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Lessons from the Great Depression:

Tyler Cowen on the lessons for today from FDR and the Great Depression:

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.

Anderson (mail):
Eric Rauchway's post on Cowen's column is worth a look.

In the NYT, you'll see the eminently reasonable and decent Tyler Cowen explain, "The New Deal Didn't Always Work, Either." It's a good thing nobody's arguing that, then, isn't it?
11.23.2008 9:32pm
DiversityHire:
Rauchway's got a real burr in his butt on the New Deal, you'd think he had some kind of stake in it.
11.23.2008 10:05pm
TyWebb:
Cowen's also being overly simplistic when he says, "expansionary monetary policy isn't so easy to put into effect" given current conditions in the credit markets. It would be more appropriate to say, as the Big Lebowski said, "The goddamned plane has crashed into the mountain!"

We're in a liquidity trap. Monetary policy isn't "not so easy," it's a headwall on a quadruple black diamond.

See Krugman's analysis of a white paper by Goldman on this issue.
11.23.2008 10:10pm
Mr L (mail):
Eric Rauchway's post on Cowen's column is worth a look.

No, it isn't. I don't see how you could have read Rauchway's comments and found anything worthwhile in them; he bites off half-sentences taken out of context, pretends that's the whole of Cowen's argument, then has the gall to whine about straw men.

Going by Rauchway's post, you'd be lead to believe that Cowen's main thrust is that the NRA is bad and we need to start a war to fix the economy, as opposed to the points he actually made -- conveniently summarized in ALLCAPS BOLD TEXT at the top of every section. What an infant.
11.23.2008 10:43pm
TruePath (mail) (www):
The Rauchway post isn't so much bad or incorrect but rather so firmly locked in a certain kind of partisan mindset that it tries to put all of Cowen's points inside that context. As I read Cowen, perhaps affected by reading his blog, is that he's mostly just offering the sort of lesson that teachers and professors are inclined to give: here is a simplistic explanation one could have and here is why it's not right.

In other word Cowen isn't trying to respond to the intellectual arguments of the policy wonks on some other side of this debate but just to educate the public at large and inexpert politicians.
11.23.2008 10:56pm
A. Zarkov (mail):
Will Keynesian pump priming, which we now call stimulus packages work? I doubt it because today we need more investment and less consumption. A stimulus package will most likely increase employment in China more than the US. Unlike the 1930s we don't have a lot of idle manufacturing capacity. Unlike the 1930s we import 2/3 of our liquid fuels consumption. For these an other reasons another Great Depression might be considerably worse. Spending on infrastructure projects might work, and at least it will put Americans to work. Unless of course, we start importing foreign labor to work on them.

Over the last 15 years we have suffered a tremendous misallocation of capital by building too much residential real estate. Homes aren't factories-- they don't produce a revenue stream.

The credit crisis also threatens to choke off a recovery from the currently accelerating recession. My solution: make all Credit Default Swap contracts null and void. No one knows how to untangle the CDS mess, and the uncertainty of how this will unwind has to investor paralysis. Take the bitter pill (for some) and cut the Gordian knot.
11.23.2008 11:03pm
JunkYardLawDog (mail):
and at least it will put Americans to work. Unless of course, we start importing foreign labor to work on them.


By not enforcing our borders and immigration laws we are importing the labor to work on them.


Says the "Dog"
11.23.2008 11:12pm
DiversityHire:
That's OK, JYLD, the failing economy is solving the immigration problem without anyone having to "do" anything.
11.23.2008 11:20pm
Peter Smythe (mail):
will probably come for reasons that have little to do with most policy initiatives.

Haven't you heard? Benito Obama is going to create 2 1/2 million new jobs next year.
11.23.2008 11:31pm
David Welker (www):
Given Tyler Cowen's concession that the response to the Great Depression (on this, he agrees with Paul Krugman) did not include expansionary fiscal policy, where does the conclusion that "the recovery will probably come for reasons that have little to do with most policy initiatives" come from?

I would say that this particular conclusion comes from Tyler Cowen's libertarian tendencies rather than anything he learned from the Great Depression. This is quite a leap.
11.23.2008 11:47pm
Curt Fischer:
David Welker: Tyler Cowen's NYTimes piece says:


The New Deal's legacy of public works programs has given many people the impression that it was a time of expansionary fiscal policy, but that isn't quite right. Government spending went up considerably, but taxes rose, too. Under President Herbert Hoover and continuing with Roosevelt, the federal government increased income taxes, excise taxes, inheritance taxes, corporate income taxes, holding company taxes and "excess profits" taxes.

When all of these tax increases are taken into account, New Deal fiscal policy didn't do much to promote recovery. Today, a tax cut for the middle class is a good idea — and the case for repealing the Bush tax cuts for higher-income earners is weaker than it may have seemed a year or two ago.


Perhaps it goes against the grain of established economist jargon, but I don't think it's a stretch to say that rapidly increasing governmental spending is an "expansionary" fiscal policy.

That said, Mr. Cowen's point seems to be that the New Deal fiscal policy combined higher spending with higher taxes, and that the effect of higher government spending was partially cancelled out by the effects of higher taxes. I'm not qualified to assess whether his point is valid, but that is the claim. If most policy initiatives partially hinder and partially assist recover, it seems straightforward to infer that "the recovery will probably come for reasons that have little to do with most policy initiatives".

I'm unsure why libertarianism has anything to do with it or where the leap is.
11.24.2008 12:43am
David Welker (www):
Curt Fischer,

Increasing spending is not expansionary fiscal policy if you also raise taxes at the same time.

So, the leap is, even though expansionary fiscal policy was not tried in response to the Great Depression, we can conclude that expansionary fiscal policy (i.e. "policy initiatives") will probably not have a role in any recovery from our current economic situation.

That is not a lesson you can draw from the Great Depression, because, as Tyler Cowen concedes, expansionary fiscal policy was not implemented at that time.
11.24.2008 1:12am
Cornellian (mail):
Much more interesting, IMO was the recent NYT article suggesting that the steel industry may be a template for dealing with the auto industry.
11.24.2008 1:36am
Bill McGonigle (www):
"The Federal Reserve definitely caused the Great Depression by contracting the amount of currency in circulation by one-third from 1929 to 1933." - Milton Friedman

liquidity crisis. m3.

(though the Fed appears to be [ineptly] trying to increase the money supply of late)
11.24.2008 3:30am
Smokey:
Bill McGonigle is correct, and I might add that velocity has fallen by ~5%, which is the equivalent of taking 5% of cash out of the economy.

Inflation is a problem. But deflation is really, really scary.

Inflation can be dealt with by raising interest rates, a la Paul Volcker. But pouring money into the economy to combat deflation is like pushing on a string; the cash goes directly into savings, hoarded by frightened consumers -- when what we need are free spending buyers of goods and services, which provide jobs, pay raises, and a healthy, growing economy.

It's going to be a very long haul getting out of this deflationary situation. Japan had the same problem in 1989-90, and they're not out of it yet.
11.24.2008 7:51am
mls (www):
My solution: make all Credit Default Swap contracts null and void.

What, if anything, is wrong with this idea?
11.24.2008 8:04am
MichaelP:
Amen to David Welker -- this is the second time I read an essay used the argument "Keynesian economics won't save us because the recovery package of the New Deal was not Keynesian."

Both essays argued implicitly that spending due to expanded government programs was 'canceled' by tax increases -- yet this is an empirical assertion, that should be verifiable by comparing consumer spending before and after New Deal tax increases. I would like to see such a comparison. If consumer spending was largely unaffected by the tax increases, then there is a good argument that expanded government programs were an important part of the recovery.
11.24.2008 9:01am
HLSbertarian (mail):

My solution: make all Credit Default Swap contracts null and void.

What, if anything, is wrong with this idea?


Illegality and futility, in that order.

Nullifying a swap just shifts a loss to a different financial institution. How does that help?
11.24.2008 9:11am
A.C.:
People who have spare cash aren't spending for two reasons:

1) They have too much debt and not enough savings. So, any money they get is going into shoring up financial positions.

2) They have enough stuff. I don't have a lavish lifestyle, but I could easily go a couple of years without buying any shoes, towels, kitchen gear, or entertainment media (including books -- my to-read stack is already huge). It might even be a good idea to stop spending until I wear some things out, or otherwise use them up the way they were intended to be used. Storage space has become an issue.

It has actually been hard for me to think of things I want for Christmas this year, except for gift certificates for theaters and restaurants and so forth. (Those create jobs, I suppose, and the jobs they create can't be outsourced to China.) I won't need any new THINGS until the stuff I have breaks, or until I buy that house I keep talking about buying when the prices come down enough.

Is there a point when people get tired of stuff and start to focus on other areas of life? I feel as though I've hit that spot. What will the economy do if we all have?
11.24.2008 9:16am
Houston Lawyer:
I'm with AC on spending issues. All of my extra cash is going against my mortgage. I suspect that there are quite a few people who could go a number of years without any major new purchases. However, I also suspect that our economy is driven by people who's spending habits are quite different from AC's.
11.24.2008 9:35am
Curt Fischer:
David Welker: Now I see your point, and I agree that it is correct, but I thought Cowen was making a broader point. It seemed he wasn't speaking just about expansionary fiscal policy, but about many economically oriented policies in general.

For example allowing union votes to occur without a secret ballot, or the expansion of trade protectionism, are policies (though they may be justified on other grounds) could hinder economic recovery, while expansionary fiscal policy could help.

If true, it would be wrong to attribute economic recovery to changes in unionization laws, and thus, "the recovery will probably come for reasons that have little to do with most policy initiatives".
11.24.2008 9:44am
Doc W (mail):
Budget deficits were massive throughout the 1930s except for 1930 and 1938. So no, increased taxes did not cancel increased spending.

When people get really sick, they may have to take as medicines things that normally aren't very good for them and that will have negative side effects even if they do work. Perhaps it's possible that printing up a bunch of greenbacks (or the equivalent) will free up a badly stalled economy. It will also cause distortions, malinvestments, that will ultimately have to be liquidated. The likelihood is another boom-bust cycle courtesy of the economic court astrologers.

What's more important in the long run is, how do we avoid getting sick again?
11.24.2008 10:21am
MarkField (mail):

Budget deficits were massive throughout the 1930s except for 1930 and 1938.


Only if by "massive" you mean roughly 5% of nominal GDP. See the chart about 1/4 of the way down the page here.
11.24.2008 11:05am
Bill McGonigle (www):
What's more important in the long run is, how do we avoid getting sick again?

Have the government start issuing debt-free money (again) and take away the power of the banks to create artificial wealth (that inevitably busts).

It would stabilize the currency, but break the business model for the massive "Wall Street" banks. Our current policy is to tax the labor of the citizenry for the benefit of said banks, and things like 98% devaluation of the currency are just considered 'normal', so I'm not holding my breath.
11.24.2008 11:54am
David Welker (www):
"Doc W" aka Allan Walstad,

I thought you were done with the anonymous comments? Why say you are done with anonymous comments if that isn't true? Why not mean and do what you say?

So, is it your position that Tyler Cowen, who asserts that it isn't "quite right" to assert that the New Deal programs were "time of expansionary fiscal policy" is another "quack" just as you said Ben Bernanke, Henry Paulson, and Paul Krugman are quacks?

Oh, yes, and when called out on this, you said you were completely "satisfied" with your assertion that these economists were "quacks."

So, I am curious, can we infer that you believe that only physicists like yourself know anything about economics while all the economists are "quacks"?
11.24.2008 12:34pm
David Welker (www):
MarkField,

Doc W aka Allan Walstad probably thinks that Brad DeLong is just another quack. So your little graph won't mean anything to him. After all, Brad DeLong is an actual economist, not a physicist.
11.24.2008 12:39pm
Ms. Mae (mail):

My solution: make all Credit Default Swap contracts null and void.


How does this comport with the libertarian view of the Contract Clause? I wonder what Co-conspirator Prof. Barnett thinks about your solution.

Your solution sounds like Big Government (Socialism) to me.

I like the ring of "Benito Obama" too! Obama's career trajectory is strikingly similar to Mussolini's: spending early days stabbing youngsters on the playground, then travelling abroad to community organize and fight alongside socialists and unionists against corporate strikebusters, then returning to the home country to seize absolute power!

I hope B. Obama builds some of those kick-ass Bullet Trains, too.
11.24.2008 1:03pm
Allan Walstad (mail):
Re earlier post: The computer put "Doc W" up and I didn't notice. Did some gremlin eat my fresh cookies?
11.24.2008 1:15pm
Curious Passerby (mail):
Homes aren't factories-- they don't produce a revenue stream.

How about make all profits of home-based businesses tax exempt to home-owners? Bet that would soak up the glut of homes and double the GNP.
11.24.2008 1:18pm
Allan Walstad (mail):
Mark Field:

Budget deficits were massive throughout the 1930s except for 1930 and 1938.



Only if by "massive" you mean roughly 5% of nominal GDP. See the chart about 1/4 of the way down the page here.

Take 1936: Yes, the deficit was "only" 5.5% of GDP, but it was also over half the entire budget. So it clearly makes the point that increases in taxes did not cancel out increases in spending. Far from it.

http://www.whitehouse.gov/omb/budget/fy2006/pdf/hist.pdf
11.24.2008 1:34pm
MarkField (mail):

Doc W aka Allan Walstad probably thinks that Brad DeLong is just another quack. So your little graph won't mean anything to him. After all, Brad DeLong is an actual economist, not a physicist.


I remember the name change and figured it was a cookie issue.

Regular readers of DeLong's site know that he occasionally posts about and fully understands the mathematics of physics. Perhaps that will lend him more credibility in Allan's eyes (though DeLong's not the ultimate source of the chart).
11.24.2008 1:38pm
MarkField (mail):

Take 1936: Yes, the deficit was "only" 5.5% of GDP, but it was also over half the entire budget. So it clearly makes the point that increases in taxes did not cancel out increases in spending. Far from it.


The effectiveness of Keynesian stimulus depends on the size relative to the GDP, not relative to the existing budget.

I agree that the tax increases didn't entirely cancel out the deficit, but the change from Hoover wasn't much, as can be seen from the chart.
11.24.2008 1:40pm
DiversityHire:
fully understands the mathematics of physics

This I gotta see!

Is that even a possibility? For anybody?
11.24.2008 1:55pm
MarkField (mail):

Is that even a possibility? For anybody?


Lots of people understand the math. The physical interpretation is the real problem when it comes to particle physics.
11.24.2008 3:39pm
EIDE_Interface (mail):
Can anyone explain me the fetishization of manufacturing? All those factories do is produce MORE crap that people stuff into their homes that they don't need. Why do we need to do more of that same thing that got us into this mess?
11.24.2008 4:39pm
Harry Eagar (mail):
Geez. Are there any lawyers reading this blog?

I'd at least like to see one of them acknowledge that the New Deal never was tried because the Supreme Court decided it was unconstitutional. What FDR did after that was not the New Deal.

It was a second-best (or third) expedient.

We don't know if the New Deal would have worked or not, because it was never tried. This is not a secret in the real world.

There is an entire cottage industry now devoted to explaining how the New Deal was a failure. I cannot take these people seriously.
11.24.2008 4:47pm
Micha Elyi (mail):
EIDE_Interface communicated: "Can anyone explain me the fetishization of manufacturing? All those factories do is produce MORE crap that people stuff into their homes..."

Uh huh. And when their homes are full to overflowing, millions of those people go rent another garage-sized space from Public Storage and fill that space up too. So, I agree with A.C.'s remarks that the US economy could coast forward for quite a while without as much consumption of new stuff as supposed by those who program current econometric models -- if people's preferences changed regarding new versus used goods. (I wouldn't be surprised if Houston Lawyer is right now blowing $100/month plus on a storage space to house unused personal belongings.)

I really should get working on a paper about America's possible transition to an "Ebay Economy," an economy with a much larger trade in used goods than the US has experienced since World War II ended, a topic I discussed with my economics dept. chair a few years ago. The blossoming of Craiglist lowers the transaction costs of trading in serviceable used goods still further. Urban and suburban dwellers may also have noticed the proliferation of never ending yard sales in certain neighborhoods. Secondhand shops aren't just Goodwill, St. Vincent de Paul Society stores, and Sally's anymore. Who needs to trudge to a flea market anymore to sell that bicycle the kids outgrew or buy a used yet sturdy larger replacement?
11.24.2008 5:44pm
Aleks:
Re: So, I agree with A.C.'s remarks that the US economy could coast forward for quite a while without as much consumption of new stuff

Problem with this idea is that a lot of our stuff doesn't last very long, and it's cheaper to replace than to repair if it can be repaired at all. The only repairs I've had done in the last several years were to cars, a hot tub and a washing machine. I've replaced a vacuum, a TV, a toaster, a coffee maker, a macrowave, two printers, an alarm clock and a laptop.
11.24.2008 10:07pm
A.C.:
Some things wear out and do, indeed, have to be replaced. On the other hand, once you buy some All-Clad pots (made in the USA!), you've got 'em for life. I don't know how you would wreck those, short of high explosives.

My point was that you spend less once you ramp your lifestyle up to full adult level, not that you spend nothing. And many people downsize as they get older, which puts a lot of durable goods back into circulation.

This may be an aging population thing. There was a spending boom as the Baby Boomers bought and equipped their homes. Now there are fewer people in the household formation stage, even counting people like me who delayed some major purchases because house prices were so crazy. And there are a lot of people facing retirement and residential downsizing.

Plus, people who overbought in recent years can simply work through their extra sets of things that last 2-5 years in normal use. Their towels may not be as pretty when they are done, but they will still have towels. And when they finally replace them, they may not buy so many.

What do these trends mean for manufacturing industries, here and abroad?

Anyway, I think we should all buy less stuff and more concert tickets, to help employ my musician friends. And live theater is bigger and more colorful than even the largest TV screen.
11.25.2008 8:31am
E.Grim (mail):
Harry Eagar wrote:

Geez. Are there any lawyers reading this blog?

I'd at least like to see one of them acknowledge that the New Deal never was tried because the Supreme Court decided it was unconstitutional. What FDR did after that was not the New Deal.

It was a second-best (or third) expedient.

We don't know if the New Deal would have worked or not, because it was never tried. This is not a secret in the real world.


I'll try to overlook H.E.'s snotty tone and respond seriously.

In this real world, FDR threatened to pack the court with sympathizers, leading to the "switch in time that saved nine," leading to such decisions as Wickard.

H.E. claims that FDR getting his way in the end wasn't the New Deal, but since he didn't support his claim, it's hard to tell what "real world" he is referring to.
11.25.2008 5:18pm
Harry Eagar (mail):
Well, lessee. FDR enters office in '33. Starts New Deal. Has teeth kicked in by Supco. Threatens to pack Supco in '37.

Depression ends, for some reason, around end of '40.

I am having a hard time understanding where the '7 years that FDR extended the Depression' slots into that period.

I prefer to think of my tone as adult and the writings of, eg, Shlaes as childish and intellectually dishonest. YMMV.
11.26.2008 3:48pm