March, 2000, Vol. 123, No. 3
from the Depression
Book reviews from past issues
Lessons from the Depression
The Economics of the Great Depression. Edited by Mark Wheeler. Kalamazoo, MI, W.E. Upjohn Institute for Employment Research, 1998, 211 pp.
What do people know about the causes of the Great Depression? We certainly know that the era altered the lives of everyone who experienced it, but it is difficult to recognize how bad those times were in comparison to more recent periods. Certainly unemployment was high and there were dramatic efforts to improve the economy in the 1930s, but what policy lessons can be learned to help us avoid or recover from such tremendous economic shocks in the future? Politicians, economists, and writers have studied these issues for decades, but what insights do modern economists have to share on the topic?
The Economics of the Great Depression is a collection of academic papers discussing what happened and what we can learn from the Great Depression. The six authors provide a mix of approaches and views into the causes of the event, and their differing interpretations of data, events, and policies reflect a wide range of economic thinking. Some of the essays are historically oriented—what happened and what was thought at the time; others relate to the present situation—what actions were taken and what policy lessons are useful for today. The authors used investment analyses, econometric methods, and review of public microdata records to address the subject. The arguments offered are concise and thought provoking, although they are couched in the technical jargon of the economist.
As might be expected, there was a range of analytical approaches to the issue. One historical study looked at characteristics of the unemployment and those who were unemployed during the Great Depression. Unemployment episodes during the Depression were much longer than previously and many episodes lasted for more than a year. As well, those who were unemployed for these long periods tended to be either younger workers or older workers, and workers with fewer skills and less education. Another essay noted that the severity of the Depression varied by industry and region in the United States, and even among countries. Although aggregate output and employment declined, there were increases in both output and employment for some consumer industries. Further, the Depression was less severe in Southern States than in some other parts of the country such as in the Northwest and the Central States. As well, the decrease in international trade forced many less-developed countries to shift emphasis away from raw-material exports and toward industrialization for internal consumption. Thus, the Great Depression affected different areas in different ways.
Some of the papers examined the root causes of the Great Depression. One economist analyzed a number of theories that sought to explain the length and severity of the Depression, such as collapse of the financial markets, government and Federal Reserve policies, and economic maturation. Another used econometric modeling to test a number of possible causes, although it determined no dominant explanation. A study by David C. Wheelock examined the impact of policies developed during the Great Depression on more recent actions of the Federal Reserve. He specifically cited the impact of 1930s changes to currency requirements that led to a Federal Reserve bias toward inflationary monetary policies in the 1960s and 1970s.
Economist Stephen Cecchetti proposed that deflation, itself a result of the significant economic downturn, explained several other behaviors and effects of the Great Depression. Deflation decreased the value of real goods and especially hurt those who were heavily invested in such goods, including factory owners, landowners (such as farmers) and lenders (such as banks). It also led to a desire to maintain assets in cash, leading to bank runs and cash hoarding. Cecchetti suggested a key lesson from the Great Depression is that deflation leads to such catastropic consequences that policy-makers should avoid it at all costs.
It is no surprise that there was no firm agreement as to the reasons for the Great Depression among these six economists. Further, because of the technical language, this book is no casual read. Nonetheless, it increases the economic understanding of the Great Depression and its causes. It rigorously examines various explanations for the Depression, shows weaknesses in the simple answers often given for it, and provides some policy lessons for the future. Thus, it is a worthwhile addition to the vast literature concerning the Great Depression.
Stanley W. Suchman
Bureau of Labor Statistics
Kansas City Region
Income Inequality in America: An Analysis of Trends. By Paul Ryscavage. Armonk, NY, M.E. Sharpe, Inc., 1998, 229 pp. $56.95, hardcover; $22.95, paperback.
With the U.S. economy approaching the longest uninterrupted expansion on record, unemployment and inflation at their lowest levels in decades, and real earnings growing after years of stagnation, it may seem an odd time to write a book about income inequality in America. Yet, despite rosy economic conditions overall, not all Americans are riding the current wave of economic prosperity. Millions remain in poverty. Constant restructuring in the U.S.
economy has displaced many workers from "middle class" jobs once considered secure, and some workers must settle for contingent jobs, which by definition may not be there for them tomorrow.
Against this setting, Paul Ryscavage (who formerly worked for both the Bureau of Labor Statistics and the Bureau of the Census) has written Income Inequality in America. It is accurately billed as a primer on income inequality. The book is well-written, readily understandable, and comprehensive. It provides an overview of the data, tools, and techniques used to gauge income inequality and a thorough assessment of income inequality trends in the United States. The book includes a discussion of some of the latest thinking on the underlying causes behind the growing earnings and income inequality of recent decades, and also compares the U.S. experience with that of other industrialized nations.
Ryscavage recognizes at the very outset of his book that the topic is "provocative." The subject provokes controversy among economists because even though there is a general consensus that the distribution of income in America has become more polarized in recent decades, there is comparatively little agreement on the answers to questions that naturally follow. How much has income inequality grown? Is it still growing? What are the underlying causes? If growing income inequality is a bad thing, as is widely assumed, what are the policy prescriptions that can reverse the trend? In his book, Ryscavage sifts through the data and the literature to provide some answers to the first three questions, but deliberately steers clear of the much more politically-charged debate over the merits and limitations of various policies designed to address growing income inequality.
The subject is also provocative, if not overtly so, for many "main street" Americans—persons who have not studied the issue but have nevertheless sensed that something is happening to the distribution of income in the country. They see it when the local shoe factory closes or when the bulldozers turn the family farm down the road into an expensive housing development. Their perception is fueled further by news stories recounting the enormous pay packages awarded to business executives and professional sport figures, juxtaposed with daily announcements of mass layoffs. Unfortunately, laypersons attempting to square their perceptions of income inequality—commonly thought of in terms of the declining middle class—with actual facts and figures may be discouraged by complicated and sometimes contradictory stories on the topic. Getting a fix on the "truth" is made even more difficult by the polemical tone that pervades much of the discussion.
Income Inequality in America does a good job of summarizing what is known, as well as what is not known, about income inequality. Perhaps most importantly, the information is presented in an apolitical, unbiased manner. Although the subject matter is technical by nature, persons with a nontechnical background also can learn from this book. It is a good resource for anyone interested in studying the issue.
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