WSJ is full of crap

About a week ago, the Wall Street Journal put up this op-ed claiming to prove that boosting aggregate demand (i.e. fiscal stimulus) didn't play a role in ending the Great Depression.  Needless to say, their narrative is based on an embarrassing misreading of the facts.  Uneasy Money pokes holes in their methodology here.  In essence, they either flat out lie about or badly misrepresent the facts to get to their desired conclusion.  The relevant garbage collection:

the version of events offered by Cole and Ohanian is still a shocking distortion of what happened before FDR took office in March 1933.  In particular, although Cole and Ohanian are correct that the trough of the Great Depression was reached in July 1932, when the Industrial Production Index stood at 3.67, rising to 4.15 in October, an increase of about 13%, they conveniently leave out the fact that there was a double dip; industrial production was flat in November and started falling in December, the Industrial Production Index dropping to 3.78 in March 1933, barely above its level the previous July.  And their assertion that deflation continued during the recovery is even farther from the truth than their description of what happened to industrial production.  When industrial production started to rise, the Producer Price Index (PPI) increased almost 1% three months in a row, July to September, the only monthly increases since July 1929.  The PPI resumed its downward trend in October, falling about 9% from September 1932 t0 February 1933, at the same time that industrial production peaked and started falling again.

That is why most observers date the trough of the Great Depression in the US not in July 1932, but in March 1933 when FDR took office in the midst of a banking crisis that threatened to drive the US economy even deeper into deflation and depression than it had been in July 1932. So when Cole and Ohanian assert that recovery from the Great Depression started in July 1932, and go on to say that the recovery took place during a period of significant deflation, it is hard to avoid the conclusion that they are twisting the facts to suit their own ideological predilection.

The misrepresentation perpetrated by Cole and Ohanian only gets worse when they describe what happened during the period of true recovery, April through July 1933.  Contrary to their assertion, deflation stopped in February 1933, the PPI hitting its low point of 10.3.  Prices began to rise as soon as FDR suspended the gold standard shortly after taking office in March (not June as Cole and Ohanian mistakenly assert) 1933, the PPI rising to 11.9 in July (an increase of about 14% over February) when industrial production hit a peak of 5.95, 57% above the March low point.

Cole and Ohanian reply to this call-out by suggesting... that they didn't mean what any reasonable reader would conclude they meant.   Then Brad DeLong points out that this is complete BS.  The relevant part of DeLong's argument.  

Cole and Ohanian say:

Cole and Ohanian Reply: Paul Krugman claims our economic history is in "incredibly bad faith" by showing that industrial output is positively correlated with the wholesale price index. The main point of our op-ed, as well as our earlier work, is that most of the increase in per-capita output that occurred after 1933 was due to higher productivity – not higher labor input…

The first three paragraphs of Cole and Ohanian:

HStimulus and the Depression—The Untold Story: About one-half of President Obama's proposed $447 billion American Jobs Act consists of payroll tax holidays designed to boost spending and increase hiring. But these temporary policies will do little to jump-start the economy, much as earlier temporary economic Band-Aids, such as the 2009 stimulus, did little to improve the economy.

Proponents justify stimulus spending in part based on the widely held view that government-fueled increases in "aggregate demand" during FDR's New Deal ended the Great Depression and brought recovery. Christina Romer, former chairwoman of Obama's Council of Economic Advisers, has argued in op-eds that government should continue to spend for this reason. And in a 2002 speech as a Federal Reserve governor, current Fed Chairman Ben Bernanke claimed that monetary expansion and the turnaround from the deflation of 1932 to inflation in 1934 was a key reason that output expanded.

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 defy anybody to read the first three paragraphs of Cole and Ohanian and not believe that Cole and Ohanian's "main point" is that the level of production is unrelated to aggregate demand--that Romer and Bernanke are wrong in claiming a link. We are told that production "rose nearly 50%… [in] a period of significant deflation". We are told that "despite higher aggregate demand, industrial production was roughly flat…"

If Cole and Ohanian want to delete the first three paragraphs from their op-ed, that would be good.

The proper lesson to be learned here is that the WSJ op-ed authors knowingly mislead their audience.