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Thomas Sowell has repeatedly made the case that government intervention is largely responsible for the Great Depression. For example, he notes what happened with the unemployment rate in the months after the stock market crash of 1929. Based on Out of Work by Vedder and Gallaway (alternatively available through JSTOR), page 77, one sees that the unemployment rate went from 5% (Nov. 1929) to 9% (Dec. 1929) and down to 6.3% (June 1930). It is then that Hoover signs the Smoot-Hawley Tariff Act, which Sowell contends is the first cause of the Depression. He then notes that by December 1930, the unemployment rate had shot up to 14.4%. Furthermore, aside from minor fluctuations in early 1931, the unemployment rate dips just below that 14.4% figure in 1936, but that is still the unemployment rate in December 1939.

I'm wondering what alternative factors or explanations could explain the quick increase to the unemployment rate followed by a decrease that approaches the previous numbers and then the marked and sustained increase, or if such alternatives even exist.

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  • $\begingroup$ Unemployment is typically a significantly lagging economic variable, and it is arguable that what happened in the Wall Street Crash took a year to feed through to employment. In addition US unemployment was also affected by other countries increasing their tariffs $\endgroup$ – Henry Aug 8 '17 at 20:01
  • $\begingroup$ Henry Yes, I would suspect that a "tariff war" would have an impact, which would seem to support Sowell's assertion. But it seems strange that the unemployment rate would shoot up immediately after the crash, then come back down in a short timespan, and then the subsequent surge was a result of the crash a year prior. $\endgroup$ – Pistol Pete Aug 8 '17 at 20:19
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One caveat to the author you refer to, Thomas Sowell is a staunchly conservative economist, so most arguments you hear from him will stick to the Econ 101 wisdom that government intervention is usually bad, tariffs are always bad (to be fair, it is hard to use them to correct externalities for global "public goods"), etc.

Although tariffs probably were not necessarily the right choice for a tightening economy, the general story is that our central bank in America back then was a lot less independent from politics and less knowledgeable of how to deal with liquidity crises. It ended up tightening monetary policy instead of loosening it to ease the economic contraction, exacerbating employment problems for a long time. Keep in mind as well that this period of unemployment over 10% lasted for over a decade or so; it's not quite feasible to tell what all the factors were that caused the high unemployment, especially without official data on unemployment for a lot of that period.

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  • $\begingroup$ So, going off your second paragraph, you side more with Milton Friedman's view of the Depression? My main question is what other proposals explain the initial increase, followed by a return to near the starting point, and then the immediate increase of the unemployment rate if Sowell's idea on the Smoot Hawley tariffs is wrong? And while it is true that we don't have official unemployment data, the estimate in Out of Work seems to be an accurate estimate, given the high $R^2$ value. $\endgroup$ – Pistol Pete Aug 9 '17 at 16:56
  • $\begingroup$ If you're talking about the very beginning, well, when the collapse happened, there were plenty of bank runs that collapsed local banks that didn't have insurance backed by the central bank back then. Those banks affected industry and the supply of jobs, but also made people broke because they lost all their savings to this and in many case, lost savings because they would leverage a mortgage or something fancy to buy stocks (all this you imagine can exacerbate unemployment length). $\endgroup$ – Kitsune Cavalry Aug 11 '17 at 15:10
  • $\begingroup$ Yes, I don't imagine that that would help matters, but I would think that any impact that would have had would have been manifest in the unemployment spike of November-December 1929, as opposed to subsequent spikes in unemployment. $\endgroup$ – Pistol Pete Aug 12 '17 at 3:30

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