Paul Lee
Brad DeLong finds “coherence” in the Greenwald-Stiglitz Depression model. The following isn’t Brad DeLong’s entire summary of Greenwald-Stiglitz, but it gets at the central assumption: However, even though I do not fully buy it I do think I understand the argument.
And I do not think it is incoherent.As I understand the Greenwald-Stiglitz hypothesis–about the Great Depression as applied to agriculture and about today as applied to manufacturing–it goes like this:Rapid technological progress in a very large economic sector (agriculture then, manufacturing now) leads to oversupply and steep declines in the sector’s prices. Poorer producers have less income. They come under pressure to cut back their spending. Others–consumers–are now richer because they are paying less for their food (or their manufactures), but their propensity to spend is lower than that of the stressed farmers or ex-manufacturing workers.Moreover, the oversupply of agricultural commodities (or manufactured goods) means that only an idiot would invest at their normal pace in those sectors.
I Don't Fully Buy Stiglitz's Argument That Our Macro Problems Have Deep Structural Roots. But I Do See Its Coherence. Truth is, I don't understand all the hating on the Vanity Fair Stiglitz piece, "A Banking System is Supposed to Serve Society, Not the Other Way Around".
Perhaps I am giving Joe too charitable a reading. But I really do not see a serious analytical problem. Not that I buy the argument--I don't think that our macro problems today have deep important structural roots in the decline of manufacturing due to its rapid productivity growth, and I don't think that a massive governmental borrow-and-spend program is the only way out (but Stiglitz may be right in his claim that it would be the best way out). However, even though I do not fully buy it I do think I understand the argument. And I do not think it is incoherent. As I understand the Greenwald-Stiglitz hypothesis--about the Great Depression as applied to agriculture and about today as applied to manufacturing--it goes like this: Now at this point I disagree with Greenwald-Stiglitz. Two conclusions…. Stiglitz does say that (c) is best: Joseph Stiglitz: “A Banking System is Supposed to Serve Society, Not the Other Way Around”
What this transition meant, however, is that jobs and livelihoods on the farm were being destroyed.
Because of accelerating productivity, output was increasing faster than demand, and prices fell sharply. It was this, more than anything else, that led to rapidly declining incomes. Farmers then (like workers now) borrowed heavily to sustain living standards and production. Because neither the farmers nor their bankers anticipated the steepness of the price declines, a credit crunch quickly ensued. Farmers simply couldn’t pay back what they owed. The cities weren’t spared—far from it.
The value of assets (such as homes) often declines when incomes do. Given the magnitude of the decline in farm income, it’s no wonder that the New Deal itself could not bring the country out of crisis. The Agriculture Adjustment Act, F.D.R.’s farm program, which was designed to raise prices by cutting back on production, may have eased the situation somewhat, at the margins. Business cycles: In search of a theory of deep downturns.
Getting started.