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 of July 1932 and June 1933. This was a period of significant deflation. Inflation began after June 1933, following the demise of the gold standard. Despite higher aggregate demand, industrial production was roughly flat over the following year.
I choose to highlight the next paragraph of the C&O article (my bolds):
The growth that followed the low point of the Depression was primarily due to productivity. Productivity is considered a supply-side factor by many economists: It is determined by the technology and regulatory structure of the economy and therefore is largely independent of spending policies.
I find it must have been just “coincidence” that productivity would rise at the very same moment that aggregate nominal spending revived! The figures show (monthly data for the 1930s courtesy of David Beckworth) that as soon as monetary policy became expansionary in March 1933 spending took off, narrowing the “gap”. If only MP were as expansionary following the trough of the “Great Recession”, things would be very different by now!
The next set of figures show that things only improve when money supply changes. Following a strong rise in money demand (fall in velocity) reinforced by a decrease in money supply, the latter has to rise by more than the increase in velocity. At present, money supply should be growing much faster than what is in fact observed. That´s the only way spending growth will rise to narrow the “gap”.
I find the “monetary story” much more compelling than the “productivity story” told by C&O. Moreover, you don´t have to “fudge” dates!
Note: The story stops in 1936 because in 1937 both the Treasury and the Fed took actions to tighten MP. The Treasury by sterilizing gold inflows (as recounted by Douglas Irwin) and the Fed by not “interfering” and by thinking it suitable to increase required reserves. And fiscal policy was also contractionary. So, a “triple whammy”!
Update: Via Steve Williamson, C&O reply:
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.
Fine, no one contests the deleterious effect of many New Deal policies. The MM point of view is that, despite NIRA and such, the turnaround only came when MP went into “high gear”. That´s exactly what´s missing today, worsening the economic predicament.