What If the New Deal Never Happenned

[Welf]

While the significance of the possibility of a liquidity trap is disputed, there wasn't a liquidity trap in the US during the Great Depression. The Government could and at times did inflate the currency.

The government, but not the central bank. The Roosevelt administration did implement fiscal policy which is the way out of the liquidity trap. And the abandonment of the gold standard worked by increasing inflation expectations.
And the liquidity trap is not seriously discussed, it is a fact that has been empirically confirmed. We had a liquidity trap the last 5 years in US and EU, and since the 90s in Japan.

By the way, I basically use the definition from wikipedia: "A liquidity trap is a situation described in Keynesian economics in which injections of cash into the private banking system by a central bank fail to lower interest rates and hence fail to stimulate economic growth."

Monetary policy in the late 20s and early 30s wasn't controlled by the government since they still had the gold standard.

The government's monetary policy was to have the gold standard.

Ah, I assumed you meant an active policy.

And wage rigidity isn't necessity something bad. If wages fall after a crisis it can even amplify a recession if it was caused by high private debt. If all wages fall by 20% it means debt to equity ratio increases by around the same percentage.

It also means unemployment increases. From a welfare point of view it is generally better for everyone to lose 20% of their income than for 20% of people to become unemployed and lose their income entirely (which reduces total wages by the same amount anyway, assuming job losses are evenly distributed). Wage rigidity that isn't caused by regulations (including union privilege) is simply a market failure and, while you might be able to find some case in which it's perversely beneficial, it's much more likely to cause problems.

That would only be true in a frictionless market. You can't just replace 1 worker by 1,2 workers. You'd need to reorganize how work is done which itself would mean additional cost. For example, you can't just hire 1,2 musicians to play one song 20% faster. Same goes for many higher level jobs like engineer or manager. And as we currently see, wages are only partly determined by marginal cost and quite a lot by power balance. Work is not a commodity, that is the big
And you ignore the reason for a balance sheet recession. It starts when people reduce their consumption because they want to reduce debt-to-equity ratio. But if their wages and all other prices fall, their equity shrinks and they have reduce consumption again, leading to the next round of recession.

[energiewende]

While the significance of the possibility of a liquidity trap is disputed, there wasn't a liquidity trap in the US during the Great Depression. The Government could and at times did inflate the currency.

The government, but not the central bank. The Roosevelt administration did implement fiscal policy which is the way out of the liquidity trap. And the abandonment of the gold standard worked by increasing inflation expectations.
And the liquidity trap is not seriously discussed, it is a fact that has been empirically confirmed. We had a liquidity trap the last 5 years in US and EU, and since the 90s in Japan.

By the way, I basically use the definition from wikipedia: "A liquidity trap is a situation described in Keynesian economics in which injections of cash into the private banking system by a central bank fail to lower interest rates and hence fail to stimulate economic growth."

I'd be wary of using that definition, because the Keynesian paradigm has largely been replaced. Neo-Keynesianism may recover some of the results but it does it by a much different route. In Japan for instance it's true that monetary (and fiscal, for that matter) policy has failed to recover growth rates but this is because of Japan's declining working age population, not a failure of productivity to rise or high unemployment. QE seems to have been effective in the US and the northern EU.

And wage rigidity isn't necessity something bad. If wages fall after a crisis it can even amplify a recession if it was caused by high private debt. If all wages fall by 20% it means debt to equity ratio increases by around the same percentage.

It also means unemployment increases. From a welfare point of view it is generally better for everyone to lose 20% of their income than for 20% of people to become unemployed and lose their income entirely (which reduces total wages by the same amount anyway, assuming job losses are evenly distributed). Wage rigidity that isn't caused by regulations (including union privilege) is simply a market failure and, while you might be able to find some case in which it's perversely beneficial, it's much more likely to cause problems.

That would only be true in a frictionless market. You can't just replace 1 worker by 1,2 workers. You'd need to reorganize how work is done which itself would mean additional cost. For example, you can't just hire 1,2 musicians to play one song 20% faster. Same goes for many higher level jobs like engineer or manager. And as we currently see, wages are only partly determined by marginal cost and quite a lot by power balance. Work is not a commodity, that is the big

You can keep the same number of workers, and now they have to do the same work for less money. That's unfortunate but the recession means there's simply less money to go around, so it's a fact of life however you choose to distribute the losses. As I understand it the claim of Neo-Keynesianism is that there is wage rigidity in markets even in the absence of policy interventions (may be true, but seems difficult to demonstrate empirically) so that you will always get some involuntary unemployment as a result of recessions. That's roughly what we've seen in US, UK, Sweden, etc. during the current recession. But in the Great Depression unemployment was much higher, and that's because both Hoover and FDR instituted a constellation of policy failures that dramatically drove up wage rigidity and at times suppressed inflation. The only places we see that sort of unemployment today are the Southern Eurozone countries, because of bad monetary policy imposed by the Euro. Those GD-era policy failures certainly could have been avoided and therefore the New Deal would not have become a political necessity. US could have survived 18 months of 10% unemployment, but not 5 years of 20% unemployment.

And you ignore the reason for a balance sheet recession. It starts when people reduce their consumption because they want to reduce debt-to-equity ratio. But if their wages and all other prices fall, their equity shrinks and they have reduce consumption again, leading to the next round of recession.

I don't think I did, I rather disagreed that making some unemployed necessarily reduces aggregate wages less than reducing everyone's wage while keeping everyone in work.

[Welf]

I'd be wary of using that definition, because the Keynesian paradigm has largely been replaced. Neo-Keynesianism may recover some of the results but it does it by a much different route. In Japan for instance it's true that monetary (and fiscal, for that matter) policy has failed to recover growth rates but this is because of Japan's declining working age population, not a failure of productivity to rise or high unemployment. QE seems to have been effective in the US and the northern EU.

Classical Kenianism had a comeback the last years, partly because QE wasn't very effective. The recovery in the US has been very slow and isn't even close to get to the old growth path. In the EU zone the northern countries have an advantage because they have an undervalued currency and can export to the southern Euro countries and third countries at a lower price.

You can keep the same number of workers, and now they have to do the same work for less money. That's unfortunate but the recession means there's simply less money to go around, so it's a fact of life however you choose to distribute the losses.

That's not a fact, the idea of fiscal and monetary policy is to not have a fall in income.

As I understand it the claim of Neo-Keynesianism is that there is wage rigidity in markets even in the absence of policy interventions (may be true, but seems difficult to demonstrate empirically) so that you will always get some involuntary unemployment as a result of recessions. That's roughly what we've seen in US, UK, Sweden, etc. during the current recession. But in the Great Depression unemployment was much higher, and that's because both Hoover and FDR instituted a constellation of policy failures that dramatically drove up wage rigidity and at times suppressed inflation. The only places we see that sort of unemployment today are the Southern Eurozone countries, because of bad monetary policy imposed by the Euro. Those GD-era policy failures certainly could have been avoided and therefore the New Deal would not have become a political necessity. US could have survived 18 months of 10% unemployment, but not 5 years of 20% unemployment.

Hoover implemented a brutal policy of liquidation and nothing to support unemployed, he only stayed on the gold standard. The reforms of Roosevelt started years later and they were only basic help for workers.
Also I see a problem with your argument: why is less wage rigidity and more inflation at the same time required? If you have flexible wages you can keep at same inflation level and simply have the wages fall. If you have wage inflation you get more employment by more inflation.

I don't think I did, I rather disagreed that making some unemployed necessarily reduces aggregate wages less than reducing everyone's wage while keeping everyone in work.

I don't think you did, and you didn't explain how it can work without in a world with frictions.
Example: you have a guy earning 60.000 USD in a accounting job. Now you cut his income to 50.000 USD and hire another guy for the rest. Now you have to buy a computer, set up his account in the system, get him training for the first days, prolong meetings so he can talk with co-workers, spend time to allocate duties for him. That costs time and money, and time is money, too. If you still want to spend only 60.000 USD you can't pay the new guy the remaining 10.000 USD.
Also, the old guy now can spend less, leading to layoffs at the places he used to shop. Since I assume a balance sheet recession that means old guy was underwater with his debt. Now he has less income and thus less equity, leading to higher interest at the bank, further reducing demand. The new guy could offset the decreased consumption spending from decreased income, but he can't offset the decreased spending from the higher interest spending. And he won't even do the former, since he will try to save his money because he is afraid of losing his job (unless there is good unemployment insurance, then he can expect a stable level of income).