A specter is haunting our economy: stickiness.
Or so some say.
A chief dogma of Keynesianism has it that we suffer from “sticky prices.” By this, Keynesians mean wage rates and other prices that don’t change fast enough for a fast-changing economy.
After the crash of ’29, the story runs, sticky prices prevented the economy from finding a new, lower price level and we were left with idle resources and an “unemployment equilibrium.” That latter term was John Maynard Keynes’s coinage for the unpleasant steady state where some resources (usually labor) wind up underused.
To fight this, Keynesians task governments with pushing money into the system to increase “aggregate demand,” buying up those previously fallow resources.
My trouble with this business about stickiness begins with a historical perspective: Before governments began micro-meddling in the economy, prices seemed less sticky.
The great story about this was told by W.H. Hutt, who noted that, in the early days of pro-union interventionism, Fabian socialist luminary Sidney Webb spat vitriol at the unions of his day (after the Great War) for the unions’ part in maintaining high wage rates in the face of a deliberate deflation. Union recalcitrance caused massive unemployment, and Webb knew it.
Privately, he called the union leaders “pigs.”
Publicly, he said nothing. He couldn’t risk losing union support, though the unions’ demands were causing a major depression.
In America, too, government support for stickiness became the rule, not the exception. After the onset of the Great Depression, President Herbert Hoover orchestrated a behind-the-scenes attempt at a wage freeze, to prevent wages from falling. His successor, Franklin Roosevelt, went further, instituting anticompetitive price fixing schemes using the National Recovery Act, and a vast regime of quota guarantees and price supports for agriculture . . . all this while the country descended into poverty, and the people became increasingly unable to pay the high prices.
It’s no coincidence that our earlier depressions didn’t last as long as the first one that Keynes was able to influence. In their respective first years, the 1920 downturn was worse than the 1929–1930 downturn. By 1923 things were rolling along nicely. That certainly couldn’t be said about the third year of what we now know as the Great Depression — a more than decade-long debacle.