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What are the lessons from the New Deal?
This week they put my Sunday column on the web on Friday; I was alerted by the ever-vigilant Mark Thoma. The intro is this:
The traditional story is that President Franklin D. Roosevelt rescued capitalism by resorting to extensive government intervention; the truth is that Roosevelt changed course from year to year, trying a mix of policies, some good and some bad. It’s worth sorting through this grab bag now, to evaluate whether any of these policies might be helpful.
If I were preparing a “New Deal crib sheet,” I would start with the following lessons...
The conclusion is this:
In short, expansionary monetary policy and wartime orders from Europe, not the well-known policies of the New Deal, did the most to make the American economy climb out of the Depression. Our current downturn will end as well someday, and, as in the ’30s, the recovery will probably come for reasons that have little to do with most policy initiatives.
Read the whole thing. For critical responses, perhaps you can try the comments section at Mark Thoma's. For reasons of space, it was not possible to specify that I was praising the proposed Obama middle-class tax cut. I do not, however, think it will do much (if anything) to end the current recession, although tax hikes could make things worse.
Posted by Tyler Cowen on November 22, 2008 at 07:40 AM in Economics, History | Permalink
Comments
I agree with most of what you say in your column. Perhaps you should have stressed first how different current policies and the regulatory framework are today in comparison with the early 1930s, and then the implications of these differences for policymaking and in particular how much they limit the range of good policies that can be implemented. I'm afraid that by ignoring these implications, most new policies will turn out to be bad. I've just read that earlier today Obama announced a goal of creating 2.5 million jobs in two years without saying anything on how he plans to do it--apparently he has yet to learn that grown-up people don't announce goals without saying how to get them (he may think he's still running for President).
Posted by: E. Barandiaran at Nov 22, 2008 8:08:35 AM
Will a non-gated version be published on the IHT site (iht.com)?
(Yes, I realize registration is free, just can't stand registration requirements for non-essential news sites, like the NYT and WaPO.)
Posted by: at Nov 22, 2008 8:17:09 AM
You are praising a policy to put millions more Americans on the Federal dole under the guise of a "tax cut"? You know these are just transfer payments to low income earners, right?
Posted by: Matthew C. at Nov 22, 2008 8:24:29 AM
From the first comment on Thoma's post:
Aye yai yai! Yet another attack on the 'New Deal?'
I thought professor Krugman had soundly debunked the right's critique of the New Deal.
...
How does Tyler boy expect us to do this without 'government intervention'?
First, it's "Ai yi yi!"
Second, when did Tyler become "the right"? I was under the impression that Tyler was a small "l' libertarian. Not the same things as "the right". (Although libertarians are often right, i.e., correct.)
Third, Tyler is not a boy.
Fourth, I don't recall Tyler ever saying "no government inetrevention".
This first commenter led me to wonder if most of the commenters on Thoma's site are illiterate?
Posted by: at Nov 22, 2008 8:28:03 AM
The really amazing thing is how everybody is revisiting the New Deal. Imagine a Rip Van Winkle who took a cat nap for just the last 5 years ... to wake up and find the market down and Dew Deal options in vogue.
I sure hope this is excess preparation, and not as I fear, that too many economists think we are 30's style policy for a 30's style economy.
Wheres Alex? Maybe I'll take "there is no credit crisis" after all!
Posted by: odograph at Nov 22, 2008 8:33:19 AM
This first commenter led me to wonder if most of the commenters on Thoma's site are illiterate?
You'll notice that Tyler said "For critical responses, perhaps you can try..." With the emphasis on "perhaps".
Posted by: at Nov 22, 2008 8:38:11 AM
It's very hard to do but you get out of a deflation depression by dispersing people to the countryside to grow food. There they engage in honest labor and save money (build savings) for a new economy
This happened during the great depression. War also disperses men to the countryside and bare living conditions. WW2 -- that meant dispersal to the periphery meaning foreign nations to fight
Deflationary depressions sober people up while inflationary depressions connote chaos and degeneracy. Inflationary depressions make for a lot of fast buck artists as people frantically buy and hedge against their diminishing in value savings. The psychology is 180 degrees different than in a deflationary depression
Posted by: dennisw at Nov 22, 2008 8:47:33 AM
Hey this is a great column! Nice one. Most people don't have a good outline to the ND, and you provided a fair one. Kudos!
I know you are limited to space in a single column, but it would be really nice to see a much longer treatment of this topic. As a country, we are entering a period where we might be facing something like the great depression. You would do the country a favor to write a longer treatment that goes into detail about each of of these points.
I don't see anything here about magnitude of effectiveness among the different topics discussed.
I also don't see anything about where the increase in the money supply was targeted. It would be very useful to break out where funds were spent/given/increased, what groups were given money, and the relative effectiveness of each program. For example, on the day of the crash, the fed bought 5X its' legally allowed amount of treasuries in an attempt to inject cash into the system. It clearly didn't have much of an effect. Money going into a bank and into the hands of people are two different styles of increase in the money supply, and have different consequences.
I disagree about the tax cuts - in the long run they will make for a more stable capitalism, and as you say, it is a marginal revolution.
We should suspend payroll taxes today.
Posted by: mickslam at Nov 22, 2008 9:21:15 AM
The first commenter on Thoma's post is indeed a loon. But the second is a gem as well: an unrepentant Keynesian who says things like...
If the government raises taxes during a recession, the worst thing that would happen is neither a stimulus nor a contraction of the economy. One form of spending is simply replaced by another. Tax hikes are NEVER CONTRACTIONARY.
Uh, there is a big difference between what people spend and what government spends. People spend money on things people want. Government, in general, spends money on things people don't want.
Recovering from a recession or depression requires retooling the economy to produce things that people want. Taking money from those who buy what people want to be spent by planners who neither know nor really care what people want is entirely destructive of those ends.
Posted by: MikeP at Nov 22, 2008 9:25:19 AM
imho, the real lesson here is that experimentation and willing to move on from bad ideas makes a great president. FDR tried a variety of New Deal ideas. Lincoln tried a variety of generals. Bush II 'stayed the course'. So let's that whatever policies Obama tries that he is willing to observe and learn from the results and adjust course accordingly.
Posted by: DK at Nov 22, 2008 9:46:19 AM
Hi Tyler,
Learned a few things reading it but felt it was too short and didn't have
anything more than neat summarizations.In future, can you put up any longer, unedited drafts here so that we can read the more detailed version.
Thanks
Posted by: RV at Nov 22, 2008 10:21:52 AM
Learned a few things reading it but felt it was too short and didn't have anything more than neat summarizations. In future, can you put up any longer, unedited drafts here so that we can read the more detailed version.
I second that.
Posted by: at Nov 22, 2008 10:24:43 AM
The Obama tax plans are bad because they create extra layers of complexity and distort incentives. Plus they give politicians the ability to be social engineers with the tax code. Leaving Pelosi, Franks, Dodd, Waxman et all in charge of "planning" for America is enough to give you a fright.
I am amazed that some critics still think that the path to prosperity is to tax and spend. You just have to tax people you don't like and spend it on things you do like?
FDR spending efforts were more political then economic. The CCC was designed, in part, to get unemployed inner city youths off the streets. Fear of social unrest was very real. Chicago had, by some estimates, a 50% unemployment rate. Many citizens were afraid that the social contract would fall apart, replaced with increasing crime and possible riots. Don't forget that many big cities in America had race riots in 1919, due in part to unemployment after WW1.
Some of the New Deal jobs programs were about dealing with people like Huey Long, you wanted to push the country to the extreme. As economic policy, the New Deal is highly suspect. If you view these policies as a pressure valve on the society, they may have worked a little better.
Still, there is no evidence that simply spending and then taxing is of much help. Helping the economy quickly reallocate resources into productive activities helps. (This is a big reason why restrictive monetary policy is so hurtful.) But the kind of social engineering that the Democrats in Washington are talking about will dramatically hurt growth prospects.
We can hope. Obama the peace candidate is placing war hawks in key positions. Obama the Social Democrat is placing some center right advisors on economics. Obama has always been a rather empty suit that people projected what ever they wanted to project upon him. I really don't know what a President Obama will do on many of these issues. The current Obama seems very different from the candidate Obama, or even the Senator Obama. He ran to the left of Hillary now he is ?????
Posted by: DanC at Nov 22, 2008 10:31:30 AM
Tyler, my understanding of the Great Depression's early monetary policy was that the monetary base actually expanded, whereas the money supply contracted because so many banks were failing.
Am I incorrect?
Posted by: Robert Olson at Nov 22, 2008 10:34:11 AM
DanC, where would you honestly judge the complexity of American taxes in 2008, and their distortion on incentives?
Call it 100. Call Obama's changes 105. Big deal.
I'm afraid it's a weak argument to begin "let's all pretend we are starting with a free market." Or "let's pretend the Bush Administration left us with a simple and uniform system of individual and corporate taxes."
Or to pretend that we aren't coming off 75 years of "social engineering" ... engineering that did not really lag at all in the last 8 years ... it just changed direction. How many freaking billion went to Halliburton?
Posted by: odograph at Nov 22, 2008 11:02:42 AM
The point that needs to be made is that the expansionary monetary policy in 1933 was a product of policy moves by the White House and the Treasury, not the Fed.
Throughout the 1933-38 era the administration was fighting a strong head wind of continued tight monetary policy by the Fed. What bothers me about all the depression analysis is that all the focus is on monetary policy until 1933 but after that monetary policy is essentially ignored. Yet, it was still a major negative factor in the economy in the 1933-39 period. You hint at this in your article, but do not go into it in any detail.
Posted by: spencer at Nov 22, 2008 11:23:51 AM
Tyler, much of this commentary rings true, but I'm kind of shocked that you don't mention the single most obvious and significant fiscal and monetary fact of the war years: extraordinary government (deficit) spending.
Mark Thoma and a zillion other economists have pointed to that spending as the item that finally broke the depression's back.
http://edgeofthewest.files.wordpress.com/2008/11/pic09961.jpg
Perplexed.
Posted by: Steve Roth at Nov 22, 2008 11:43:41 AM
Actually, what ended the Great Depression in the U.S. was the halving of government spending due to the end of the War, releasing spending and saving to the market and allowing the necessary adjustments to complete. Of course, your unemployment numbers will look better if you take all the unemployed and send them to another country to kill or be killed; and GDP looks better when you add in spending for weapons you are going to destroy and destroy property with them. Are we trying to improve statistics or the actual standard of living?
Posted by: Shane Chubbs at Nov 22, 2008 12:23:13 PM
Perplexed?
During the War spending was up, deficits were up, employment was up, production was up. Economic models based on such numbers will show a "recovery".
Yet household consumption was down, with rationing a part of daily life. That is not recovery. The purpose of an economy is not to make jobs: it is to satisfy individual demands. Jobs and productivity are only a means to that end.
Consider the limit of the war economy: every worker either builds material to be shipped overseas and destroyed or goes with the material to destroy it himself. Everyone is employed, but store shelves are empty. As a bonus, since there isn't anything for any civilian to buy, you can pay them whatever you want.
Posted by: MikeP at Nov 22, 2008 12:42:31 PM
Could someone please post or cite some numbers on monetary policy 1929-39. The charts (not numbers) that have been posted show very smaller federal deficits resulting from higher spending almost offset by higher taxes.
What cannot be true is that wartime orders from overseas pulled the US out of the depression as growth was recovering very rapidly before 1939; per capita income in 1939 was back at its 1929 level and presumably would have been back in 1938 were it not for an unfortunate tax increase.
Posted by: Thomas at Nov 22, 2008 1:46:12 PM
"What cannot be true is that wartime orders from overseas pulled the US out of the depression": Britain and France started placing large orders starting in (approx - does anyone know better?) 1937.
Posted by: dearieme at Nov 22, 2008 2:11:20 PM
I wonder why so much interest in making historical comparisons and debating about old times so extensively. Who cares about New Deal and what Roosvelt did? Cannot we see the difference between past and present? It is not a scientific method to say it worked, or not, in the past so let's try now this and that. Past performances are not guarantee for the future...
On the other hand this debate is part of a top-down approach discussing larger aggregates, the "big picture". However these days need a general equilibrium approach to try to give an understanding of the whole economy using a "bottom-up" approach, starting with individual markets and agents, giving solutions to respective problems after some cost benefits analysis.
Posted by: Massimo GIANNINI at Nov 22, 2008 2:49:03 PM
According to the BEA in 1939 exports contributed 0.25 percentage points of the 8.1% increase in real gdp and in 1840 it was 0.62 percentage points of the 8.8% increase in real gdp. In 1938 the contribution of real exports to real gdp growth was negative -0.05 percentage points.
The BEA data does not break out how much of this contribution to growth was war related shipments to Europe, But this data makes it hard to accept the thesis that such shipments were a major driving force of the economy between the 1937-38 recession and 1940 when the US really started preparing for war.
Posted by: spencer at Nov 22, 2008 2:50:20 PM
I'm left with the summary that the best thing for our economy would be to stir up some good old wars (of which we are not a part) and be the contractor of first choice for weapons and other goods.
Let's send BFF email to Japan hinting that China has been talking trash. And vice versa.
"The Obama tax plans are bad because they create extra layers of complexity and distort incentives. Plus they give politicians the ability to be social engineers with the tax code."
Thanks for the laugh - you say this as if Bush didn't do the same thing (distort incentives). Only his incentives were for the disgustingly rich to stay that way and for the middle class to shoulder the burdens of his and the Republican Congress' out of control spending.
Man, I wonder how some of you fool yourselves into believing this nonsense.
Posted by: meter at Nov 22, 2008 3:01:02 PM
Ah, so tax based fiscal stimulus=good. Spending fiscal stimulus= bad. Also, wages going up=bad.
Yeah, if your main goal is to promote inequality, not growth, i can see how this makes sense.
Posted by: yoyo at Nov 22, 2008 3:20:58 PM
