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Persistence of Depression. Note : GDP, consumption, investment, and hours w orked all remain significantly below trend throughout the 1930s. Productivity quickly returns to trend. Manufacturing wages remain significantly above trend throughout the 1930s. Puzzles.
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Persistence of Depression Note: • GDP, consumption, investment, and hours worked all remain significantly below trend throughout the 1930s. • Productivity quickly returns to trend. • Manufacturing wages remain significantly above trend throughout the 1930s.
Puzzles • Why was the recovery so weak? • Why did the real wage remain so high?
National Industrial Recovery Act • Passed as part of 100 days (June 1933); later ruled unconstitutional Supreme Court (May 1935) • Created National Recovery Administration (NRA) to foster codes of “fair” competition. • Designed to combat deflation by boosting prices/wages (excessive competition, rather than monetary contraction, was thought to be responsible for falling prices/wages and depression). • Allowed industries to cartelize and raise prices (in return for raising wages, permitting collective bargaining, etc.). • By 1934, NRA covered over 500 industries – accounting for nearly 80% of private, nonagricultural employment. • After Supreme Court struck down NIRA, same ends were pursued with National Labor Relations Act (July 1935) and loose anti-trust enforcement.
Impact on Wages • Manufacturing, bituminous coal, and petroleum sectors were covered by the policies (rising wages). • Anthracite coal and farm sectors were not covered by policies (falling wages)
Impact on Prices • Relative prices of fixed and durable investment goods rose. • Prices of investment goods typically falls during recoveries.
Research Strategy • Use a dynamic general equilibrium model (“real business cycle” approach). • Include cartelized sector (intermediate good) and competitive sector. • Parameterize model and run simulation for 1934-1939. • Compare time path of output with (i) no cartelization (competition), (ii) presence of some cartelization to actual path of output. • Results: New Deal cartelization policies are a key factor behind the weak recovery, accounting for about 60% of the difference between actual output and trend output.
