Tariffs and the Great Depression Revisited
Working Paper No. 03-W16
Mario J. Crucini and James Kahn
ABSTRACT [article]
In this paper we revisit the issues addressed in Crucini and Kahn
(1996) in the light of recent research on the Great Depression. In that
paper we had argued that particular features of the Hawley-Smoot tariffs
could have provided them with a stronger impact than conventional wisdom
had held, and we described the magnitudes in a calibrated general
equilibrium model. We suggested that while the tariffs could directly account
for only a small part of the Great Depression, they nonetheless had
a significant, recession-sized impact, "small" only in the context of the
Great Depression. Here we reformulate our arguments in the context of
the business cycle accounting framework of Chari, Kehoe, and McGrattan
(2002) and show that tariff increases in our model correspond primarily to
an increased efficiency wedge in a prototype one-sector model. Moreover,
the efficiency wedge implied by tariffs correlates well with the productivity
wedge measured by CKM. Our model fails to produce a labor wedge
of any consquence, which combined with large empirical estimates of the
labor wedge in the U.S. by Mulligan (2002a) is the basis of his critique of
the role we attribute to tariffs. While we agree that a complete understanding
of the Great Depression will require an accounting for the labor
wedge, its existence does not in any way contradict our case for a modest
e˘ciency effect of the tariff war.