Cole and Ohanian replied as Stephen Williamson’s blog as follows:
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.
Several “Market Monetarists” have had a go at Cole & Ohanian (C&O). David Glasner did it in elegant and convincing fashion. Scott Sumner was glad Glasner “demolished” it, Bill Woolsey was “circumspect” and Krugman (a “closet MM”), temporarily forgetting about “peddling” fiscal stimulus, summed it up in strong words:
This goes beyond holding views I disagree with (as does much of what happens in this debate). This is a deliberate attempt to fool readers, demonstrating that there is no good faith here.
The highly misleading paragraph of the C&O article was highlighted and discussed in great detail by David Glasner:
But boosting aggregate demand did not end the Great Depression. After the initial stock market crash of 1929 and subsequent economic plunge, a recovery began in the summer of 1932, well before the New Deal. The Federal Reserve Board’s Index of Industrial production rose nearly 50% between the Depression’s trough…
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