Staff Report, Federal Reserve Bank of New York 172
Drawing on recent business cycle research on the Great Depression, we return to an argument we advanced in a 1996 article in the Journal of Monetary Economics—the argument that features of the Hawley-Smoot tariffs could have done more to decrease economic activity than is customarily believed, though not enough to account for the severe decline of the early 1930s. Here we reformulate our argument in a business cycle accounting framework that apportions fluctuations between three types of wedges: (productive) inefficiency, the consumption-leisure margin, and intertemporal inefficiency. Tariff increases in our model correspond primarily to productive inefficiency in a prototype one-sector model. Moreover, the wedge implied by tariffs during the Depression correlates well with the overall measure of productive inefficiency. Our model fails to produce a labor wedge of any consequence—persuasive evidence that factors other than tariffs also contributed significantly to the severity of the Depression.