This left me thinking about exactly who had the inflationary/deflationary expectations. As I understand it, deflationary expectations lead to a deferral of consumption in the expectation that prices will lower. I have a hard time imagining the ordinary British or American worker of the 30s deferring consumption - food and rent consumed almost all their wage, and this becomes more true as wages were cut. So whose consumption was deferred? Who was expecting lower prices for what? Put off breakfast today because it will be cheaper tomorrow?
You are very right, of course, but it is investment, not consumption, that we usually think of as the main lever in this case. In the simple IS-LM, for example, you have deflationary expectations -> higher real interest rate -> lower money demand -> lower investment -> lower aggregate demand.
OK. But investment does not generally expect an immediate return, and depressions arrive quite suddenly - in months not years. One would expect a considerable lag. Also 'aggregate demand' here needs unpacking. If wages are cut demand will be lower - but which comes first? The demand for food, the need to pay rent will be constant, so that demand follows wages. In a way I'm endorsing Temin's point: this is a political problem, primarily around on where the costs fall.
This is where thinking in terms of macroeconomic models is helpful, at least to clarify many of these points. But anyway, what we are thinking about are investment decisions, not returns per se, and the main aggregate demand channel is thus employment.
Also, what Temin is interested in with expectations is not so much what causes the demand shock, but why recovery does not occur/occurs very slowly. Again, what matters here are investment decisions.
I can't but feel that 'investment decisions' is a bland cover for a political tussle. JW Mason (Money and Things Blog) had a recent post on New York housing. Essentially, he argues that landlords over-borrowed in the expectation that they could raise rents by a lot. When this did not happen, the issue becomes on whom the fallout of this misjudgment bears: the renter, the landlord or the lender. A depression or recession raises the same issue - solved via Keynes in one way (government invests) and then Greenspan, Bernanke and other central bankers in another - lend furiously, recoup later. So avoiding the snake-tail and politics issues of cutting wages, hence income, purchases, capacity, investment ....
Regarding your final sentence, I'm no economist, so I can more easily imagine a budding financial crisis than a deflationary spiral. Where would that come from?
Would it be fair to say Temin’s story runs from political/geopolitical pressures to a shift in the policy regime (not just policy actions), which then reshapes expectations and drives the macro outcome?
This left me thinking about exactly who had the inflationary/deflationary expectations. As I understand it, deflationary expectations lead to a deferral of consumption in the expectation that prices will lower. I have a hard time imagining the ordinary British or American worker of the 30s deferring consumption - food and rent consumed almost all their wage, and this becomes more true as wages were cut. So whose consumption was deferred? Who was expecting lower prices for what? Put off breakfast today because it will be cheaper tomorrow?
You are very right, of course, but it is investment, not consumption, that we usually think of as the main lever in this case. In the simple IS-LM, for example, you have deflationary expectations -> higher real interest rate -> lower money demand -> lower investment -> lower aggregate demand.
OK. But investment does not generally expect an immediate return, and depressions arrive quite suddenly - in months not years. One would expect a considerable lag. Also 'aggregate demand' here needs unpacking. If wages are cut demand will be lower - but which comes first? The demand for food, the need to pay rent will be constant, so that demand follows wages. In a way I'm endorsing Temin's point: this is a political problem, primarily around on where the costs fall.
This is where thinking in terms of macroeconomic models is helpful, at least to clarify many of these points. But anyway, what we are thinking about are investment decisions, not returns per se, and the main aggregate demand channel is thus employment.
Also, what Temin is interested in with expectations is not so much what causes the demand shock, but why recovery does not occur/occurs very slowly. Again, what matters here are investment decisions.
I can't but feel that 'investment decisions' is a bland cover for a political tussle. JW Mason (Money and Things Blog) had a recent post on New York housing. Essentially, he argues that landlords over-borrowed in the expectation that they could raise rents by a lot. When this did not happen, the issue becomes on whom the fallout of this misjudgment bears: the renter, the landlord or the lender. A depression or recession raises the same issue - solved via Keynes in one way (government invests) and then Greenspan, Bernanke and other central bankers in another - lend furiously, recoup later. So avoiding the snake-tail and politics issues of cutting wages, hence income, purchases, capacity, investment ....
Sorry for suggesting again Mary O'Sullivan work: an interesting follow-up to your post where Temin's Great Depression explanation is widely discussed: https://onlinelibrary.wiley.com/doi/pdf/10.1111/ehr.13117
It was without saying how much I enjoy reading your writing!
Thank you, will read with urgency!
Regarding your final sentence, I'm no economist, so I can more easily imagine a budding financial crisis than a deflationary spiral. Where would that come from?
I agree! Temin’s point is that political tensions can make the unthinkable, thinkable. My point is just that we might keep that in mind today :)
Would it be fair to say Temin’s story runs from political/geopolitical pressures to a shift in the policy regime (not just policy actions), which then reshapes expectations and drives the macro outcome?
Yes, I’d say so!