For the last couple of months, I’ve been seeing a lot of liberal frustration over the repetition of the CW that the boost in industrial production for WWII ended the Great Depression. Their argument (to the best of my memory) is that from the beginning of the New Deal you see a consistent, progressive decrease in unemployment and increase in wealth in the US, except for one period (I believe, 1937) when FDR actually scaled back the New Deal under conservative pressure.
Is this true? Anyone got some hard numbers and graphs? It seems that one of the sticking points, for example, between partisans is who exactly is considered employed. Are people working for the TVA employed since their work is temporary? (one of the sticking points in the current debate, too, right?)
I took a class back in college called history between world wars, and I feel that what I learned was something of a hybrid of these two concepts, i.e. the TVA and other publics works projects jolted the economy, then the production from the war further increased that.
There’s a nice graph in this post at Daily Kos that shows the Us GDP over 1929-1941. It’s pretty telling that in 1936, a new record level of GDP was established.
That period also shows nicely the negative impact of the conservative effort to scale back deficit spending in 1937.
Paul Krugman’s book, “The Conscience of a Liberal” is a good, easy read on this topic, and he does a very nice job of illustrating how the policies of the New Deal laid the foundation for the economic strength and income equality of the US through the 50’s until the early 70’s.
The problem you run into repeatedly in macroeconomics is that we have no control group. That is to say, we don’t know what would have happened had FDR’s plans not been enacted, or had some other plan been enacted.
Defenders of FDR can point to the fact that the economy did in fact recover. Critics can point to the fact that other countries recovered faster. I don’t think anyone would seriously argue that absent the New Deal, unemployment would have stayed at 25%. The question is if doing something else (or doing nothing) would have helped more, and that’s likely unknowable.
furt, you are correct that there is no control group to compare the US economic recovery to. However, as tagos noted, there is a nice real-workld A-B-A intervention design during 1937 that does give some information.
At least you are starting at the right spot - acknowledging the data, but questioning the implications. Many conservatives now are crazy misinformed about the data. They don’t lie - the recovery process started right away and was stable (when the policies were in place consistently - e.g. not 1937) even before the ramp up for WWII.
Other less direct information comes from all the economic data associated with each presidency, which demonstrates that any and all economic indicators that I’ve seen data on have performed better under Democratic presidents in comparison to Republican presidents. At some point, reality will have to set in.
A subtle point - the ramp up to WWII is nevertheless stimulus by government spending, so it doesn’t run contrary to the present intent of the stimulus bill (apart from all of the tax cutting stuff in it).
And there’s also the fact that even then it was true that when the USA sneezed everyone else caught a cold. Likewise for any recovery. The bottom line is that the numbers show the New Deal was a positive and no serious economist believes doing nothing was the smart option.
And see, this is where we go. There is no country that did absolutely nothing, and thus no countries that can serve as control groups. I could point to Australia, which did very little and still recovered, and you can then say that what little they did do was, in fact decisive intervention, or else that the fundamentals of their economy were so different that any comparison is misleading. I could point to Canada, where most New-Deal style programs were shot down in court, but recovery still happened, and you can say that it was because the US and Canadian economies are so intertwined that the recovery of the US pulled Canada through. And of course the fact that most of Europe was back to 1929 GDP levels by the mid-1930s can be attributed to the impending war.
And of course, if I use GDP figures, you can respond that unemployment is what’s really important. Or adjusted real wages.
And they both have good points, and it is in the nature of macroeconomics that, in 2008, we simply do not know enough or have enough data to issue definitive judgements.
That reminds me of another nice point of Krugman’s book - he takes on this “it’s impossible to know” mentality pretty nicely. We can know, because we can look at what the outcomes were under different conditions over time.
“We can’t know” is simply a conservative myth designed to serve the purpose of continuing to foist failed economic theories on us.
This quote is directly relevant to the issue of causal link between policy and economic expansion when it comes to one of the most important New Deal policies: the decision to leave the gold standard which allowed for a more expansionary monetary policy.
If you look at the US, it left the gold standard in 1933 and that year there was a massive monetary expansion and also the start of a massive recovery in the economy. It’s hard to attribute that just to coincidence particularly given the international pattern that Romer notes.
As for Ohanian and Cole, their criticism of NIRA is quite valid but not particularly relevant. No one is proposing NIRA style policies today. The policies that are being carried out are monetary expansion, fiscal stimulus and financial regulation and the history of the Depression offers strong evidence that these policies do work.
Actually, this makes no sense. Neither Roosevelt nor the New Deal changed the economic situation enarly fast enough. The lag time factor is at least a quarter, and often a year and a half! Their analysis is exceedingly shallow, and pretends there are no other factors than Enlightened, Saintly FDR and Evil, Stupid Republicans.
Secondly, Krugamn, for all his theoretical work, has a serious political chip on his shoulder and has a definite bias. He is well known for disregarding evidence (or even making stuff up) whenever it suits him. He only engages the latter lie in political matters, however.
Wow. That’s a pretty stunning argument you have there. I’m really impressed by your command of the facts; I especially liked that point-by-point refutation of the actual conservative argument I linked to.
I gotta admit it, that up until now I thought that listening to both sides and being skeptical of both was sort of the way to go. But that was before you told me that you had read a book and that Paul Krugman says that he’s right. That makes my life soooo much easier.
I thought about reading something on the issue once, but there were so many different ones, arguing so many different things. I even read that the causes of the Great Depression was still the most-debated issue in economics, spawning dozens of new dissertations every year. I guess all those people never heard of Paul Krugman! They’re all wasting their time, those silly people!
Thanks so much for relieving me of the burden of independant thought! Which way to the Soma bar?
Perhaps true (I’m certainly not knowlegable enough to argue), but I wasn’t linking to them as relevant to the current situation; I was linking to them as an example of a credible anti-New deal argument.
Sheesh. Your point was apparently that some economists say X and some economists say Y, so we can’t know. I believe that is false, and is also a dodge. Just because opposing viewpoints are put forward does not mean that we must shrug our shoulders and pretend it’s an unresolvable point.
Those two are certainly not too fond of each other.
Barro is a professor of Economics at Harvard. He is also associated with the Hoover Institution on War, Revolution and Peace at Stanford.
Krugman is a professor at Princeton, and picked up a Nobel for his work on trade.
Both are biased columnists IMHO, but both are damned smart. Barro is doing some interesting research on the multiplier effect of government spending, and has also done research on the effect of tax cuts.
Then prove, with scientific certainty, that the Depression would not have ended had the New Deal not happened (or not ended as soon, or as stongly). Be sure to identify the control you are using to prove your case.
It is not a dodge to recognize that some sciences are 1) young and 2) working with drastically limited data sets, and to recognize therefore that most people making definitive statements are doing it on the basis of ideology, not facts.
This is an optimization problem, not a science problem. The goal is to achieve the optimal future, not to define our future with absolute certainty.
Past experience suggests that government stimulus does work. To chose not to stimulate the economy, we must have the faith in our methods to step into the total unknown. I find it odd that the so called ‘conservatives’ are so eager to do that here.
One can describe a stimulus as having “worked,” if one cares to, if it creates 100 temporary jobs at the cost of ten trillion dollars. But I think most people would say that’s unacceptable.
So far as I know, nobody is advocating “never do anything.” The question is what, when, and how much – even most supporters of government intervention would acknowledge that it isn’t always the right step (just as few Friedmanites would say the government should never ever have any role whatsoever), or that it can have unintended consequences, or go too far, etc. Otherwise, they wouldn’t be Keynsians, they’d be socialists.
And, to get back to the subject of the OP, I’d love to see a cite from any credible economist that says that all of FDR’s interventions were useful. Every one I’ve ever read, regardless of their overall view of FDR, says that some things were effective, some were ineffective, and some were even counterproductive. So, no, I don’t think the record comes close to bearing out a blanket “government stimulus does work”
That’s Japan. Our history tells us that when the economy falls off a cliff, and we subsequently spend a lot of government money on job creating programs, the economy comes back.
We have never NOT spent a lot of money on job creating programs after the economy tanks. Without, as you say, absolute scientific proof, that sitting around twiddling our thumbs, and maybe cutting some taxes will work, we are taking a great leap of faith in an untested cure.
