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How did Nazi fiscal policy work?
Please do not think I am trying to call anyone, or any advocate of active fiscal policy, a Nazi. The point is that Nazi fiscal policy did drive a recovery in measured gdp, so it is worth knowing how and why. Robert J. Gordon has some answers (NBER; I don't see an ungated copy):
Tooze confirms previous findings that relatively little of the expansion in public expenditures took the form of public works like the autobahns, while over 80 percent consisted of spending for rearmament. Abelshauser (1998, p. 169) calls this “military Keynesianism on a large scale.”
Furthermore real wages were falling not rising:
The previous literature has emphasized the Nazi policy of holding down real wages as a contribution to the rapid expansion of employment, the opposite of the perverse wage‐increasing policies of Roosevelt’s NRA. Indeed, Barkai shows that the share of German wage income in national product declined from 64 to 59 percent between 1932 and 1936, while the increase in profits was “quite spectacular” (p. 196). Likewise, Abelshauser (p. 148) reports that the income share of the bottom half of the income distribution fell from 25 to 18 percent between 1928 and 1936.
In other words, Nazi fiscal policy boosted measured gdp rather than driving a recovery with higher real standards of living. Even putting the brutality of the Nazi regime aside, this should not count as an example of successful fiscal policy. I'll look at some other historical examples soon but -- at the risk of sounding like a broken record -- I wish to stress my conclusion that the evidence in favor of government spending as effective fiscal policy is weak.
Addendum: On fiscal policy more generally, Mark Thoma has many comments.
Posted by Tyler Cowen on December 17, 2008 at 07:08 AM in History | Permalink
Comments
Higgs JEH 1992 finds similarly for the US WWII "recovery," but more importantly emphasizes the meaningless of the data under such conditions.
Posted by: Daniel Klein at Dec 17, 2008 7:30:57 AM
Everybody interested in Nazi Economic Policy should have a look at the work of Albrecht Ritschl, who is a former Professor of Economic History at Humboldt University, Berlin where I am a grad student, but recently moved to the LSE.
However, in my opinion the economic resurgence of the Nazi era might have a lot to do with the unilateral abandonment of the Versailles treaty which had a devastating effect on the German economy.
Posted by: Hannes Bretschneider at Dec 17, 2008 7:53:56 AM
doesn't nazi fiscal policy describe pretty well the bush years?
Posted by: dis at Dec 17, 2008 8:42:12 AM
Mark Thoma is simply wrong. He claims there is no crowding out because labor and resources are idle during a depression. That's not the point. Deficit stimulus crowds out private investment, unless he is claiming that through massive government borrowing that the government can lift interest rates enough to convince people to invest in business ventures and not hard assets or cash. The money has to come from somewhere. If the pool of investment dollars is relatively fixed the government is at best moving resources around. At worst they are taking money from profitable ventures and pouring it down the drain.
Posted by: Brian Shelley at Dec 17, 2008 9:20:06 AM
I have to say I find the use of the word perverse to describe FDR's policies very off when it is being contrasted with Nazi Party's fascist policies.
Fiscal policy is not a panacea for general economic woes. But it can provide some help in retarding a recessionary period.
Certainly it is better when government money is spent creating some tangible benefit. New York's decision to build the Erie Canal was of incalculable benefit to that state for 20 years both the building of the canal and the tangible benefits of having the canal.
The north's economy catapulted into possibly the most powerful economy in the world after the Civil War.
Mr. Shelley,
How exactly does deficit stimulus spending on infrastructure crowd out private investment?
Posted by: flyerhawk at Dec 17, 2008 9:52:23 AM
How exactly does deficit stimulus spending on infrastructure crowd out private investment?
Infrastructure projects have to be paid for like anything else. To get the money to pay for them, governments either have to tax more (which takes money away from private investment) or borrow more (which takes money away from private investment), or just print more money (in which case fiscal policy has simply become a mask for monetary policy).
Posted by: Blackadder at Dec 17, 2008 10:18:14 AM
Read "Hitler's Beneficiaries" -- an excellent book.
http://www.amazon.com/Hitlers-Beneficiaries/dp/B0012DHDNG/ref=sr_1_12?ie=UTF8&s=books&qid=1229527435&sr=8-12
Posted by: Carl Oberg at Dec 17, 2008 10:25:54 AM
Flyerhawk,
Blackadder makes good points, but I think that deficit stimulus could be worse than tax and spend. Taxing allows people to choose between hoarded wealth (like 1 bp t-bills, gold, and cash) and invested wealth. Deficit spending only takes from the pool of invested wealth. If the cause of depression is supposedly an economy of extremely risk averse individuals, then any government borrowing would fail to induce more investing and be almost completely offset by a drop in private investing.
Posted by: Brian Shelley at Dec 17, 2008 10:36:34 AM
I think Thoma is right. You need a deep depression with high unemployment for fiscal expansion to work without much crowding out, and so it's hard to find historical examples, because in the postwar period we have thankfully not experienced many examples of depression-level unemployment. I do think there is one historical example of the efficacy of fiscal expansion, and that's the military buildup in the U.S. that followed the Fall of France. Federal government spending went from 6.4% of GDP in 1940 to 14.2% in 1941, as defense spending went from 1.6% of GDP in 1939 to 2.5% in 1940 and 11.3% in 1941. Meanwhile real personal consumption expenditures went from a growth rate of 5.6% in 1939 and 5.2% in 1940 to 7.1% in 1941. Maybe this doesn't seem like such an impressive acceleration of growth, and maybe the growth could be attributed to monetary expansion? Perhaps. But in fact the recovery showed signs of stalling out in early 1940. Personal income was flat in the first half of 1940 and industrial production actually declined slightly in early 1940. Why this was the case I don't know. The whole period deserves closer analysis by someone more competent than myself. Nonetheless, I offer it to Tyler as one example of efficacious fiscal expansion.
Posted by: Phil P at Dec 17, 2008 10:40:17 AM
Since I can't access Gordon's article, but have read Tooze's book ...
... please just tell me, does he add anything to Tooze?
Posted by: Anderson at Dec 17, 2008 10:56:30 AM
Tyler, isn't this pretty similar to what happened to the US economy during WWII?
Posted by: Grant at Dec 17, 2008 11:16:11 AM
Taxing allows people to choose between hoarded wealth (like 1 bp t-bills, gold, and cash) and invested wealth. Deficit spending only takes from the pool of invested wealth.
But isn't invested wealth subject to a capital gains tax? How do we know that this effect is smaller than USG-borrowing-induced crowd-out?
Also, isn't it an empirical question how much investment crowd-out happens, given that USG bonds are a relatively low-risk investment, whereas corporate bonds may be higher risk?
Posted by: mk at Dec 17, 2008 11:48:15 AM
I'm sorry if I derail this thread, but why do people keep bringing up wartime spending as an example of increasing economic growth?
The fundamental thing that these discussions neglect, at least from my point of view, is the concept of value. Economies should be about creating value and not just producing things to make more stuff. Humans are not hamsters that just need a big hamster wheel to keep them busy. Even if you could construct an ultra-efficient economy from on high, are you satisfying each individuals need for value?
We could of course employ everyone the way we did in WW2 and have them make tanks and planes and then dump them into the sea never to be seen again. If we wanted to be just like WW2 we could even have a draft and seal some poor schlub into each tank or plane as we roll it off the dock. Everybody's working now. Everyone has a job. I bet the economic numbers would be great. But is this an economy anyone really wants? The few people who like making tanks might like it. The rest of us not so much.
While most government projects are rarely so ruinous they are very likely going to create little if any real value. Sure most people can agree that more roads are good to have. Unless of course you're a telecommuter, or walk to work, or are a rail company. For those people they may not be getting any real value out of building additional roads. As they are helping to pay for it, either now or on "credit," they will have obviously less money to create value for themselves or for others. To take that example further we could bring all our roads up the level quality of the Autobahn. That would generate a lot of work but what kind real value does that give us over the less expensive, if more pothole strewn, roads we already have?
To sum up, the point of an economy should be generating value for those individuals in it. Just providing something to keep people busy just generates a lot of numbers that to most indivduals is meaningless.
Posted by: apostate at Dec 17, 2008 12:17:33 PM
One should also include the 1% of the population forced into exile or murdered along with the public and private 'repatriation' of their monies/goods; and the government spending and support of chemical companies (not to mention their support of IBM...). So, by extension, maybe the states should consider the forced exile or eradication of, say, the 1.2% population of Chinese-Americans. This coupled with the ideological adrenaline pumped into the call for a sacrifice to the 'greater good' (i.e. the eradication of the Chinese-Americans... or any other population, really) would certainly help turn around the American economy and cut ties with all of those 'evil foreigners' in Europe and elsewhere. Win-win for the right... [please note the heavy and bitter ironic inflection in my post...]
Comparing post-Weimar Germany to America seems a brilliant exercise in the comparison of apples and rocks (both are round...).
Posted by: John W. at Dec 17, 2008 12:29:32 PM
Brian Shelley's premise that:
If the pool of investment dollars is relatively fixed the government is at best moving resources around...
Is totally wrong.
First of all the whole scenario takes place under conditions of deflation (remember this is a depression). That means that the value of hoarded wealth is not fixed but is growing relative to goods and services. Secondly, the money paid by government for goods and services doesn't just vanish but it circulates around the economy through multiplier effects which operate to inflate the economy and employ factors of production which are by definition underutilized in a depression.
During deflation a rational entreprenuer would ALWAYS, ALWAYS, ALWAYS tap his hoarded wealth before borrowing to finance private enterprise because the burden of the debt would constantly be increasing (due to deflation) relative to whatever goods or services he obtained with the loan money.
It is only AFTER excess hoarded wealth is effectively exhausted that government spending can crowd out private investment!
Posted by: Michael Carroll at Dec 17, 2008 12:51:56 PM
I second apostate's concerns and add the uncomfortable twist that it's not clear what the "right" growth rate is. Why not transition our lives towards more leisure? Is it really necessary for the economy to grow at all, per capita?
Obviously many people will be involuntarily unemployed, and for those people, bad economic numbers represent tragedy and deprivation not choice. But there is the voluntary aspect of low growth to consider too, especially for a rich nation.
Posted by: mk at Dec 17, 2008 1:01:12 PM
I second apostate's concerns and add the uncomfortable twist that it's not clear what the "right" growth rate is. Why not transition our lives towards more leisure?
If you're talking about your own life, who's stopping you? If you're talking about other people, then shouldn't they get to decide whether they would prefer more leisure to a higher income?
Posted by: Blackadder at Dec 17, 2008 1:32:25 PM
M.Carroll's comment completely destroys the crowding out premise. Rich people don't create jobs, they pyramid compounding interest. Simple. GDP is not jobs. USA has been borrowing money to make rich people richer. It is communism. It is monrachy. It is a media dictatorship. Too much market forces when compounding interest rich Americans crowd out entrepreneurs. The solution isn't more market forces like the rich would have you beleive.
War spending is Keynesian, albeit very inefficient. In retrospect if the Nazis had spent on computers and the supply chain, we'd have an internet AI that could connect this conversation with a dozen others that refute and bolster the correct lines of argument, and could move on to the bleeding edge of what stimulus to provide, etc, instead of repeatedly having to refute policy position that amount to making rich Americans richer. The rest of the world and a few hundred USA CEOs are passing America bye bye.
Apostate, I like building rails, alot. The more expensive oil gets the better they look. No reason can't be part of stimulus.
Posted by: Phillip Huggan at Dec 17, 2008 1:45:00 PM
Michael Carroll,
I don't have a problem with your "first", but your second is ignoring the multiplier effect of private investment and entrepreneurial consumption.
Also, the entrepreneur and the hoarder are not likely to be the same person. The hoarder hoards because he is extremely risk averse. The entrepreneur, by definition is willing to take risks. The hoarder has removed his assets from the investment pool, limiting the investment pool.
Posted by: Brian Shelley at Dec 17, 2008 2:01:59 PM
If you're talking about your own life, who's stopping you? If you're talking about other people, then shouldn't they get to decide whether they would prefer more leisure to a higher income?
The question is whether gov't policy should aim at high growth. If yes, then what is the target growth rate, given that some may increasingly be choosing leisure over work, and if we don't know the target growth rate, then how do we know we are not growing fast enough?
My question has libertarian implications, although by your tone I ultimately suspect you are farther down that road than I am.
Posted by: mk at Dec 17, 2008 2:05:11 PM
Tyler, I think you're drawing too general a conclusion. The Germany evidence only supports the conclusion that MILITARY spending fails to be an effective fiscal policy. This makes sense, because military spending is like Keynes's famous example of digging a giant hole -- there is no continued benefit once the hole's built. A shiny new bridge, sewer, power line, or subway, by contrast, can spur business by removing bottlenecks or improving the quality of a needed good.
Posted by: tom veil at Dec 17, 2008 2:45:02 PM
Grant:
A few years ago, I saw Ohanian talk about why the WWII U.S. military buildup gave a bigger boost to measured GDP than the New Deal did. I don't know if this made it into the Cole-Ohanian papers, but it's probably in Vedder and Galloway's book, Out of Work.
Ohanian's story is simple: During the WWII buildup, FDR's pragmatism won out, and he weakened his pro-cartelization, pro-union policy. FDR pushed real wages down in WWII, so firms could afford to hire and so the remaining workers weren't so picky.
Basically, Depression-era Hitler and WWII-era FDR followed the same low-wage policy. So if you're going to have government-created jobs, make sure those jobs pay low wages, or else you'll get stuck in the Quadrini/Trigari trap...
(Link to Quadrini/Trigari trap in my name)
Posted by: Garett Jones at Dec 17, 2008 3:31:23 PM
Tyler,
Regarding the effectiveness of fiscal policy, I'm sure you've taken a look at the work by Price Fishback, Shawn Cantor, and William Horace on New Deal expenditures (http://www.nber.org/papers/w8108). It is very carefully done. Their point is basically that the New Deal was multifaceted, and that some of the programs were much better at stimulating economic activity than others. For example, spending on public works stimulated economic activity in the communities in which it was spend as well as in surrounding communities. By contrast, work relief programs stimulated the counties that received the relief at the expense of neighbor counties.
So, government spending can be effective fiscal stimulus, if done right.
Posted by: Noel Johnson at Dec 17, 2008 4:16:28 PM
The problem with Brian Shelley's argument is that the issue has very little to do
with money and everything to do with excess capacity in the construction and other
investment-related sectors. If unemployed workers are standing around in the construction
and machine tools and other investment goods sectors, then all that is needed is some
increase in demand for them to go back to work and start producing, and it does not
matter if that demand comes from the public or private sectors. There need be no
crowding out.
Indeed, the concept of "crowding in" should be kept in mind here, although Shelley and
others here probably deny the possibility of such a phenomenon. If the decline in investment
is due to a collapse of expectations of demand growth (aka animal spirits), then a fiscally
induced stimulus to investment and growth may well alter those expectations and bring forth
more private investment, as long as there is excess capacity in the investment goods sector.
Posted by: Barkley Rosserr at Dec 17, 2008 5:10:04 PM
I think some of you may missed my point (or I wrote it poorly).
This makes sense, because military spending is like Keynes's famous example of digging a giant hole -- there is no continued benefit once the hole's built. A shiny new bridge, sewer, power line, or subway, by contrast, can spur business by removing bottlenecks or improving the quality of a needed good.
Sorry to use you as an example Tom, but those shiny new things you mentioned only have value to those who use them. Those that don't or who would prefer an alternative means are in fact being robbed of value. To build the shiny new projects resources are taken from them that would normally be allocated to things they find valuable. Even worse for them, if they wish to use an alternative they will be forced to pay more, if available at all, than they would had the government project not crowded out their alternative that they value. I know a number of people who would gladly bike to work. However, it is currently impractical in most places because the infrastructure is built only for cars. Who's to say more people wouldn't bike more if the government had not setup the infrastructure to favor cars?
I imagine most people talk about using government funds for infrastructure because most people make use of it. So it's easy to get behind. Like it is a foundation for other things to be built on. But we really have no choice in that do we? People don't build homes or business by roads because that's the only way to do things. They do it because otherwise they would have to not only pay the cost of building their own alternative infrastructure, they would be forced to compete with government infrastructure that they were also paying for even though they are not even using it. In that case the only sensible thing to do is going along with crowd and making the best value you can with a system less suited to your individual needs.
Take a more specific example, the smart grid concept. It sounds like a good idea, but is it necessary? Perhaps more localized power would be a better fit for certain parts of the country. Maybe personnel solar panels, or some other technology, would have had the funds to develop into something practical had there been a real demand for them. But when government steps in and builds a system that gives everybody power no matter where they are, no matter how inefficient, then why bother?
The fact that government infrastructure attains any value is usually by happenstance and entirely dependent on individuals ability to make the most use out of it given the circumstances, or some cases simply work around it. So the idea that it stimulates anything is incorrect. Whatever value it creates does not make up for the potential value it destroys.
Posted by: apostate at Dec 17, 2008 6:10:08 PM
