Recently, Scott Sumner had this to say:
Consider the following three dramatic declines in NGDP growth: 1929-30, 1981-82, and 2008-09.
Now think about what the sticky wage model would predict in each case. I’d say a sharp fall in RGDP. And that’s what happened in all three cases. Then what? Here’s where things get interesting. The 1929-30 NGDP decline was followed by an even bigger plunge, so that by early 1933 NGDP was at less than 1/2 of its 1929 peak. In 1983 and 1984 NGDP soared, rising at an 11% rate in the first 6 quarters of recovery. After mid-2009, NGDP grew below trend, roughly 4.2%/year.
Now let’s think about what kind of recovery you’d expect in each case if the sticky wage model was true. I’d expect a further fall in RGDP after 1930. I’d expect very rapid growth in RGDP in 1983-84, and I’d expect modest growth in RGDP in the period after mid-2009.
As the charts bring out, that´s exactly what happened.
Note1: In 1981-82 the Fed´s goal was to bring inflation down from lofty levels. To do that it didn´t “crash” nominal spending; only significantly reduced its growth rate. That was enough, given the inflation expectations at the time, to “crunch” RGDP. Nevertheless, despite the strong rise in nominal spending, inflation expectations shifted down over time. At present, accompanying the feeble rise in nominal spending inflation expectations are also down, and well below “target”.
Note2: The scale in the 1930s is in a league of its own!
Bottom line: Despite all his studies of the “Great Depression”, Bernanke only managed to contain the “scale” of the event (including on the “uptake”)!