If you believe the New Deal didn’t revive the economy please look at the GDP and unemployment statistics between 1933 and, say, 1937. What happened was that Roosevelt’s first term saw some of the fastest growth in US history and a massive drop in unemployment. Some of those gains were lost in the 37-38 recession but the economy resumed fast growth afterwards. Of course total recovery required WW2 but the US economy was vastly better off in 1941 than it had been in 1933. So the New Deal did revive the economy; in particular the decision to leave the Gold Standard was crucial.
Oh, nice.
Very nice.
If I cherry pick my dates, I can prove anything I want, too.
For the rest of you, 1937 is an extremely dishonest date to end things at… because that’s when the Recession of 1937 began! Yeah, the New Deal did temporarily make growth, and was expanding Hoover’s welfare programs, but it also didn’t actually fix the long-term problem, either. The growth was only done through massive borrowing. Sure, that was nice for the people in trouble, but it meant running large deficits and it still didn’t actually solve anything. Any idiot can pump up his economy with borrowed cash, but it won’t really help unless the underlying energy of the economy is in motion… which government generally can’t help. (It’s kinda like steroids: you can use them to pump up now, but it will cost you later and the muscle growth will often be temporary and hurt your fundamental endurance.)
And the borrowing of WW2 didn’t actually fix anything, either. The economy didn’t fundamentally heal itself until the economic liberalization of the post-war period.
In case you didn’t notice, I mentioned the 37-38 recession myself. There is no cherry-picking because even if you take 1938 the economy was much better off in terms of output and unemployment than 1933. And there wasn’t actually that much deficit financing during the New Deal especially if you look at the states’ fiscal policies. Nor is there anything wrong with deficit financing in a depression; it is an excellent policy when the economy has extensive unemployed resources.
That’s it in a nutshell. Keynesian economics was so popular for so long because it was so wildly successful worldwide in the '30s. What wasn’t realised for some decades that it wasn’t economic panacaea.
There’s a political argument to be made that it didn’t work, but it requires a massive amount of intellectual dishonesty to do that - namely that anyone employed by the government didn’t really count as having a job and that the projects funded by the government shouldn’t contribute to the recovery. I’ve seen articles in the last month that claim both.
Is there any school of economics that views it that way? The libertarian Austrian school and Chicago School have always impressed me as very mechanistic – an impression this old thread did nothing to dispel.
That’s pretty much the way that economics works. Its nature is an attempt to treat political economy as a series of scientifically-proven parts - a sort of unified field theory that doesn’t always work in the real world.
There’s a sort of implicit recognition that if we could develop the right model, working out how everything effects everything else, we’d be able to fix everything. Unfortunately every time we think we’ve found the levers to pull, we find out that we didn’t quite have a handle on everything.
There’s a number of parallels to be drawn with chaos maths, quite frankly.
There is a big difference between the Austrian school and the Chicago school wrt that thread. The Austrians do very little empirical work and are practically dead as a part of modern economics. They are more a part of libertarian ideology than a school of economics these days. Chicago economists do a lot of empirical work which is part of the reason they have had a lot more influence on the discipline. Milton Friedman for example did more systematic empirical work than almost any other major economist.
I must agree with BigNik here. It’s a weakness of all economic systems (at least after Adam Smith, who was more a philosopher than anything like a modern economist). Economists descend primarily from a French school which focused on some odd theories. And they have a valuable place in society, but they are also very limited. They’ve gone down the modern, rationalistic route by adopting statistics and math into their ideas. However, this also causes them to think is terms of pure numbers, when economics in practice has very little to do with numbers. The economy is not an equation, or a machine. You cannot put stuff in and automatically get what you want out.
The other problem with economics as a discipline comes from that. People are often crazy, but never stupid. They will eventually do everything you just proved (absolutely positively) they would and could never do. You may be right for a very long time, but you only have to be wrong once.
This is a maor part of the current economic fiasco. A lot of very smart people in government, finance, and government finance (apparently FMA and FMC were backed by the government) they had an absolutely good principle and an absolutely good understanding of what was going on. And they were almost right. But it is in the nature of economics that “almost right” is eventually “totally wrong.” Everything you do in the economic system eventually pushes it out of balance, or equilibrium, and it will eventually jump to a new equilibrium, probably one you don’t like.
Here’s my basic idea, and why I use an ecosystem, or biologic organism, as a metaphor…
Let’s say you have a nice forest. (It’s relatively isolated by mountains.) It has deer and elk in season. It has rabbits and squirrells and porcupines and skunks year-round. There are wolves and foxes and hawks and the odd bobcat. There are oaks and maples in the lowlands and pines and firs in the uplands. There are cherry trees and walnuts dotting the place. There is good groundcover. More or less, it’s a fairly stable forest. On occaision, a fire might burn it out. It will regrow in time. The forest does change over time naturally, too, but slowly.
Now a man comes in. The man wants more cherries and walnuts. He wants more deer and rabbits. What does the man do? He kills the wolves. He cuts down maples and pines and plants cherries and walnuts.
And this has consequences. He may wind up, for a time, vastly increasing the number of deer and rabbits. They may eat all the cherries and walnuts he planted, then eat the young trees, then finally all die as they starve. The wolves he kept at bay will die off (as he kills them), then shoot up in numbers (as they eat the booming deer and rabbits) then crash with their prey.
Now, I don’t want you to take this as a lesson never to do these things. They may be worth the cost. That has to be considered on its own merits. However, a certain humility when it comes to messing with things is a very valuable trait.
This is why one of the more irritating myths of the recent crash ticks me off. This goes back to decades-old fiddling with the market (not all of it government fiddling, either). But we shoudl have a certain humility about our ability to understand things which are, by definition, vastly beyond the comprehension of a man or any number of men. And we should understand that everything we do has a cost, often hidden from us.
Government wasn’t where it ought to be and shouldn’t have been where it was. Some operations (like Naked Shorting) are actually unnatural to the market; they would not normally be allowed by anyone sane in the absent of government persmission). Others (like normal Shorting) are perfectly natural and help properly value things.
Now, I oppose the stimulus. I don’t like it at all. On another day, with different circumstances, I might agree with a different stimulus. I think government should spend much less on the arts and welfare and much more on science and technology. I think government procurement, particularly military-wise, is horribly broken. I think earmarks are an awful source of corruption and that a plurality of Congressmen are hopelessly corrupt.
Well, that criticism applies with equal force to all the social sciences, or “sciences,” doesn’t it? Which does not mean that putting them on a truly scientific will remain forever fundamentally impossible, like predicting the weather in fine details two weeks in advance, but only that it will be very difficult.
What species are you talking about?! People are often stupid, but rarely crazy.
Well, according to your quote, he’s talking about I-People. 
Actually, I don’t think so, because humans, and all human things, get more unpredictable… as they get more predictable.
Let me explain. Humans use, if they can, all useful information. The better a model becomes, the more and more people use it. But, any such model must neccessarily contain flaws and those flaws can (and probably will) magnify over time. Likewise, the systems people use, which are influenced by the models, tend to become more and more complex over time until the system either collapses under its own weight or finds a better way of existing.
The models I am talking about include straight-up economic ideas, but also includes various kinds of self-organizing or culturally-influenced social conceptions.
Can’t agree. I’ve never met anyone ever who was truly stupid. But I’ve seen a lot of people who were damn crazy. Or I might say that people are more often willfully stupid than actually dumb. Unlike some, I don’t think a mere difference of politics are reason enough to call someone stupid.
But I was talking about economics, which is a different beast, really. People certainly can and do make seemingly irrational choices, but these choices usually have a method to the madness. Of course, sometimes they’re simply believing what they want to believe - it’s a bad habit of the brilliant.
BigNik, I have a question that’ll kinda high jack my own thread but it doesn’t really deserve it’s own.
Do you think there exists an economic truth or does the reality evolve with the information available? Like vaccines and viruses, do economic problems inherently get more complicated when they are momentarily solved?
No, it really didn’t. There are many problems with Keynesianism as a tool for ending recessions, which are widely accepted even today.
First, there’s the timing problem. By the time you recognize that you are in a recession, you’re often already on your way to recovery. If not, then almost certainly by the time the wheels of government turn, approve a spending package, and actually spend the money. There’s a good chance that your ‘stimulus’ will come along when the economy is already roaring back, and simply contribute to the next bubble. I believe there’s good evidence that Bush’s first round of tax cuts did exactly that.
Second, Fiscal stimulus has been increasingly looked down upon as the economy has grown more complex. It’s one thing to get a stimulus out by handing out a million shovels and building a network of roads using unskilled labor, like you could do in the 1930’s. There were huge infrastructure gaps, and the type of infrastructure that needed building could often be done with any old laborer. So labor was fungible, and you could draw on a national labor pool without distorting the labor markets too much.
Those days are long gone. Specialization and globalization have made it extremely difficult for government to mange the economy. High levels of worker training have made it extremely hard for a government to staff large national infrastructure projects without pulling workers out of existing, thriving business (the ‘crowding out’ problem).
Finally, Keynesianism went by the wayside because monetary policy proved to be much more effective. We’re only talking about Keynesian stimulus now because there’s a liquidity trap and monetary policy isn’t available.
In his later years, even Keynes became skeptical of fiscal policy as a mechanism for ending recessions. In 1942 Keynes said:
(John Maynard Keynes, Collected Writings, vol. XXVII, p.122 ).
Another cricitism of Keynesianism comes from the Permanent Income Hypothesis, which suggests that one-time stimuli do not have the effect they should have, because people and corporations base their behavior on their expectations for long-term income. A one-time injection of cash will therefore be treated differently than a permanent, but smaller, increase in income.
Funny then that such theories have made it into peer-reviewed journals, eh?
- Harold L. Cole and Lee E. Ohania, UCLA, Journal of Political Economy, Aug 2004.
The fact is that the effects of the New Deal are still a subject of much debate among economists, with most believing that some policies worked, some failed, and the result was, at best, mixed.
The Depression didn’t end until the war started, and it’s no mystery why: The government spent massive amounts of money (40% of GDP), women went into the workforce in numbers never before seen, to build weapons for the country and for many nations abroad. U.S. debt rose to 120% of GDP. Then when the war ended, global trade exploded and the U.S. became the industrial supplier to the world, which helped pay down the debt and maintain the manufacturing base.
Would you mind providing the data showing that fiscal stimulus has worked to end recessions?
This paper found no evidence that fiscal stimulus produced long-term benefits.
Another paper examining the effect of fiscal policy shocks in Germany, found slight positive effects for three years, but with very low confidence, and a decrease in private investment (possibly due to Ricardian Equivalence, as my guess), but also of very low significant. The paper concluded, “Government net revenue shocks do not affect output with statistical significance.”
There have been many other studies, not just of government fiscal shocks, but of similar price shocks to the economy (such as rapid changes in gas prices and rapid buildups of military spending) which consistently find that they have far less effect on aggregate output than Keynesian theory would predict.
Let me get this straight: You think the problem is that, while government decisions are rational and have perfect information, the problem arises because people and companies behave irrationally? You’ve got it exactly backwards.
Do you honestly think governments have the best possible information on the state of the economy and its needs? That’s one of the most ridiculous things I’ve heard. Leaving aside Hayek’s profound explanation of how information travels through a modern economy (and why governments can’t get at it), the mere thought that 535 people in Washington could haggle for a month and come up with a plan to spend a trillion dollars more efficiently than could the collected wisdom of the free market is completely ludicrous. The people voting on the current stimulus are making decisions and horse-trading billions of dollars with each other without even having read it, let alone understanding it.
That’s debatable. A much better idea would be for the government to not borrow the money in the first place. The burden of proof should be on ‘techno-socialists’ to explain, in detail, why they need to spend a trillion dollars on the things they think are important - fully backed with peer reviewed data showing that it has worked in the past within a reasonable confidence interval.
This is quite wrong. The PIH does say that a temporary tax cut would be ineffective. However it doesn’t say that a temporary increase in government spending is. Remember that unlike tax cuts, government spending on , say, repairing a bridge is already part of GDP and adds to the supply of goods in the economy. Even if there is not much of a subsequent multiplier effect it will have helped stimulate the economy. And of course the PIH itself is an approximation and is often violated in practice.
As for the Great Depression, one thing that is important to remember is the amount of progress made during the Roosevelt years both in terms of economic growth and lower unemployment. The New Deal didn’t fully end the Depression but the economy was vastly better in virtually any year that you choose compared to 1933. I would like to see more of that Cole and Ohania article. I expect they are focusing on a part of the New Deal not the whole thing, in particular not the decision to leave the Gold Standard.
http://www.brookings.edu/papers/2008/0110_fiscal_stimulus_elmendorf_furman.aspx
This is a good primer on when and how to design a fiscal stimulus based on empirical evidence and general economic principles. It’s good to know that one of its authors, Jason Furman, works for Obama now.
One important point is that most economists believe that the average recession can be handled by monetary policy plus automatic fiscal stabilizers. However the current recession is exceptional and may well be the worst since the Depression (which of course was ended by a gigantic fiscal stimulus). So just because a past fiscal stimulus in a normal recession hasn’t made much difference doesn’t mean that one isn’t required today.
You’re right about the PIH being focused mainly on tax cuts, but it can apply to income person or company gets as part of a temporary job or contract. In other words, if a person is unemployed, and they are given a stimulus job that they know will end when the stimulus money runs out or the project is over, and they have no certainty that they will find other employment, they will behave the same way that they would had they got the money directly as a tax rebate. Same with corporations - they behave one way when they believe their sales are part of an ongoing trend, and quite another when they make money from a one-time contract and have no expectation that there will be additional contracts forthcoming.
As for the New Deal, I think even economists who think that it on balance did more harm than good will acknowledge that *some aspects of it were beneficial. New Deal monetary policy in general is looked upon favorably. The more damaging aspects of the new deal were things like the Agricultural Adjustment Act, which was later found to be unconstitutional and in any event was horribly counter-productive, The National Planning Board, and other attempts to control supply and demand.
The New Deal should probably not be used as a data point in this debate however, because much of it consisted of things that are not being considered today in any event, and because the economy was very different in the 1930’s. It was much more regional, not nearly as complex and interrelated, and global trade was a fraction of what it is today.
What I would most like to hear the new Keynesians explain is how the fiscal multiplier is going to work, given that so much of the supply chain in modern infrastructure construction is global.
Maybe but, unlike a rebate, a bridge will have been repaired or a school renovated which adds value and contributes meaningfully to GDP.
Another important point is that a fiscal stimulus can help individuals and corporations repair their balance sheets even if they don’t start spending immediately. This is why I am not prepared to declare TARP a failure just yet. Ideally you would want banks to start lending and consumers to start spending now, but if it takes a couple of years for them to get their debt down before spending again that’s still useful because it will speed the recovery in 2010.
The fundamental point is that the government has a different budget constraint from the private sector and can borrow at lower rates of interest. It makes sense for the private sector to deleverage but if everyone is doing this rapidly at the same there will be a steep fall in aggregate demand and asset price which damages the economy. The government can ease this transition through a fiscal stimulus. Then when the private sector is in better shape it will have to raise taxes and restrain spending like in the early-mid 90’s.
Incidentally all this would have been a lot easier if Bush had continued on the fiscally responsible trajectory he had inherited from Clinton; both deficits and the debt/gdp ratio would be much lower.
I do agree that this can happen. I don’t agree that is usually does, or that will happen via the stimulus bill.
A big government program is not really an efficient means of moving the money to the people in this manner.
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The fundamental point is that the government has a different budget constraint from the private sector and can borrow at lower rates of interest. It makes sense for the private sector to deleverage but if everyone is doing this rapidly at the same there will be a steep fall in aggregate demand and asset price which damages the economy. The government can ease this transition through a fiscal stimulus. Then when the private sector is in better shape it will have to raise taxes and restrain spending like in the early-mid 90’s.
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Except the govenrment really has not done this historically. (Frankly, it ought to cut programs and lower taxes now, too, but that’s something of a side issue.) I see no realistic assessment that it will do this now. In any case, it should only raise taxes in order to cut down on an aleady-hot economy.
Bush, I’m afraid to say, had relatively little to do with it, and neither did Clinton. Congress is, and has been responsible for this (both parties) for a very long time. It doesn’t matter who’s in power - they want to spend more than they take in.
Sorry to bump my own post but no one has commented on this even to the extent of saying “no”. I wanted to add another war-related question: is it also significant that on a global scale the war razed much infrastructure and manufacturing capacity, allowing the equivalent of forest succession to take place as the economies of Europe and Asia regrew?