Conservatives better hope that wages and prices are sticky

Source: EconLog
by Scott Sumner

"I believe that a combination of sticky wages and monetary shocks produce most of America's economic slumps, including the Great Contraction of 1929-33, as well as other big recessions like 1920-21, 1937-38, 1981-82 and 2008-09. I do not believe the capitalist system is 'inherently unstable' and that big government is needed to stabilize it, rather I believe that it is naturally stable, as long as bad monetary policy doesn't interact with wage stickiness to produce business cycles. But suppose it were shown that I am wrong, and that wage/price stickiness is not an issue — what then? That would be very bad news for my laissez-faire ideology. Now I'd have to concede that events like the Great Contraction of 1929-33 showed that capitalism is indeed inherently unstable, and that this problem could not be fixed with good monetary policy. Now I'd have to entertain other solutions, such as big government and or comprehensive economic planning." (03/25/17)