
Remarkably, this assumption “had virtually no effect on the ability to track”
employment and hours, suggesting that “the importance of lagged adjustment for
explaining observed real wage behavior” during the Depression “may not have had
great allocative significance.” Then, drawing again on the international
evidence, Chapter 9 notes (p. 300) that “the correlation across countries of
high nominal wages and low output is interpretable as an allocational effect of
sticky wages.” Exactly what is going on here? Bernanke clearly views wage
stickiness in the 1930s as an economic puzzle, since few of the standard
post-WW2 institutional stories (e.g., unions, efficiency wages, and the like)
seem to have explanatory power. While I don’t disagree with Bernanke on this
point, greater familiarity with the economic history literature would have
alerted him to the stylized fact that wage stickiness long-predated the 1930s,
in the United States and other countries.
While I applaud Bernanke’s willingness to move beyond the standard US time
series, readers should keep in mind that all of the US data come from
conventional, if somewhat neglected sources, as do the international data.
Other than occasional asides, not much attention is paid to data quality, and
only rarely do readers get any sense of the sort of archival work that might
improve matters for future research. Some of the regressions (for example, in
Chapter 7) were estimated prior to Christina Romer’s revisions to the standard
(that is, Lebergott) labor force series, and thus invite re-estimation.
Finally, in a book of essays about the Great Depression, one might have
expected more attention paid to unemployment, particularly its uneven incidence
across the workforce, and the strikingly high levels of long-term unemployment
prevailing in the US and elsewhere.
Criticisms aside, Essays on the Great Depression displays one of the
great contemporary masters of applied macro-econometrics at work. In the grand
scheme of things, I am glad that Ben Bernanke is fascinated by the Great
Depression. Hopefully his personal obsession will translate in an expanded
audience for the work of economic historians. In any case, his book will more
than do as a fine and ready example of why the past continues to have useful
macroeconomics.
Robert A. Margo is Professor of Economics and of History at Vanderbilt
University, Nashville, TN, and a Research Associate of the National Bureau of
Economic Research. He will be on leave during the 2000-01 academic year as
Visiting Senior Scholar and Visiting Research Professor of Economics at Bard
College in Annandale-on-Hudson, NY. His most recent books are Wages and
Labor Markets in the United States, 1820-1860 (University of Chicago Press,
2000) and Women’s Work? American Schoolteachers, 1650-1920 (with Joel
Perlmann, forthcoming, University of Chicago Press, 2001).
Subject(s): | Macroeconomics and Fluctuations |
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Geographic Area(s): | North America |
Time Period(s): | 20th Century: Pre WWII |