What or who started the Great Depression?

Greg Mankiw provides the conclusion from a paper by ULCA economist Lee Ohanian title "What - or Who - Started the Great Depression?" It has some interesting ideas that challenge conventional wisdom about the depression.

Everyone knows that the depression resulted from Herbert Hoover's do nothing approach. Ohanian concludes that:

... the Depression is the consequence of government programs and policies,
including those of Hoover, that increased labor’s ability to raise wages above
their competitive levels. The Depression would have been much less severe in the
absence of Hoover’s program. Similarly, given Hoover’s program, the Depression
would have been much less severe if monetary policy had responded to keep the
price level from falling, which raised real wages.

He contends that the "defining characteristic of the Great Depression is a substantial and chronic excess supply of labor, with employment well below normal, and real wages in key industrial sectors well above normal."

Economic theory would suggest that in a condition of excess labor supply, real wages would fall below normal rather than rising above normal. He concludes that the higher than expected wages resulted from "President Hoover’s program that offered industrial firms protection from unions in return for paying high wages."

Mankiw suggests that this should make everyone think of the macroeconomic effects of card check now before Congress. It was certainly my reaction as I read Ohanian's conclusion. In our present economic situation, increased unionization through card check seems to be the last thing this country needs.

It depends on what "nationalization" means.

Greg Mankiw provides a rational look at what "nationalization" of banks means. True nationalization of our banking system would be a disaster. As Mankiw recognizes, this would lead to the government deciding who is deserving of credit and what projects deserve financing. This would lead to "crony capitalism, where the politically connected get the goodies, and economic stagnation awaits the rest of us."

However, temporary government financing that assists in the reorganization of insolvent banks could restore confidence in the solvency of banking institutions. Some might stimatize this as a "nationalization" of banks. So long as the government gets in and out as quickly as possible, nationalization should not be the term used to describe the process.

The real problem seems to be a lack of certainty as to the value of the many subprime loans. This makes it difficult to know how to value present shares in any reorganization. Mankiw describes this issue: "The government cannot blithely walk into banks and tell them they are insolvent when the banks are saying (pretending? hoping? praying?) otherwise."

Banks and regulators in complete good faith may not know the value of some of the subprime loans and their impact on the solvency of the bank. The key seems to be to find a way to defer final valuation of the assets until they can be determined more accurately while allowing for continuing operations as though there were no question as to the value of the assets.

Government participation in providing guarantees or capital to banks until assets can be reasonably evaluated seems to be the answer. That participation must remain temporary only until a proper reorganization can occur.

Unions won one, but what about the country, President Obama?

Greg Mankiw points to the union win resulting from President Obama's order to permit federal agencies to require union-only labor in contracts. He points out, however, that the win for union workers is bad news for non-union workers, but also bad news for the taxpayer who will pay more for what the government receives from the union contracts.

Mankiw also concludes that "In my judgment, it is bad news from a macroeconomic perspective. As I once learned from Professor Larry Summers, one 'cause of long-term unemployment is unionization.'"

President Roosevelt encouraged unionization under the New Deal. The increased labor costs and reduced business profits, discouraging hiring of employees and expansion of the economy. Obama seems to be going down the road of increased unemployment to pay political obligations to one of his main constituencies, the unions.