Cole and Ohanian Reply

Here is a clarification of Cole and Ohanian's WSJ piece, sent to me by Hal and Lee.

Paul Krugman claims our economic history is in "incredibly bad faith" by showing that industrial output is positively correlated with the wholesale price index. The main point of our op-ed, as well as our earlier work, is that most of the increase in per-capita output that occurred after 1933 was due to higher productivity – not higher labor input. The figure shows total hours worked per adult for the 1930s. There is little recovery in labor, as hours are about 27 percent down in 1933 relative to 1929, and remain about 21 percent down in 1939. But increasing aggregate demand is supposed to increase output by increasing labor, not by increasing productivity, which is typically considered to be outside the scope of short-run spending/monetary policies.

The facts that labor doesn’t recover very much, and that wages in some sectors of the economy are well above trend, is why we have analyzed the impact of New Deal cartelization policies. And the slow recovery from the Depression has been known for decades, including work by Armen Alchian, Milton Friedman and Anna Schwartz, and Robert Lucas, all of whom point to New Deal policies that depressed competition in labor and product markets.

In terms of the relationship between changes in prices and changes in industrial production, our piece examined the 1932-34 period because that was a period cited by Bernanke for strong growth related to eliminating deflation. And the growth that occurred in industrial production during that period occurred while the CPI was falling (1932-1933). Between 1933-34, the CPI rose, but industrial production didn’t.

In any case, growth during the New Deal was due primarily to productivity – not labor.