Queen’s PhD candidate and JDI Student Fellow, Jenny Watt, discusses recent research from the November 4, 2016 Economic History conference at Queen’s.
By Jenny Watt, JDI Student Fellow, Queen’s University
Josh Hausman of the University of Michigan presented a paper on the role that farmers played in the recovery from the Great Depression. The paper argues that an effect called “the farm channel” explains 25% to 50% of the economic recovery occurring in America in the spring of 1933.
The basic idea is that farmers were some of the most indebted Americans at the time of the Great Depression, and economic policies that increased the income of farmers allowed them to significantly increase spending. These indebted farmers had what is known in economics as a high marginal propensity to consume, meaning that an increase in their disposable income led to a large increase in consumption.
The farm channel was not unanticipated by the government. American policymakers specifically pursued policies that raised agricultural prices in the hopes of producing large benefits for farmers.
Though the paper focuses on the American economy, Hausman argues that it can be used to explain the effects of economic policies in other countries. He points to a group of economic policies in Japan referred to as Abenomics.
While the Abenomics policies are similar to those analyzed in his paper, the beneficiaries are quite different. Abenomics is argued to transfer income to large corporations without inducing economic recovery. Hausman argues that Abenomics does not increase economic activity because corporations are only spending a small portion of the income they receive, compared to the 1930s’ farmers who spend a large portion of their increased income.
In short, the farm channel provides evidence that helping indebted consumers may be more important for economic recovery than helping corporations.
That sentiment is particularly relevant for Canada in a time when household debt is rising significantly among mortgage holders, and some experts fear that a housing crash is on the way.
While Canadian policymakers no doubt hope to avoid such a crash all together, Hausman’s research provides valuable insight as to how to design recovery efforts should a crash occur.