Krugman’s point is not that FDR’s New Deal didn’t work because it was too interventionist; his point is that it didn’t go far enough. If FDR had spent what was necessary to stimulate job creation, deficit be damned, over the long term, he might have pulled the country out of the Depression in a much shorter time, but he was convinced to cut spending and raise taxes in 1937, undoing the good his earlier programs had achieved. The implication is that all the people right now who are teabagging and ranting about our huge deficit are worried about the wrong thing. What should be learned from the failure of the New Deal is not that interventionist policies don’t work and laissez faire is better; rather, be MORE interventionist, and worry about the deficit when you have a functioning economy again.
Yes, that’s Krugman’s theory. And I can point you to a half dozen economists with Nobel Prizes who think he’s nuts when it comes to the notion that fixing the economy means just being willing to borrow insane amounts of money and spend it.
And we should not forget that Paul Krugman is not a macroeconomist. His academic specialty is in trade theory. I really wish he would stop being used by the left as the ultimate authority on all matters economic. His opinions are decidedly in the minority.
Opinions on what? While Krugman (like pretty much every other economists) certainly holds some opinions shared by only a minority of his colleagues, he’s pretty mainstream on other issues.
This sort of unsubstantiated sweeping generalization doesn’t really tell us anything about Krugman except that you don’t like what he says. And I think we already knew that.
“Effective” only makes sense as a relative term. If A caused B, but Not-A would have done a much better or cheaper job at it, then A wasn’t all that effective. Even “caused” is somewhat context dependent – the original argument I was responding to was that it was indisputable that the New Deal “led to” America’s sustained economic prosperity in the following decades. If, however, said prosperity was very likely to occur with or without Roosevelt’s plan, then the New Deal led to prosperity in only a very limited sense.
Oh, and I think it’s rather misleading to claim that Krugman’s recommendations for fixing the economy are limited to “just” large-scale deficit spending.
I meant specifically his notion that the New Deal just wasn’t big enough, and that the current stimulus package’s problem is that it isn’t big enough. He’s a fan of GIANT stimulus programs - like, two or three times the size of the current one, or even more.
He’s just about the only major economist I can find who believes this.
I would argue it was mismanagement of a fiat money supply by the government, which is about as far from laissez-faire economics as one can get. I would also argue that is the biggest factor in today’s crisis as well.
We are in receipt of your threat to make an argument. We wait with bated breath.
Including, I have no doubt, John Forbes Nash, who is nuts.
Sorry. That was just too easy to pass up.
Every government, even one designed by Ayn Rand, has to manage the money supply, and what did the Coolidge, Hoover or Roosevelt Administrations do wrong in that regard?
Believes that the current stimulus spending should be much bigger? Well, Joseph Stiglitz (another Nobel laureate) agrees, as does Yale economist Rick Levin.
I think you may have been somewhat misled the spin attempts of the Cato Institute and other conservative organizations to make it seem as though support for more deficit spending in the current recession is an oddball minority view. While there are certainly some economists who oppose it, it’s by no means accurate to say that support for it is just coming from Krugman.
That’s the sort of thing diehard Communists used to say about the Soviet Union and other Communist governments: it wasn’t that Communism itself didn’t work, you see, it’s just that it had never been properly implemented.
Uh-huh. The fact is that government policies in the 1920’s were significantly more laissez-faire (slashed income tax levels, hands-off approach to regulation, etc.) than they have been since then—and they ended up with the Great Depression. Diehard libertarian true believers may feel convinced that the real problem with them was that they just weren’t laissez-faire enough, but they’ve offered no persuasive evidence why the rest of us should think so.
(In fact, your kind of no-true-Scotsman argument is exactly the same thing Sam Stone is complaining about in Krugman’s super-Keynesian view of the New Deal. And Krugman has at least made some attempt at reasoned justification of his position that the only problem with New Deal government intervention was that there wasn’t enough of it.)
If the 1920’s weren’t what you consider sufficiently laissez-faire to produce economic success, then we might as well just forget about laissez-faire approaches entirely. We’ll never have a more laissez-faire economic policy than we did in the Coolidge and Hoover years (at least, not until the hypothetical dawn of your true libertarian utopia in some remote colony on Mars or somewhere), so if that’s not laissez-faire enough, then laissez-faire is clearly of no practical use.
A critique of Amity Shales’ The Forgotten Man from Slate magazine. Some quotes from the critique:
Now, I’ve never examined the unemployment figures myself, and this sort of statistical analysis is beyond my skill. However, I’ve seen this criticism echoed by other economists such as Krugman.
To answer the OP: No the general consensus among economists is that the New Deal policies had a major and positive impact on the economy even though a few of Roosevelt’s initiatives were misguided. And no the New Deal didn’t start with Hoover, the New Deal was a revolutionary increase in government intervention which was opposed tooth and nail by Hoover and the other Republicans.
In particular Roosevelt left the Gold Standard which allowed for a much more expansionary monetary policy which created a huge positive stimulus for the economy. Scholars like Barry Eichengreen stress this as being perhaps the single most important policy implemented by Roosevelt.
Roosevelt’s second great policy was to repair the broken banking system starting with his famous bank holiday and through policies like federal deposit insurance. Again most economists consider these policies highly beneficial in increasing the stability of the financial system.
And thirdly you had a host of government programs to alleviate poverty and create jobs financed with a certain amount of deficit spending. Here many economists would argue that Roosevelt didn’t go far enough and should have pursued fiscal expansion more aggressively.
Overall these policies worked beautifully. Roosevelt’s first term saw the highest growth in US history: at almost double digit rates. After his re-election Roosevelt foolishly tried to balance budgets and this helped trigger the 37-38 recession but the economy recovered quickly again afterward and certainly on the eve of the world war the US was vastly better off than in 1933.
So what are the lessons of the Great Depression:
a) The banking system is absolutely critical and the government must do what it takes to prevent its collapse and restore confidence.
b) Central banks need to aggressively pursue monetary expansion to stimulate demand
c) Governments need to aggressively pursue deficit-financing and use that to help those worst affected.
d) Governments should avoid bad microeconomics interventions like price-fixing and tarriffs. Ironically the few interventions that were attemped by Hoover were mostly the bad sort.
I would say the Obama administration has applied the lessons of the depression very well; not surprising since his chief economic adviser: Christina Romer is a leading scholar of the Depression and Bernanke over at the Fed is another Depression expert.
I think it’s probably accurate to say that economists are increasingly willing to examine whether some aspects of the New Deal made the Depression worse, but the consensus is still very much in its favor, at least as to most parts. Certainly almost no one is arguing against the FDIC, no one sensible is suggesting a return to the gold standard, and we all saw how GWB’s flirtations with radical changes to Socaial Security died on the vine.
This strikes me as begging the question, equivalent to positing that because the Depression was the longest downturn in our history, then obviously FDR managed it incorrectly. Every economic boom ends in a downturn. The whole question in this thread is whether the reason the Depression was so much longer than others because of the economic policies that led to it, or the economic policies followed while it was going on.
Hoover was considerably more interventionist than history gives him credit for. Indeed, he is held in some disrepute (warning: PDF) by economic writers on the right, for this reason.
There was also a sharp monetary contraction in 1937. I think it’s hard to say with certainty to what extent the 1937 recession was driven by fiscal vs. monetary factors.
That WSJ article is really quite bad. For instance it repeats the myth that the Smoot-Hawley tarriffs were a major cause of the Depression which is considered false by most economists who have examined the issue. And absurdly it ignores what was probably the single biggest cause of the Depression: the collapse of the US banking system during the Hoover years.
As I said Hoover did carry out some ineffectual interventions but on the things that mattered he was resolutely non-interventionist. For example he strongly supported the Gold Standard whereas Roosevelt left it which was a major source of recovery. He strongly believed in balanced budgets and foolishly tried to reduce deficits in the middle of the Depression. By and large Roosevelt was much more pragmatic about deficits though he repeated the same mistake in 1937.
You are right that the 37-38 recession was partly caused by monetary policy and that is also an important lesson. The Fed was worried about inflation because of the earlier monetary expansion and prematurely raised reserve requirements which caused higher interest rates.
This and other issues are discussed in this terrific piece by Romer about lessons from the Great Depression (pdf):
http://www.brookings.edu/~/media/Files/events/2009/0309_lessons/0309_lessons_romer.pdf
The question is what do you mean by “work”. If you had told someone on Inaguration Day of 1933 that a set of policies would lead to the depression lasting another 8 years, I don’t think that many would have gone for it. It is possible to say that the depression would have been worse had it not been for the depression, but it is the same arguement that George Washington died because he had not been bled enough.
This was not the first depression in history and all of the previous ones had been much shorter and did not include a new deal. The depression of 1920-1921 had been cured by laissez-faire policy and led to the roaring 20s. The depression had worldwide impact yet lasted longer in the US than the rest of the world, which did not have a new deal.
In the depression millions of people were lacking in food yet the govenment destroyed millons of pounds of food. In the depression millions lacked proper clothing, but the government put people in jail for lowering clothing prices. In the depression millions of people lacked jobs, yet the government taxed all jobs by an additional 6%.
Hower, the question is what do you mean by “work”. I’d say, since FDR was elected 4 times, the new deal did work as intended.
By work I would mean comparing the overall state of the economy after several years of the New Deal compared to the bottom of the Depression in 1933 when Roosevelt came to office. And by that measure the New Deal worked extremely well in its first four years with GDP growing at around double digits. The US was vastly better off in 1937 than in 1933 by every important measure. Some of those gains were lost in the 37-38 recession but even in the bottom of that recession GDP was much larger than in 33 and anyway started growing rapidly after the recession.
I came in here to echo the recommendation of the Amity Shlaes book. If you want a one-stop shop for the argument against the New Deal, that’s it. And readable to boot.
As for that Slate critique, at least those two points quoted by BrightNShiny are refuted within her book. To say that “Except in the 1937-38 recession, unemployment fell every year of the New Deal” is to say that, except for the bullet wound, Lincoln enjoyed the play. The structural problems in the economy were never solved by the New Deal, and in fact, made far worse due to the exorbitant government intervention in the economy.
Because GDP is a static measurement of what the economy is, while the DJIA reflects the confidence the private sector has in the ability of business to grow, and hence return future profits.
The greatest problem with the New Deal (as argued in the book) is that the government made two major errors: one, it experimented TOO much (robbing the private sector of confidence that the rules weren’t going to be changed on them ex post facto), and two, government intervention crowded out private capital. Confiscatory tax rates from the “rich” prevented the more efficient generation of long-term industry because money just hunkered down.
And a relief program job wasn’t a real job-- it was unsustainable make-work, funded through tax dollars, assigned for political reasons, and not something that created lasting wealth.
Were some public works admirable? Yes, and even Shlaes acknowledges as much. The problem is, others-- such as the TVA, which she spends a LOT of time on in detail-- were catastrophically bad for the economy in that they represented government competition with, not assistance to, the private sector. None of this was sustainable without tax dollars. And efforts like the TVA were enabled by the active destruction of private utilities by the government-- utilities that were not only proving profitable, but far more efficient at delivering services at lower prices than the government-owned utilities ever were.
At the end of the day, the difference between the government and the private sector, clearly evidenced in the flaws within the New Deal, is that government takes capital while the private sector earns it. Government capital is then expended based not on the most effective or efficient economic basis, but on the basis of political decisions.
That’s not a bad thing-- it’s an essential thing-- but the New Deal skewed the relationship between the government and the private sector in a dramatic, and in hindsight, irrevocable way.
The scariest thing about Shlaes’s book? I couldn’t read more than a few pages without finding EXACT parallels between what FDR was doing and the economic policies of the current Administration. We’re repeating many of the same mistakes-- creating an unsettled business environment, and introducing too much government (read: political) control into the private sector.
Anyway, just my opinions, but again, read her book. Even if you disagree with it, at the very least you’ll understand the most persuasive arguments against the historical accounts of the New Deal. (And, for the record, her thesis isn’t that the New Deal entirely failed-- just that it LARGELY failed, and that almost any other approach would have produced a real rather than illusory recovery).
It never ceases to amaze me how people can’t seem to see the difference between “spending” and “investment”.
…except that it created real, tangible infrastructure upon which large parts of rural America are still built.