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How the New Deal Prolonged and Deepened the Great Depression:

Economists Harold Cole and Lee Ohanian have written an interesting Wall Street Journal op ed summarizing their important research showing that the New Deal prolonged and deepend the Great Depression of the 1930s:

The New Deal is widely perceived to have ended the Great Depression, and this has led many to support a "new" New Deal to address the current crisis. But the facts do not support the perception that FDR's policies shortened the Depression, or that similar policies will pull our nation out of its current economic downturn.

The goal of the New Deal was to get Americans back to work. But the New Deal didn't restore employment. In fact, there was even less work on average during the New Deal than before FDR took office....

Why wasn't the Depression followed by a vigorous recovery, like every other cycle? It should have been. The economic fundamentals that drive all expansions were very favorable during the New Deal...

So what stopped a blockbuster recovery from ever starting? The New Deal. Some New Deal policies certainly benefited the economy by establishing a basic social safety net through Social Security and unemployment benefits, and by stabilizing the financial system through deposit insurance and the Securities Exchange Commission. But others violated the most basic economic principles by suppressing competition, and setting prices and wages in many sectors well above their normal levels. All told, these antimarket policies choked off powerful recovery forces that would have plausibly returned the economy back to trend by the mid-1930s.

As they say, read the whole thing.

I previously blogged about this issue in this post. Unfortunately, many today are bent on repeating some of the mistakes of the 1930s.

UPDATE: For those interested, here is an ungated link to Cole and Ohanian's well-known 2004 Journal of Political Economy article that provides evidence showing that the New Deal prolonged the Depression by some 6-7 years.

Lior:
I think it is important to realize that the recession will eventually end, to be followed by an expansion, no matter what economic policies are followed. Furthermore, society will remember the following narrative: first there was recession, then various politicians "did something", then the country emerged from the recession. It will then be obvious to credit the politicians with "leading the country out of the recession" independently of the merits of the policies. In fact, the more they were seen to have done, the more they will be remembered as having "done the necessary things".

Given this attitude by the voters, I submit that the politicians have carefully studied the lessons of the New Deal, lessons that they are successfully applying today:

1. Effort is more important that achievement (this is what is taught in the schools, and it also works in politics).

2. Those that benefit from the policies should be easily identifiable. This is important both from the PR perspective and from the hope of getting their votes in the future.

3. Those that lose can be told that they would have suffered no matter what. No-one will be able to prove otherwise.

4. Jingoism is popular -- "protecting the American worker" sounds much better than "protecting the American consumer".
2.2.2009 3:44am
James Gibson (mail):
Those who fail to learn from history are destine to repeat it. We are even putting in place the foundation for a tariff/trade war from the Buy American clause in the Stimulus. It is stated this provision can cause a steel war. But in order to have a war you have to have the means to wage such a war. In short do we actually make anything in this country anymore, including steel to have a trade war over.
2.2.2009 4:03am
David Welker (www):
For a different point of view on the New Deal, check out this link to a blog entry by Nobel prize winning economist Paul Krugman, complete with nifty graphs.

A few other interesting points. The articles conclusion is as follows:


A large fiscal stimulus plan that doesn't directly address the specific impediments that our economy faces is unlikely to achieve either the country's short-term or long-term goals.


In other words, these economists aren't even against a large fiscal stimulus package, they are merely against one that does not address "specific impediments that our economy faces."

A final point. Somin asserts the following:


Unfortunately, many today are bent on repeating some of the mistakes of the 1930s.


I think this can be criticized as pretty crude reasoning along the lines of asserting that it is the responding to the crisis at all, rather than the character of the response, that is problematic. The biggest problem with the New Deal that the economists in this article identify is as follows:


The most damaging policies were those at the heart of the recovery plan, including The National Industrial Recovery Act (NIRA), which tossed aside the nation's antitrust acts and permitted industries to collusively raise prices provided that they shared their newfound monopoly rents with workers by substantially raising wages well above underlying productivity growth.


And what is the most damaging policy that Somin identified in his previous post? Here it is:


Perhaps the most egregious example was the National Industrial Recovery Act, the centerpiece of FDR's 1933 "First New Deal" (discussed at pp. 649-55 of my article).


The policies embodied in NIRA (and the Agricultural Adjustment Act) can perhaps be fairly characterized, as in the WSJ article as:


suppressing competition, and setting prices and wages in many sectors well above their normal levels


If this is the problem that both the economists in this article and Somin identify, the question is, are policies that primarily act to suppress competition and set prices and wages above normal levels the primary feature of the fiscal stimulus currently before Congress. Answer: no.

So, where exactly does the conclusion "many today are bent on repeating some of the mistakes of the 1930s" come from??

May I suggest that this post goes a long way to demonstrating my earlier point. Crude generalizations do not serve use very well at all. (In this case lumping policies that suppress competition and set wages and prices with policies to provide fiscal stimulus.)

One should not primarily focus on generic issues, like the size of government but should instead usefully focus one's critiques on specific policies with a laser-like focus.
2.2.2009 4:17am
pireader (mail):
Professor Somin --

Be careful. You're veering close to the fever swamps, where people seize on whatever odd bits of evidence support their ideological preconceptions.

That op-ed you cite "proves" its point in a strange way. Why, you might wonder, would we compare a 1930-32 average with a 1933-39 average? Well, perhaps coincidentally, that's the only way to prop up the op-ed's thesis.

Employment and real GDP fell from 1929 to 1933, picking up downward speed as they fell. Then they mostly rose steadily from 1933 to 1940 (except for a downtick in 1938).

So averaging together 1930-32 (but not 1933) grossly understates how bad matters got. And averaging together 1933-39 (but not 1940) understates how far the economy recovered.

Nice work in the fever swamps, but weak history and weak economics.

See for yourself. Here's the data:


Employment(MM)
1929-- 46.2
1930-- 44.2
1931-- 41.3
1932-- 38.0
1933-- 38.0
1934-- 40.3
1935-- 41.7
1936-- 44.0
1937-- 46.1
1938-- 44.1
1939-- 45.7
1940-- 47.6

GDP (billions of $2000)
1929-- 865
1930-- 791
1931-- 740
1932-- 644
1933-- 636
1934-- 704
1935-- 767
1936-- 867
1937-- 911
1938-- 880
1939-- 951
1940-- 1034
2.2.2009 6:09am
Hoosier:
pireader

The "downtick" of the 1937-38 "Roosevelt Recession" was quite severe. As important to note for the sake of this conversation is that FDR didn't have any plan for recovery, short of spending a lot more money.

The Depression ended because of war orders from Europe. We don't know how long the 1937 Recession would have continued if Hitler hadn't spooked the Brits and French in 1938.

When it comes to the "Three R's" of the New Deal, it's a mixed bag. Relief and reform: High marks. Recovery: It's not clear that six years of New Deal policy had brought significant, permanent improvement.

Best advice for economic recovery: Let's get Germany to attack France. How hard could that be?
2.2.2009 6:53am
David Warner:
"But others violated the most basic economic principles by suppressing competition, and setting prices and wages in many sectors well above their normal levels. All told, these antimarket anticonsumer policies choked off powerful recovery forces that would have plausibly returned the economy back to trend by the mid-1930s."

There, maybe now the legions of Welkers and Naders will get their friendly fire trained in a productive direction.
2.2.2009 7:03am
Angus:
Pireader has pointed out one of the sleight-of-hand tricks the op-ed writers used to fudge their numbers. That is only one of many examples in a short piece. A couple of others:

From the op-ed:
Even comparing hours worked at the end of 1930s to those at the beginning of FDR's presidency doesn't paint a picture of recovery. Total hours worked per adult in 1939 remained about 21% below their 1929 level, compared to a decline of 27% in 1933.

So, the measure of recovery gets boiled down not to traditional measures of GDP, or even per capita income, but rather number of hours worked. Why, I wonder, would the authors do that? Could it have to do with the 40-hour work week becoming the standard in the 1930s -- an idea that predated the New Deal by decades? But even in the authors' numbers, hours per worker went UP during the New Deal. This is bad in what way?

From the op-ed:
Per capita consumption did not recover at all, remaining 25% below its trend level throughout the New Deal, and per-capita nonresidential investment averaged about 60% below trend.
Well that's just damning: consumption and investment stayed flat or went down during the New Deal. Except that they didn't. Investment went up by about 500%, and even limiting it to nonresidential investment, it went up by 160% from 1933-1937 (I don't have the numbers on hand for 1937-1940). Consumption likewise jumped remarkably higher. Ahh -- the authors say it was "below trend". Conveniently, the authors get to decide what the "trend" should have been, largely based on their own imaginations.

Manipulation via nonsensical date ranges? Bizarre and inappropriate measures of prosperity? Using imaginary data points to evaluate the New Deal's impact?

The authors of the op-ed are either stupid or dishonest. Their credentials seem to rule out stupid, which leaves...
2.2.2009 7:23am
American Psikhushka (mail):
David Welker-

One should not primarily focus on generic issues, like the size of government but should instead usefully focus one's critiques on specific policies with a laser-like focus.

Size of government effects everything because the private economy has to pay for it. When the cost of government swamps the economy and prevents it from recovering and creating societal wealth it doesn't matter what the money is spent on.
2.2.2009 7:24am
ERH:
For their next project Cole and Ohanian will prove that FDR actually caused WWII to drag on for years longer than it would have. Because you see he was a Democrat and by definition bad.
2.2.2009 7:24am
Angus:
The Depression ended because of war orders from Europe. We don't know how long the 1937 Recession would have continued if Hitler hadn't spooked the Brits and French in 1938.
Well, we do know the recession was over and the economy was growing again by mid-1938, which is well before any stimulus that arming the Brits or French could have provided.
2.2.2009 7:26am
A. Zarkov (mail):
pireader:

Do you have a source for those numbers? In particular the unemployment statistics? Did they come from household surveys or what? I suspect they are derived from GDP.
2.2.2009 8:03am
Richard Riley (mail):
Ilya, I hope you will update your post, or write a new one, to address a very big problem at the heart of the Cole-Ohanian op-ed. David Welker discusses it above. The problem is that the component of the New Deal that Cole-Ohanian really complain about - the National Industrial Recovery Act with its anti-competitive cartelization of huge swaths of the economy - is exactly what is NOT in the Obama stimulus package. Basically the Obama plan is to spend a lot of money, either directly or through tax cuts. Cole-Ohanian actually say that the spending part of the New Deal, at least some of it, was a GOOD thing (they point to things like unemployment insurance). You have to admit there's nothing remotely like the NIRA in the Obama plan.

I suspect the NIRA probably did have the negative consequences to which Cole-Ohanian, and you, point. But if you really think that episode has lessons for today, you have to tell us what part of the Obama plan you think is like the NIRA. Otherwise I think the Cole-Ohanian piece actually supports the Obama plan!
2.2.2009 8:26am
loki13 (mail):
Prof. Somin,

There are several problems with both this article, and the general reasoning you extrapolate from it.

1. The numbers are, at best, cooked. As anyone who has taken even a basic econometrics course can tell you, the data sets you choose will predetermine your outcome. Or, put another way, lies, damn lies, and statistics. As others have pointed out (supra) the authors were *ahem* selective in their choices. I recommend choosing more mainstream economists next time (no, you don't have to pick Nobel prize winners).

2. The authors, despite their cooked numbers, at least are honest enough to point out that it was parts of FDR's plan that didn't make sense (the NIRA). At the time this was being formulated, we didn't know as much about economics and Keynes wasn't around, so their was a great deal of experimentation. The fact that there was some bad (the NIRA) does not mean the aggregate was not good. In fact, the evidence of the 1937-38 recession brought on by reducing the deficit suggests the opposite.

3. You ignore the normative questions beyond the economic ones. American Psikhushka at least attempts to do so; in his(?) opinion, all expansion of government is bad. The counter to that would be that the New Deal save lives, saved families, and arguably saved our democratic and capitalist system of government. I know which I prefer, but it's not something economics alone can answer (unless you place a dollar value on human life and democracy and run your studies).

4. The argument that "the economy always rebounds" is true- except, of course, when it doesn't. Sometimes there is political upheaval. Sometimes the economy stagnates for years. Sometimes the economic system implodes and vast amounts of wealth are destroyed until a new one rises to take its place. We have been fortunate that this hasn't happened in our country. Was the Great Depression an event that would cause this to happen? We don't know, and it is hard to argue counterfactuals. But simply asserting it doesn't make it true.

In the end, there is an attempt to re-examine the past to see if certainties are so certain. It is true that the New Deal is more complex than "everything was good", but in your attempt to de-mythologize it, you reach too far.
2.2.2009 8:34am
pireader (mail):
Hoosier --

Thanks for your thoughtful and courteous reply. Here's a few further thoughts.

"It's not clear that six years of New Deal policy had brought significant, permanent improvement."

The Roosevelt administration's greatest economic success came early, arresting the downward slide and getting the growth re-started by rescuing the banking system, moving off the gold standard, etc. Surely that was a significant and permanent improvement. (If Hoover had won another term in 1932, who knows how long matters would have continued to deteriorate?)

Thereafter, some of the administration's policies were ineffectual or even counter-productive. But so are any administration's ... and there's no reason to believe that their bad policies outweighed the good.

After all, employment and real GDP grew rapidly after 1933; by 1937, they'd returned to 1929 levels. Here's year-over-year GDP growth:

1934-- +11%
1935-- +9%
1936-- +13%
1937-- +5%
1938-- -3%
1939-- +8%
1940-- +9%


"FDR didn't have any plan for recovery, short of spending a lot more money."

Well, fiscal stimulus and better monetary policy were what the situation required; and they worked. So I'm not sure what point you're making.

The "downtick" of the 1937-38 "Roosevelt Recession" was quite severe.

The 1937-8 recession (-3% of GDP) was severe by our standards; and the Roosevelt administration was responsible for it. But viewed against the catastrophe of the early 1930s (-26% of GDP) and the subsequent recovery, it was merely a downtick in the overall upward trend from 1933 to 1940.


"The Depression ended because of war orders from Europe"

Growth resumed in 1934, long before Britain or France started re-arming.
2.2.2009 8:46am
Ugh (mail):
Economists Harold Cole and Lee Ohanian have written an interesting Wall Street Journal p ed ....

Every time a sentence includes the phrase "interesting Wall Street Journal op-ed" or "editorial" I know I'm about to be enlightened by reading what it has to say and believing the opposte.
2.2.2009 8:51am
pireader (mail):
A Zarkov --

Good catch. I should have cited my sources.

The employment data are from "Historical Statistics of the United States:Colonial Times to 1970 (Census Bureau, 1975), Table D1-10.

http://www.census.gov/prod/www/abs/statab.html

The GDP data are from the Commerce Dept's Bureau of Economic Analysis website

http://www.bea.gov/national/index.htm#gdp
2.2.2009 8:56am
Hannibal Lector:
As James Gibson points out, at least one aspect of the current stimulus package actually has no analogue in a New Deal policy, but rather resembles a policy introduced earlier, in the Hoover administration by Senators Smoot and Hawley.
2.2.2009 9:07am
pireader (mail):
Hannibal --

I won't defend protectionism, but I question whether the Smoot-Hawley tariff was a main driver of the Depression. Exports and imports were only a few percent of the US economy back then (and still are today). Even if they'd been cut to zero, why would that bring GDP down by 26% and collapse the banking system? (Export/import finance wasn't that important to the banks.)

Nonetheless, I agree that the current stimulus bill's "Buy American" provisions seem short-sighted ... especially with respect to NAFTA. We may need a free-trade pact with Canada sometime soon (e.g., in energy).
2.2.2009 9:35am
anon345 (mail):
There's really only one word to describe the authors of this cr*p and its "liars". To paraphrase Hillel, all else is commentary.
2.2.2009 9:35am
Sarcastro (www):
Wait, I thought this depression was caused by giving houses to black people.
2.2.2009 9:38am
Anderson (mail):
The "downtick" of the 1937-38 "Roosevelt Recession" was quite severe.

Yes, Hoosier, but wasn't that caused in large part by FDR's ill-timed recourse to budget-balancing? I.e., by a departure from "the New Deal"?
2.2.2009 9:48am
Uh_Clem (mail):
Cherry-picked data presented to advance a pre-determined ideologically-driven conclusion. This isn't scholarship, it's propaganda.

Put these guys in the bin with the "ID" folks, the holocaust deniers, and the "scientists" who maintain that there's no connection between smoking and cancer.
2.2.2009 9:56am
paul lukasiak (mail):
The problem here is one of perception: When people think "new New Deal", they are thinking about social safety net and jobs programs, not things like the RINA, which the authors describe as:


The most damaging policies were those at the heart of the recovery plan, including The National Industrial Recovery Act (NIRA), which tossed aside the nation's antitrust acts and permitted industries to collusively raise prices provided that they shared their newfound monopoly rents with workers by substantially raising wages well above underlying productivity growth. The NIRA covered over 500 industries, ranging from autos and steel, to ladies hosiery and poultry production. Each industry created a code of "fair competition" which spelled out what producers could and could not do, and which were designed to eliminate "excessive competition" that FDR believed to be the source of the Depression.


Even a lefty like me can see why something like that would be a problem -- you get the worst of both worlds; not merely government regulation, but private sector monopolization and collusion.

That being said, data provided above by people like pireader strongly suggest that the case for the "failure" of the New Deal is being cooked by using as a benchmark pre-Depression trends that were unsustainable, and whose unsustainability played a role in the Depression itself. To put it in today's terms, it would be like saying that a recovery program that did not result in a reinflation of the housing bubble was a failure.
2.2.2009 10:05am
paul lukasiak (mail):
Nonetheless, I agree that the current stimulus bill's "Buy American" provisions seem short-sighted ... especially with respect to NAFTA. We may need a free-trade pact with Canada sometime soon (e.g., in energy).

I like the 'buy American' proposal - provided that its a "short term" solution. No point in spending hundreds of billions of dollars that winds up overseas -- and if you're going to talk about the efficiency of a "stimulus" package in the short term, you can't ignore the fact that keeping the money in America is a lot more efficient than sending it overseas.
2.2.2009 10:13am
Jim Ison (mail):
I am impressed with the (mostly) civilized and thoughtful responses here. Canada has immediately responded to the "Buy American" aspect of the recovery bill, and I'd enjoy reading your thoughtful responses to the global fear that "buy American" will stultify most other economies.

"We may need a free-trade pact with Canada sometime soon (e.g., in energy)." True, but motivated by the same narrow interests that lead to "Buy American." Is there not a global perspective that is just as helpful to America's economic recovery?
2.2.2009 10:31am
David M. Nieporent (www):
That op-ed you cite "proves" its point in a strange way. Why, you might wonder, would we compare a 1930-32 average with a 1933-39 average? Well, perhaps coincidentally, that's the only way to prop up the op-ed's thesis.
Also coincidentally, it happens to reflect the pre-New Deal depression and post-New Deal depression. Whether the analysis proves the point is a separate question, but acting as if you don't understand where those dates come from is a little disingenuous.

Speaking of "strange" choices, it's rather odd of you to cite "employment" as a raw number, rather than as a percentage. Who analyzes employment that way, rather than by rates? It's hard to see any valid reason for so doing. (You make a similar error in discussing GDP; a normal analysis of the strength of the economy over a period of time would look at per capita, rather than total, GDP. That doesn't change the trend, but it does make the GDP improvement look a lot less impressive than you portray it.)


The Roosevelt administration's greatest economic success came early, arresting the downward slide and getting the growth re-started by rescuing the banking system, moving off the gold standard, etc. Surely that was a significant and permanent improvement. (If Hoover had won another term in 1932, who knows how long matters would have continued to deteriorate?)
I do. The economy would have fully recovered by 1934. (I mean, obviously, I don't know that, but neither do you, and your argumentum ad ignorantiam doesn't really prove anything at all, now does it? I ate chicken soup and my cold got better; who knows how long I would have been sick if I hadn't?)


Finally, in response to posters who have said that since Obama isn't attempting to cartelize the entire economy, the Op/Ed's comments aren't relevant, the Op/Ed also talks about attempts to keep wages and prices artificially high. Sound familiar? From attempts to prop up housing prices to attempts to increase unionization, the Dems are making this same mistake again.
2.2.2009 10:37am
Christopher Phelan (mail):
Credentials: In the end, credentials don't count: data and arguments do, but loki13 asked that Somin link to more "mainstream" economists next time. Cole and Ohanian are my former colleagues and the idea that they are not mainstream is absurd. Cole is a full professor at the University of Pennsylvania. a top 10 department worldwide, and Ohanian is a full professor at UCLA, a top 15 and possibly top 10 department worldwide. Their work on the Great Depression is a big part of their research reputation and it was published in the top ranked journals in the profession. Again, that doesn't mean it is right, but it does mean that it isn't the work of some non-mainstream guys. In fact, Cole and Ohanian are far more mainstream when it comes to macroeconomics than Krugman. Krugman won his Nobel for his work in international trade theory. He is not a macroeconomist, period. (Again, again, it doesn't mean he's wrong, but he's the non-mainstream macroeconomist here, not Cole and Ohanian.)

As for the substance of the argument, you simply can't get away from the main puzzle that Cole and Ohanian address. Before the Great Depression, there we quite a few depressions (usually called "panics"). They were quite severe by all accounts, but also short-lived. The Great Depression stands out not especially for its severity (the one in the early 1920's was also quite severe) but for the fact that unlike its predecessors, we didn't climb out soon after. Any serious inquiry into this question has to consider the possibility that the cure was worse than the disease.
2.2.2009 10:37am
Christopher Phelan (mail):
Credentials: In the end, credentials don't count: data and arguments do, but loki13 asked that Somin link to more "mainstream" economists next time. Cole and Ohanian are my former colleagues and the idea that they are not mainstream is absurd. Cole is a full professor at the University of Pennsylvania. a top 10 department worldwide, and Ohanian is a full professor at UCLA, a top 15 and possibly top 10 department worldwide. Their work on the Great Depression is a big part of their research reputation and it was published in the top ranked journals in the profession. Again, that doesn't mean it is right, but it does mean that it isn't the work of some non-mainstream guys. In fact, Cole and Ohanian are far more mainstream when it comes to macroeconomics than Krugman. Krugman won his Nobel for his work in international trade theory. He is not a macroeconomist, period. (Again, again, it doesn't mean he's wrong, but he's the non-mainstream macroeconomist here, not Cole and Ohanian.)

As for the substance of the argument, you simply can't get away from the main puzzle that Cole and Ohanian address. Before the Great Depression, there we quite a few depressions (usually called "panics"). They were quite severe by all accounts, but also short-lived. The Great Depression stands out not especially for its severity (the one in the early 1920's was also quite severe) but for the fact that unlike its predecessors, we didn't climb out soon after. Any serious inquiry into this question has to consider the possibility that the cure was worse than the disease.
2.2.2009 10:37am
American Psikhushka (mail):
loki13-

American Psikhushka at least attempts to do so; in his(?) opinion,...

It's fact. Government is funded by taxing private economic activity - the private economy.

...all expansion of government is bad.

Past a certain minimalist point it hampers the private economy. As it is increased it goes on to stifle, stagnate, and degrade the private economy the larger it gets.

The counter to that would be that the New Deal save lives, saved families, and arguably saved our democratic and capitalist system of government. I know which I prefer, but it's not something economics alone can answer (unless you place a dollar value on human life and democracy and run your studies).

False dichotomy. So Austrian economic responses would have killed people, destroyed families, and destroyed our democratic and capitalist system of government? One doesn't know what would have happened if Austrian policy was being followed. Austrian monetary and economic policies don't cause exaggerated boom-bust cycles so I can assume the Great Depression wouldn't even have occured if they were being followed. If you can assume a set of results so can I.
2.2.2009 10:38am
EricRasmusen (mail):
Take a look at the unemployment graphs I put up
here. I'm just a microeconomist, but it seems reasonable to start with simple trends in unemployment. It zoomed up in the early 30s and then zoomed down-tho not quite so fast, until it hit a bump in the 1938 recession. That's the unemployment we might blame Roosevelt poilcy for, I think. Otherwise, unless Roosevelt was what caused the end of the spike in 1933, the New Deal's effect isn't clear.

A separate question is whether GDP properly measures national welfare in this period. A make-work job that pays $500 will add $500 to measured GDP even if its true social value is zero.
2.2.2009 10:54am
Sarcastro (www):
[American Psikhushka I cannot pretend to understand the numbers behind the New Deal debate, but it seems to me that you are too excited about the private economy.

Economics is resource allocation. Growth is one good thing, but it need - indeed should not - not be the only goal of an economy. The economy serves the society, not vice-versa. Liberty and opportunity are both effected by resources.

Examples of private economies misallocating resources would be inflated CEO pay, credit-default swaps and short-sighted policies, such as environmental policies. CEO pay, regardless of what morality one might project on it, is not as simulative as giving that money to rank-and-file workers since CEOs tend to save a higher percentage of their pay instead of re-injecting it in the economy. Credit-default swaps were all about taking advantage of the lack of transparency in order to run up demand on flawed derivatives. And corporations exist to make short-term gains. They are obligated to fight more future-looking policies in favor of a much shorter time-horizon.

As for public economic policies stagnating private economies, it seems that the economy of the past decade would tend to disprove that. Until recently, even regulated industries seemed to be doing fine.]
2.2.2009 10:55am
MarkField (mail):

The Depression ended because of war orders from Europe. We don't know how long the 1937 Recession would have continued if Hitler hadn't spooked the Brits and French in 1938.


I think most people agree with this, but it always struck me as an argument for a bigger New Deal, not a smaller one.


Also coincidentally, it happens to reflect the pre-New Deal depression and post-New Deal depression. Whether the analysis proves the point is a separate question, but acting as if you don't understand where those dates come from is a little disingenuous.


Roosevelt didn't take office until March 1933, and it naturally took a while for his programs to have any effect. Attributing 1933 data to Hoover seems pretty legitimate (a point I'd expand to cover all presidents).


Before the Great Depression, there we quite a few depressions (usually called "panics"). They were quite severe by all accounts, but also short-lived.


Depends on what you mean by "short", I guess. The standard view AFAIK is that the Panic of 1837 lasted until 1843, that in 1873 until 1879, and that in 1893 until 1900. In fact, the latter two are sometimes combined into a "Long Depression" stretching from 1873-1900. By these measures, Hoover was just getting started.
2.2.2009 10:56am
byomtov (mail):
Also coincidentally, it happens to reflect the pre-New Deal depression and post-New Deal depression. Whether the analysis proves the point is a separate question, but acting as if you don't understand where those dates come from is a little disingenuous.

David Nieporent,

The category one decides to put 1933 into affects calculations of annual averages pretty strongly. FDR took office in March of 1933. Even though some of his legislation passed fairly quickly, I think it's a pretty serious distortion to put that year into a "post-New Deal" category as opposed to "pre-New Deal."
2.2.2009 11:00am
loki13 (mail):
Christopher Phelan,

I think you misunderstand the argument from credentialism. I am not saying that Messrs. Cole and Ohanian are complete boobs; rather, that the vast majority of macroeconomics research stands apart from their peers (the Nobel prize part was just a crack).

If you do a little digging, you'll see Ohanian has been floating this idea since 2004, and it has been rebutted many times over. I can understand why he continues to do so; there is little to gain at this point, academically, from flogging another tired piece on a Keynesian analysis of the Great Depression, while the counter-intuitive approach might land him a future endowed chair at George Mason (The Smith/Friedman Endowed Chair for White Male / Libertarian Historical &Economic Studies?). Most mainstream economists have long recognized that the NIRA (and some other programs) were bad; it is also believed that in the aggregate the programs were good, and, if anything, not *enough* was done (or, in the alternative, that which was done was not allocated correctly).

This also sets aside normative concerns, which they chose not to address.
2.2.2009 11:21am
loki13 (mail):
David Nieporent &bymontov,

There is a lag effect from both fiscal and monetary stimulus. Even assuming that *all legislation* took effect in March 1933, we would not see the effects on the economy until 1934.

Garbage in, garbage out.
2.2.2009 11:23am
paul lukasiak (mail):
The Great Depression stands out not especially for its severity (the one in the early 1920's was also quite severe) but for the fact that unlike its predecessors, we didn't climb out soon after. Any serious inquiry into this question has to consider the possibility that the cure was worse than the disease.
_
I'd like to suggest that because the depression was already four years old before the New Deal had any impact, the problems associated with the Depression became structural, and took much longer to deal with.

To use a medical metaphor, an infection that is treated promptly can be cured promptly, but one that isn't treated promptly can lead to chronic conditions that require additional, and more extended, treatment.
2.2.2009 11:33am
paul lukasiak (mail):
I think that the most interesting aspect of this discussion is what it reveals about how we discuss economic conditions. GDP grew by leaps and bounds from 1934-1937, and today we'd be talking about how that means that the "recession" was over -- our focus on "GDP uber alles" as a measure of economic progress hides what is obvious about the Great Depression -- that despite considerable, and extended gains in GDP, times were still hard for most people.
_
Indeed, when one considers recent history from the perspective that we now understand the Great Depression, the last eight years have been "the Great Recession", because while the GDP recovered, real wages remained stagnant, and the percentage of Americans who were employed dropped consistent (with a slight uptick for a year) from 2001-2008.
2.2.2009 11:46am
byomtov (mail):
loki13,

Of course the lags are important also. All the more reason to discount the idea that 1933 was "post-New deal."
2.2.2009 11:54am
Paul Allen:
There are three points in the op-ed and Ilya's post. Several comments here attempt to treat them in isolation and then ridicule the conclusions.

1) Measures to support high-wages were counterproductive. Comments suggest that this point is irrelevant because the stimulus bill does not repeat this mistake--but it does. It requires union labor and prevailing wages on the construction contracts paid via the stimulus measure.

2) The make-work aspects of the New Deal did not assist the recovery. Mark Feld and others have tried to pivot the conversation to only being about #1, but #2 is just as important (and more damning). Make-work activities are not intrinsically benign. They are coercive. If they are not effective, there is no ends-justify-the means defense.

3) The war stimulus worked first by constraining wage increases and second by diverting production sufficient such that mere subsistence demanded much higher household productivity--again at a tremendously coercive cost.
2.2.2009 12:02pm
David M. Nieporent (www):
I think that the most interesting aspect of this discussion is what it reveals about how we discuss economic conditions. GDP grew by leaps and bounds from 1934-1937, and today we'd be talking about how that means that the "recession" was over -- our focus on "GDP uber alles" as a measure of economic progress hides what is obvious about the Great Depression -- that despite considerable, and extended gains in GDP, times were still hard for most people.
_
Indeed, when one considers recent history from the perspective that we now understand the Great Depression, the last eight years have been "the Great Recession", because while the GDP recovered, real wages remained stagnant, and the percentage of Americans who were employed dropped consistent (with a slight uptick for a year) from 2001-2008.
No sale. True, during the Depression, the slope of the GDP graph was positive, but despite those "leaps and bounds," the absolute value of the economy was very low relative to before the start of the Depression. During "recent history," the absolute value may not have grown much, but it has grown. Real wages are higher -- "stagnant" is a euphemism for that, for people who don't want to admit that -- not far lower as they were until the end of the Depression. GDP is higher -- not far lower as it was until the end of the Depression.

In other words, we talk about economic conditions differently now because they are very different now.
2.2.2009 12:06pm
loki13 (mail):

Make-work activities are not intrinsically benign. They are coercive.


Yes. Exactly. People are being coerced into working so that their families can eat. Brilliant.

(As an aside, by your definition, you are correct. You say the "make work" provisions, aka the ineffective provisions whereby people were paid money for work that didn't need to be done, wasn't effective. It's a tautological definition- see also the best form of government is a benign autocracy. What Obama's advisers have attempted to do is spread out the spending and identify projects that are actually helpful, as opposed to "make work". Whether they succeed or not is a separate, debatable question. I admire your steadfast conviction that ineffective provisions are ineffective, however. Bravo.)

Also, couldn't miss this:

The war stimulus worked first by constraining wage increases and second by diverting production sufficient such that mere subsistence demanded much higher household productivity--again at a tremendously coercive cost.


Yes, it was so terrible to our economy that WW2 happened and we spent that money. That's why our economy suffered horribly during that time and the years afterwards. It's not for nothing that we call the 1946-1960 years the "Greatest Depression".
2.2.2009 12:09pm
pireader (mail):
David M. Nieporent--

[A]cting as if you don't understand where those dates come from is a little disingenuous.

I honestly don't understand why anybody seeking to describe the Depression would choose the obscure statistics, or the arbitrary date ranges, used in that op-ed. As a way to describe the Depression, they're not very helpful. However, as a way to tart up a pre-conceived opinion, they're pretty artful ... which was my point.

"it's rather odd of you to cite "employment" as a raw number, rather than as a percentage. Who analyzes employment that way, rather than by rates? It's hard to see any valid reason for so doing. (You make a similar error in discussing GDP"

I gave my own conclusions, which are rather boringly mainstream. Having just complained about the op-ed's data massaging, I was trying to give raw data for others to form their own conclusions.

By the way, US population grew 0.7% p.a. between 1929 and 1940. Adjusting for that growth wouldn't materially affect the outcome.

The economy would have fully recovered by 1934. (I mean, obviously, I don't know that, but neither do you, and your argumentum ad ignorantiam doesn't really prove anything at all, now does it?

President Hoover's strategy for addressing the Depression continued unchanged right up to the end of his term. And he tried to get President-elect Roosevelt to pre-commit to continuing it thereafter. So there's good reason to think that a re-elected Hoover would have kept at it. And nobody from Milton Friedman to John Maynard Keynes has ever doubted that that course would have continued eroding the economy ... likely at an accelerating rate. (The banking system had all but collapsed by Inauguration Day 1933.)


Christopher Phelan --

The Great Depression stands out not especially for its severity (the one in the early 1920's was also quite severe)

Previous downturns were severe by our standards, with peak-to-trough declines in real GDP of perhaps -10%. But I'm unaware of any previous decline that got anywhere near the 1929 to 1933 drop of -26%. Could you provide more specifics?
2.2.2009 12:17pm
George Smith:
Why even bother to offer any ctiicism whatsoever of the New Deal. One might as well question the existence of Gaia. Lets just sit back and see where this unstoppable liberal wet dream of a porkulus bill gets us. Besides, if it doesn't work, it'll be Bush's fault.
2.2.2009 12:23pm
RKV (mail):
Ilya, Cole and Ohanian have the right of the argument. And you do well to post their article here. To all of you who argue the minutia, and ignore the elephant in the room, Eric's charts convincingly make the case that New Deal policies didn't fix the Depression. You can talk year to year GDP all day long. The reality is that raising the price of labor in a period of high unemployment (e.g. taxes on wages like FICA) or cartelizing business a la NIRA didn't do the job (and were in fact counterproductive). FDR's cynical policies DID buy him lot's of votes, which is what politicians do. No surprise there huh? Work hard to LOOK like your're doing something which you can spin as positive, when in fact you're rewarding friends and punishing those who don't vote for you. Amity Shlaes book is good reading on this subject, as well.
2.2.2009 12:33pm
Jestak (mail):
A few points:

1) Cole and Ohanian don't indict "the New Deal" specifically, but specific elements of the New Deal, primarily the NIRA. Their published research, at least as I remember and understand it, compares actual economic performance to a counterfactual. The counterfactual assumes many New Deal policies remain in place, so their comparison is really between "the New Deal as it was" with "the New Deal with the NIRA taken away." As such, their results cannot be used to support a claim that "the New Deal prolonged and deepened the Depression."

2) While Cole and Ohanian conclude that the NIRA had a contractionary impact on the economy, that conclusion is not universally accepted. Gauti Eggertson of the New York Fed has published research that concludes that the NIRA had a positive or expansionary impact on GDP. This is a topic where research is ongoing, and it's important not to fasten onto one or two author's conclusion and ignore the rest of the discussion and debate.

3) If we're going to assess FDR's economic policies as a whole, he has to be given a huge amount of credit for taking the US off of the gold standard. Christina Romer's research has found that the biggest factor, by far, driving GDP growth from 1934 on was monetary expansion, triggered by our abandonment of the gold standard.
2.2.2009 12:51pm
loki13 (mail):
Amity Shlaes is such a hack that he was fired from the Financial Times for being awful and misleading (the FT not exactly known as being a bastion of liberalism). She is currently on libertarian welfare (thinktank).
2.2.2009 12:52pm
loki13 (mail):
In Amity Shlaes defense, she does have bachelor's degree in English, so I'm sure she has pretty words in her book.
2.2.2009 12:54pm
Harry Eagar (mail):
Yes, Professor, you blogged about this earlier, and it's true that people don't know history.

The New Deal could not have failed because it was not tried.

The New Deal was AAA, NRA etc., and the United States Supreme Court strangled them in the cradle.

After that, Roosevelt was compelled to turn to other expedients, but these were not the New Deal.

I wish you would address this, since you seem interested in the subject.
2.2.2009 1:26pm
David Warner:
Loki,

"the FT not exactly known as being a bastion of liberalism"

No, just transnational elitism, which recently has swung noticably leftward. Glad you, too, noticed that such leftism isn't particularly liberal.
2.2.2009 1:36pm
Dilan Esper (mail) (www):
The main points have been made. I will however make one point that should be self evident. The claim that ANY single act "lengthened the depression by 7 yeasrs is the sort of claim that you ought to know to be false even if you don't know any economics. The reason is the 7 year figure is too convenient. It is the number you would pick if your purpose was simply to discredit FDR.

In a complex economy such as ours, economic performance over 7 years will always have many and varied causes.

That claim alone makes the real purpose of this enterprise clear.
2.2.2009 1:41pm
RPT (mail):
"Sarcastro:

Wait, I thought this depression was caused by giving houses to black people."

Don't forget the threatened closing of Guantanamo, which has emboldened economic terrorists everywhere. The link between these matters is the subject of ongoing research.
2.2.2009 1:45pm
RKV (mail):
Failing to address the substance of Ms. Schlaes work doesn't count as argument, nor do ad hominem attacks on the author of a work of economic history (not economic theory). The unemployment numbers (and GDP) speak for themselves - FDR's policies didn't work, nor would they be expected to on a rational basis. And this business about "The New Deal could not have failed because it was not tried." sounds suspiciously simliar to arguments made in favor of socialism. What I read in many of the posts above is confirmation bias on the part of those who have political agenda.
2.2.2009 1:52pm
byomtov (mail):
What I read in many of the posts above is confirmation bias on the part of those who have political agenda.

On that, if nothing else, we agree.
2.2.2009 2:02pm
Randy R. (mail):
"No, just transnational elitism"

Yeah, the FT writes about Mozart and traveling to Bangkok. What they should do is write about football and cheezwiz.

The Washington Post did a good analysis of previous attempts to stimulate poor economies in the Sunday paper. (Feb. 1) I can't find it right now, but one conclusion (among many) was that previous attempts at stimulus fail because they dont' stick with it. Had FDR followed through and not attempted to cut the budget decifits midway, the New Deal would have had a much better impact.
2.2.2009 2:06pm
loki13 (mail):
RKV,

I am sorry to point this out, but Amity Shlaes is the most hacktacular of the possible hacktastic people you could have used. While I do not normally accept argument ad verecudiam, every word out of Amity's mouth tends to be a lie, including "the" and "a". Her book is doubtfully useful to preschools with a surplus of crayons nationwide- now that's "make work" we can believe in!
2.2.2009 2:14pm
loki13 (mail):
grrr...

s / doubtfully / doubtlessly
2.2.2009 2:16pm
RKV (mail):
So, here's a (trick) question "[Is] raising the price of labor in a period of high unemployment counterproductive?" The assumption here is that high unemployment is to be avoided, and raising taxes on labor in a recession has the equivalent effect of a price rise. I guess if you can use it to scare your constituency into voting for you because you've ensured their jobs from the public til, then a politician might say that it would be "productive." Be careful of your answer, because all I'm really saying is "Does the demand curve for labor have a negative slope (ceteris paribus)?"
2.2.2009 2:17pm
RKV (mail):
"Hack?" That's your opinion. That what she says is unpopular with you is obvious. Might I ask you for your response to my trick question? That will inform us both substantially.
2.2.2009 2:19pm
LN (mail):

The unemployment numbers (and GDP) speak for themselves


Unemployment and GDP plummeted from 1929-1933, and then went up considerably from 1933 onwards, with the exception of the 1937-38 recession, which is generally regarded to have been brought about by FDR's attempt to prematurely balance the budget. To the extent that the numbers "speak for themselves," they say that FDR did a decent job nursing the economy back to health. (Now usually the numbers do not speak for themselves, someone needs to speak for them, or needs to make them speak. But that's not what you said.)
2.2.2009 2:29pm
Dave N (mail):
Best advice for economic recovery: Let's get Germany to attack France. How hard could that be?
Can we choose different sides this time if that happens?
2.2.2009 2:33pm
loki13 (mail):
RKV,

I have already posted my substantive critique. I have neither the time nor the energy to delve further into this, because I have done this not only above, but before, in excruciating detail, in previous threads. And yet, no matter how many times I do so, I keep hearing (despite *all* the econometric evidence, except for this poorly done paper) that "FDR prolonged the Depression" or that Keyenesian policies don't work.

In a depression, we all economists are Keynesians. Even Friedman.

But it seems that by sheer repetition, certain people hope that they can make a lie the truth. Go figure.

Anyway, you brought up Shlaes. To recap:

1. BA granted in English.
2. "Prestigious award" for journalism granted (that is always trumpeted) by libertarian institute (wonderful piece, if you're interested in maine and ireland, and yes, I'm being sarcastic).
3. Fired by the Financial Times for being too amazingly stupid and ideological for even their readers.
4. Currently living on libertarian welfare (thinktank and pundit circle and rightwing press).
5. Oh, she wrote an "economic history" dealing with the Great Depression and (wait for this) doesn't even know what a recession *is* (google her comments re: Gramm).

I get it- female libertarian. Thank goodness there's affirmative action at the libertarian welfare office.
2.2.2009 2:37pm
LN (mail):
Obviously the world "unemployment" should be replaced by "employment" in my last comment.
2.2.2009 2:49pm
RKV (mail):
"Up considerably?" That's a bit too subtle for me, even though it's a common enough argument. Here's the hard numbers - GDP didn't reach 1928 levels (and stay there) until 1940 and unemployment didn't get better than 10% until 1942. And 10% unemployment is terrible.
2.2.2009 2:51pm
RKV (mail):
Well Loki we're going to disagree. I do appreciate the reasoned parts (which unfortunately are not all) of your argument. Don't agree with your conclusions.
2.2.2009 2:56pm
LN (mail):
RKV: 1928 was before the Great Depression, not after. Did the New Deal cause the Great Depression? 10% unemployment is terrible, but it's a lot better than 25% unemployment.

This picture summarizes our disagreement, doesn't it?
2.2.2009 2:58pm
PC:
Failing to address the substance of Ms. Schlaes work doesn't count as argument

Would this include her brilliant work in Phil Gramm Is Right? You know, the article where she said Phil Gramm was telling the truth by saying that Americans were just whiners and the US wasn't in a recession. Even though the US had been in a recession for 10 months by the time she published the article. Are you talking about that Ms. Schlaes?
2.2.2009 3:16pm
Anderson (mail):
Failing to address the substance of Ms. Schlaes work doesn't count as argument

Right. Because there's a vast supply of idiots out there, and every time one comes along, the rest of us have to accept everything he says, until someone goes to the effort of demonstrating the idiocy.

How about if the burden shifts to those who are contradicting the conventional wisdom?
2.2.2009 3:41pm
MarkField (mail):
For those who want an economist's response, here's Brad DeLong's.
2.2.2009 3:44pm
Andrew J. Lazarus (mail):
ERH is onto something but wasn't adequately specific.
For their next project Cole and Ohanian will prove that FDR actually caused WWII to drag on for years longer than it would have. Because you see he was a Democrat and by definition bad.
In particular, after Pearl Harbor, FDR increased taxes. If only he had known about Bushertarian economics, and lowered taxes, Hitler and Tojo would have wet their pants and surrendered on the spot.

Somehow this thread reminds me of Roger Schlafly's unbelievably ignorant comments in the baseball about whether Jackie Robinson was harassed more than Barry Bonds. We laugh at postmodern theorists who seem ignorant of Scientific American level science but we are willing to take seriously libertarian theory that makes no serious attempt to engage actual facts of the history it purports to explain.
2.2.2009 3:55pm
Kevin P. (mail):
Judging from the response of some commenters, it appears that Harold Cole and Lee Ohanian have slain someone's sacred cow.
2.2.2009 4:02pm
Anderson (mail):
Judging from the response of some commenters, it appears that Harold Cole and Lee Ohanian have slain someone's sacred cow.

Yes! And if you look at a thread about how intelligent design is underappreciated -- perhaps that will be Shlaes's next bestseller -- you will find lots of indignant people protesting that their sacred cow has been slain!

Kevin P.'s reasoning is that of the Iranian president after annoying people with his Holocaust "skepticism."
2.2.2009 4:16pm
byomtov (mail):
I second Mark Field's suggestion about reading DeLong's comments on Cole and Ohanian.
2.2.2009 4:21pm
Kazinski:
The scariest thing is the New Deal only ended because the war came along. If all manpower and material were not needed for the war then we would still have the Civilian Conservation Corp, the Works Progress Administration, etc, etc, etc.
2.2.2009 4:24pm
David Welker (www):
I see that Somin has included a link to a paper by Cole and Ohanian in an update. For an earlier paper upon which this paper is built, see this link.

I don't have the time nor the training to do a full analysis. However, I would note the following point that I though was interesting:


When we compare the decline and recovery during the Depression to a typical postwar business cycle, we see striking differences in duration and scale. The decline, as well as the recovery, during the Depression lasted about four times as long as the postwar business cycle average. Moreover, the size of the decline in output in the 1930s was about 10 times the size of the average decline.


So, the puzzle is why recovery from the Great Depression took longer than other postwar recessions. One big difference that one might suggest is that the severity of the decline from 1929 to 1933 before Roosevelt even took office and implemented any part of the New Deal in 1933 was simply unprecedented. According to Wikipedia, before Roosevelt even took office:


State governors had shut down every bank and every bank account was frozen--no one could get a bank loan or cash checks or get at their deposits.


and furthermore


From 1929–1933, unemployment in the U.S. increased from 4% to 25%, manufacturing output reduced by approximately a third. Prices fell causing a deflation of currency values, which made the repayments of debts much harder.


So, what we have here is an unprecedented crisis in confidence that simply was not repeated in subsequent postwar recessions. First, subsequent recessions were not as severe. Second, thanks to the FDIC, people have always been able to access their bank accounts, which would have a tendency to greatly increase confidence. Finally, none of the subsequent recessions have been characterized by a liquidity trap, which tends to render monetary policy ineffective.

I am not saying that the National Industrial Recovery Act was good policy, but it seems to me that there are probably enough differences between the Great Depression and subsequent and much less severe recessions to explain why it took longer to recover from the Great Depression. The number on explanation that I would tentatively offer is that the crisis of confidence was much more severe.

Cole and Ohanian characterize the assumptions underlying their model as being animated by a "neoclassical perspective." One might question whether the "rational actor model" which typically underlies the neoclassical perspective is the best model for a situation where people who may be somewhat upset at losing their life savings when they cannot access their deposits.

Finally, I will note that in any case, Somin's blaming of the New Deal in general for prolonging the Depression is an example of very crude generalization. Many New Deal policies and agencies, for example the FDIC and the SEC that were partially existent during the Depression were also existent during the subsequent recessions which are the relevant unit of comparison in the Cole and Ohanian articles. I know that Somin is a big defender of making generalizations, but he is taking it much too far.

May I politely suggest that Somin's preference for blaming the prolonging of the Depression on the New Deal in general instead of particular New Deal policies as Cole and Ohanian do is motivated by either (1) sloppy reasoning and generalization or, just as likely, (2) a general animosity towards government and the desire to frame the question in a particular manner for propaganda purposes.

Question:
Does the FDIC and the SEC, which are also part of the New Deal, really deserve to be lumped in with the short-lived National Recovery Administration (NRA)?

Answer:
Only if you are an ideologue with an axe to grind.
2.2.2009 4:26pm
PlugInMonster:
Of course the New Deal was horrible for economics, but it made people FEEL better!
2.2.2009 4:28pm
MarkField (mail):

The scariest thing is the New Deal only ended because the war came along. If all manpower and material were not needed for the war then we would still have the Civilian Conservation Corp, the Works Progress Administration, etc, etc, etc.


I dare Sarcastro to top this.
2.2.2009 4:39pm
Anderson (mail):

I am tempted to try it myself, but know in advance that I am competing against powers greater than myself.

"The Civil War unnecessarily prolonged slavery."

"The Revolutionary War unnecessarily delayed American independence."

"The Louisiana Purchase unnecessarily delayed the colonization of the American West."

"The scariest thing is that the Revolutionary War only ended because Britain gave up. Otherwise we would still have the Continental Congress and wear powdered wigs."
2.2.2009 5:09pm
LN (mail):
I can't imagine anything more comforting to libertarian sensibilities than the free-market paradise that was World War II. For once in history, government got out of the way.
2.2.2009 5:21pm
eyesay:
NASA's work in the 1960s severely delayed American progress toward landing on the moon, which would have been accomplished much faster if we had simply left it to the private sector.
2.2.2009 5:22pm
RKV (mail):
LN, I think you have to handle looking at unemployment AND GDP during the Depression simultaneously (and perhaps some other factors as well). So, no the chart isn't quite good enough. And yes, I compared the numbers prior to the Depression - that would indicate a return to more or less normal values and was intentional. Combined with fundamental analysis of the New Dealer's policy choices they make it pretty clear that whatever recovery which occurred was in spite of federal policies rather than because of them. Which is, I believe the point which Cole and Ohanian make.

[doing my best imitation of Loki]: "Brad DeLong? Snicker. Ha. Chortle. Rolls eyes."
2.2.2009 5:30pm
Dilan Esper (mail) (www):
Combined with fundamental analysis of the New Dealer's policy choices they make it pretty clear that whatever recovery which occurred was in spite of federal policies rather than because of them.

This, of course, is circular. It translates as "libertarians' and conservatives' pretty little simplistic economic theories say that government intervention can never help the economy, therefore any recovery must have occurred in spite of the intervention instead of because of it".

Of course, if you live in the real world of economics, where government intervention sometimes promotes rather than retards economic efficiency, this calculation doesn't hold.
2.2.2009 5:58pm
Ilya Somin:
May I politely suggest that Somin's preference for blaming the prolonging of the Depression on the New Deal in general instead of particular New Deal policies as Cole and Ohanian do is motivated by either (1) sloppy reasoning and generalization or, just as likely, (2) a general animosity towards government and the desire to frame the question in a particular manner for propaganda purposes.

The particular policies that Cole and Ohanian blame (the NIRA, AAA, NLRA, and other similar laws), were central to the New Deal, not just minor parts of it. They were understood as such at the time (including by the New Dealers themselves). I never said that EVERY aspect of the New Deal made the Depression worse. Indeed, I explicitly said the opposite in my earlier and more detailed post on this issue (linked in this one), and I quoted a part of Cole and Ohanian's piece where they express support for several of the other New Deal programs.

However, it is clear, given the impact of these centerpiece programs, that the NET impact of the New Deal was to make things worse.

Assessing the New Deal without considering its competition-restricting elements is kind of like assessing a hamburger while ignoring the beef.
2.2.2009 6:24pm
David Warner:
"competition-restricting elements"

How did trust-bussing get the Progressive Seal of Approval anyway? I thought they were against the fat cats conspiring together against the average Joe.
2.2.2009 6:36pm
Anderson (mail):
it is clear, given the impact of these centerpiece programs, that the NET impact of the New Deal was to make things worse.

A good example of why I banish "it is clear" and "clearly" from my briefs ... because they usually are stand-ins for "I can't actually prove this."

The above thread provides plenty of indications that the NET impact of the New Deal was to make things better, though perhaps without the NIRA (and its consequent spooking of the capitalists, who seem never to've felt confident that Soviet America wasn't just around the corner), things might have gotten even better and/or even faster.
2.2.2009 6:43pm
MarkField (mail):

How did trust-bussing get the Progressive Seal of Approval anyway?


I personally would never buss anyone I didn't trust.
2.2.2009 6:56pm
Allan L. (mail):
Your bust trussed here.
2.2.2009 7:08pm
David Welker (www):

Assessing the New Deal without considering its competition-restricting elements is kind of like assessing a hamburger while ignoring the beef.


First, it was not entirely certain that the primary purpose of this post was to assess the New Deal in particular, in light of this comment:


Unfortunately, many today are bent on repeating some of the mistakes of the 1930s.


Now, of course this statement is beyond vague. Who is this "many" you refer to? I interpreted this to mean those who support the current stimulus package before Congress. But, the current stimulus package before Congress does not contain any proposals like that are similar to the NIRA. The little things that one might pick at, like requiring "prevailing wages" on Federal construction projects don't even come close to the NIRA. And such requirements have been in place for a long time, including during previous recessions which are the basis for comparison in the Cole and Ohanian articles.

Another point:

I may be way off here, but one thing that I noticed about the Cole and Ohanian articles is that they completely fail to mention the pre-New Deal Smoot-Hawley Tariff Act which was in effect during the Great Depression but not in the subsequent recessions given that the Brenton Woods Agreement in 1944, a great lessening of worldwide tariffs starting in 1945, and the establishment of the General Agreement on Tariffs and Trade (GATT) in 1947. The first recession that the United States suffered did not occur until after 1953.

Is it at all possible that recovery in subsequent recessions was at all positively influenced by a much lower level of protectionism? I think it is very interesting that Cole and Ohanian do not even devote a single sentence to this issue in their articles.
2.2.2009 7:34pm
q:

The above thread provides plenty of indications that the NET impact of the New Deal was to make things better

It's hard to say one way or the other. Yes, things got better ('33-'37), but then they got worse ('37-'39), then they got better again (WW2) before getting worse (post-war recession), but it's hard to say whether the New Deal prolonged the time period or shortened it. Or at least reasonable economists can disagree and have disagreed. Which makes comparisons to ID jingoistic and ignorant. And assertive terms like "clearly" somewhat disingenuous.
2.2.2009 7:35pm
Dilan Esper (mail) (www):
The particular policies that Cole and Ohanian blame (the NIRA, AAA, NLRA, and other similar laws), were central to the New Deal, not just minor parts of it. They were understood as such at the time (including by the New Dealers themselves). I never said that EVERY aspect of the New Deal made the Depression worse. Indeed, I explicitly said the opposite in my earlier and more detailed post on this issue (linked in this one), and I quoted a part of Cole and Ohanian's piece where they express support for several of the other New Deal programs.

The National Industrial Recovery Act was in place 2 years, and was struck down by the Supreme Court as unconstitutional. It involved less than 1/7th the regulations that are now regularly imposed by the federal government on business.

The Agricultural Adjustment Act introduced a policy of farm subsidies that remained in place throughout all the boom times after World War II. Other prosperous nations have had similar programs. It didn't seem to "cause" any more depressions.

The National Labor Relations Act has remained in place for 70 years. Again, it is also similar to regulatory regimes in just about every other Western economic power. It hasn't "caused" any more depressions.

So you have one law that was struck down by the Supreme Court and imposed only moderate regulations on business anyway (by historical standards), and two laws that we've had at least 70 years of experience measuring the effects of, and which we know don't cause depressions.

Put these together and you have the cause of the worst 7 years in modern global economic history?

The claim is laughable on its face.
2.2.2009 7:54pm
q:

Indeed, when one considers recent history from the perspective that we now understand the Great Depression, the last eight years have been "the Great Recession", because while the GDP recovered, real wages remained stagnant, and the percentage of Americans who were employed dropped consistent (with a slight uptick for a year) from 2001-2008.

Everyone is much wealthier today than we were 10 years ago at the height of the internet bubble. See, e.g., this article. We're so used to prosperity that even a return to wealth levels of a decade ago would be pretty disastrous (the GD was about 2 decades, iirc).

No point in spending hundreds of billions of dollars that winds up overseas — and if you're going to talk about the efficiency of a "stimulus" package in the short term, you can't ignore the fact that keeping the money in America is a lot more efficient than sending it overseas.

"more efficient" has a definite meaning, I would suggest being more thoughtful in its use. As to your substantive point, there certainly is a point in allowing some of the cash to "wind up overseas," several in fact:

1) Asia and Europe are hurting far more than the US is.
2) Tariffs beget tariffs, and a collapse of world trade would make things extremely bad for everyone, as we can already see. Almost all economists agree on this point.
3) Relatedly, I don't find it very wise to piss-off the largest consumer for manufacturing commodity inputs, aka China, especially in light of China's proposed stimulus.
4) Monopoly profits aren't usually spent on more labor. So there is definitely an opportunity cost.
5) Here's a progressivist argument: why should the taxpayer be forced to line the pockets of steel and iron monopolists?
6) If that's not enough to convince you, here is some analysis from a politically diverse set of economists:

Rowe

Irwin

Becker

DeLong

Krugman
Rowe's response
Krugman's response

Honestly, I haven't found any economist who has come out in support of the provision, though it might simply be the bias my blogroll. If anyone happens to find one, I'd love to read it.
2.2.2009 8:14pm
Bart (mail):
Many of the points being made are talking past the issues raised in the article.

Cole &Ohanian's main objection to the New Deal is that it artificially increased the cost of goods and services - most especially labor costs - deepening and prolonging the Great Depression.

Pireader notes that GDP and the number of employed citizens generally increased between 1933-40 and credits the New Deal. There are several problems here:

a) The New Deal was in effect for 8 years before GDP finally exceeded 1929 levels, which Cole &Ohanian correctly observe coincided with the ramp up to WWII. Normal panics are over in 1-3 years.

b) Usage of the number of employed persons has two problems: (i) The figure includes make work jobs which were by definition temporary. When FDR drew down his make work programs in 1937, unemployment surged, which indicates a higher core unemployment rate near 20%; (ii) The figure does not account for underemployment. Cole &Ohanian were correct to note that, even though the absolute number of employed persons in 1939 had nearly returned to 1929 levels, the number of hours worked was still far below pre-Depression levels.

Pireader is correct to note that Cole &Ohanian's comparison of the Great Depression to prior panics presupposes that the alternative to the New Deal would have been the prior libertarian free market policies in effect during those panics. The problem is that there was no free market alternative being offered in 1932. The choice was between Hoover's really bad government intervention (tariffs, income tax hikes and government spending) and the New Deal's even worse interventions described by the authors. The US was well and truly screwed by its political class in 1932.

Angus notes that recovery is generally measured by GDP growth. However, rising GDP with high double digit unemployment is still a depression. Essentially, the New Deal inflicted EU style artificially increased labor costs during a recession to create ongoing double digit unemployment. Under a system of artificially high labor costs, life is good if you are fortunate enough to have a job and crap if you do not.

David Welker observed that the Obama stimulus bill does not artificially increase the costs of goods and services. Mr. Obama's plans to artificially raise the price of goods and services - most especially labor costs - are both in and out of the stimulus bill. The Obama pro union executive orders will spike the costs of government projects. The stimulus bill will bail out incredibly expensive Blue State union contracts, increase the employment of unionized bureaucrats across the board and increase the costs of government further with Buy American provisions and the elimination of competitive bidding. On the near term horizon, are plans to eliminate secret ballots for union elections and bailouts of UAW cadillac contracts.

Pireader questions whether the Smoot Hawley tariffs and the resulting trade war could have caused much of a problem if only a few percent of GDP were involved in trade. Actually, trade barriers inflict a negative efficiency multiplier because you lose the benefits of comparative advantage, increasing the costs of goods and thus national wealth substantially. Money spent on higher cost imported goods or domestic replacements is not spent on other domestic goods purchased before the tariffs.

For my own part, I would depart from the conventional wisdom that WWII pulled us out of the Great Depression. In fact, 20 million Americans were drafted into military make work jobs with very low pay and a substantial risk of death or dismemberment. Those left behind working in the factories were indeed paid, but had very little to buy with that pay because the US was sending a substantial number of the goods and services produced to be destroyed in the war. The idea that the way to stimulate an economy is to go to war is obscene.

The US really pulled out of the Great Depression after WWII when the NLRB curbed union driven labor costs, Bretton Woods freed up international trade and our goods were in demand around the world because the US was the only industrial power left fully intact after the war.

The US really hit its stride again two generations later after Reagan cut tax rates down from the WWII levels, freed up trade and, perhaps most importantly, broke the private sector unions - restoring labor flexibility and returning to full employment.
2.2.2009 8:15pm
q:
It hasn't "caused" any more depressions.
...
The claim is laughable on its face.

When people say "caused," they mean such policies made the recession worse than it had to be. This doesn't mean such policies in a time of prosperity are going to cause a depression. It's obvious on its face those policies didn't cause the initial recession, and it's likewise obvious that the gold standard didn't cause the initial recession either. But I think there are very strong arguments that they unnecessarily deepened the recession to such a point that it became a depression. At least, strong enough to not be laughable.
2.2.2009 8:20pm
Michael Ejercito (mail) (www):

Then they mostly rose steadily from 1933 to 1940 (except for a downtick in 1938).

If GDP was rising during those years, then the Great Depression ended the year the GDP went up.
2.2.2009 8:31pm
David Welker (www):

The particular policies that Cole and Ohanian blame (the NIRA, AAA, NLRA, and other similar laws), were central to the New Deal, not just minor parts of it.


I think that Dilan Esper makes a very good point. How can Cole and Ohanian be blaming the Agricultural Adjustment Act (AAA) and the National Labor Relations Act (NLRA) for prolonging the Great Depression

compared to subsequent postwar recessions
when these laws were in place not only during part of the Great Depression, but the entirety of these postwar recessions? Of these three laws, only the National Industrial Recovery Act (NIRA) was unique in being in effect only during the Great Depression but not the other postwar recessions. Yet, they are all lumped together by Somin.

Here is what Cole and Ohanian write in their Wall Street Journal piece.


The downturn of 1937-38 was preceded by large wage hikes that pushed wages well above their NIRA levels, following the Supreme Court's 1937 decision that upheld the constitutionality of the National Labor Relations Act. These wage hikes led to further job loss, particularly in manufacturing.


But, if the upholding the constitutionality of the National Labor Relations Act (NLRA) by the Supreme Court was such a great contributor in prolonging the Great Depression after the National Industrial Recovery Act (NIRA) was declared unconstitutional by the Supreme Court in 1935 after only two years in operation, why hasn't it greatly contributed to the length of other recessions, since it has ever since been in effect? The answer according to the Cole and Ohanian article that Somin cites is that the NLRA only had this effect when combined with weak antitrust enforcement.

Overall, it is quite clear that it is nonsensical to blame the NLRA and the AAA for greatly prolonging the Great Depression. It is only when these policies are combined with too little government (i.e. inadequate antitrust enforcement) that they are alleged by Cole and Ohanian to have any bite. (Is anyone seeing a reinforcement of an earlier theme -- that you should focus primarily on the role of government and not on its size?)

Furthermore, I wonder whether, to the extent that you want to blame the length of the Great Depression on government policy (rather than extraordinarily bad circumstances like 25% unemployment, not being able to access your bank deposits, and a liquidity trap leading to an extraordinary loss of confidence) one might consider blaming inadequate antitrust enforcement (i.e. too little government in a particular context) all by itself, especially in light of the fact that policies like the NLRA, AAA were all still in effect in subsequent recessions.
2.2.2009 8:45pm
Hoosier:
Allan L.
Your bust trussed here.

How large should it be before one looks at the rather radical option of trussing it?
2.2.2009 8:49pm
David Welker (www):

But I think there are very strong arguments that they unnecessarily deepened the recession to such a point that it became a depression. At least, strong enough to not be laughable.


This argument is laughable. The nation was clearly already four long years into a depression in 1933 when FDR took office and before he could implement any part of the New Deal, much less before any newly implemented policies would have any time to take effect.

The argument that more sophisticated anti-government ideologues are (predictably) trying to make is not that the New Deal turned a recession into a depression, but that the New Deal somehow acted to prevent us from recovering from that depression sooner.
2.2.2009 8:53pm
q:

The nation was clearly already four long years into a depression in 1933 when FDR took office and before he could implement any part of the New Deal, much less before any newly implemented policies would have any time to take effect.

What makes the great depression stand out, to me, was its length. But that's really a semantic disagreement, so I'm fine with your description.

The answer according to the Cole and Ohanian article that Somin cites is that the NLRA only had this effect when combined with weak antitrust enforcement.

"weak antitrust enforcement" was the point of the NIRA...
2.2.2009 9:04pm
David Welker (www):

The New Deal was in effect for 8 years before GDP finally exceeded 1929 levels, which Cole &Ohanian correctly observe coincided with the ramp up to WWII. Normal panics are over in 1-3 years.


If "normal" panics last 1-3 years, then the Great Depression was already an "abnormal" panic by the time Roosevelt took office in 1933 because it had already lasted longer than normal. (Does anyone else see some tension to referring to panic as normal?)
2.2.2009 9:04pm
David Welker (www):

David Welker observed that the Obama stimulus bill does not artificially increase the costs of goods and services. Mr. Obama's plans to artificially raise the price of goods and services - most especially labor costs - are both in and out of the stimulus bill. The Obama pro union executive orders will spike the costs of government projects. The stimulus bill will bail out incredibly expensive Blue State union contracts, increase the employment of unionized bureaucrats across the board and increase the costs of government further with Buy American provisions and the elimination of competitive bidding. On the near term horizon, are plans to eliminate secret ballots for union elections and bailouts of UAW cadillac contracts.


Going with Cole and Ohanian for a moment, there theory is not that it policies that increase the bargaining power of labor alone that prolonged the Depression, but such policies when combined with weak antitrust enforcement.

Query: Does the Obama administration plan a policy of weak antitrust enforcement? If not, and we buy into the Cole and Ohanian argument, it doesn't seem as though these policies matter much. After all, similarly dreaded policies like the NRLA and the Davis-Bacon Act have been law through many downturns without making them drag out like the Great Depression.
2.2.2009 9:14pm
Bart (mail):
David Welker (www):

BD: The New Deal was in effect for 8 years before GDP finally exceeded 1929 levels, which Cole &Ohanian correctly observe coincided with the ramp up to WWII. Normal panics are over in 1-3 years.

If "normal" panics last 1-3 years, then the Great Depression was already an "abnormal" panic by the time Roosevelt took office in 1933 because it had already lasted longer than normal. (Does anyone else see some tension to referring to panic as normal?)

That is correct. Note my discussion of the poor choice in 1932 between the awful government interventions of Hoover with the worse interventions of FDR. There was no free market alternative.
2.2.2009 9:16pm
David Welker (www):

Is it at all possible that recovery in subsequent recessions was at all positively influenced by a much lower level of protectionism? I think it is very interesting that Cole and Ohanian do not even devote a single sentence to this issue in their articles.


I need to amend this point. Although a search through their article for Smoot-Hawley does not retrieve anything, they do in fact discuss the issue that such effects worked to significantly prolong the Great Depression and reject that possibility:


It is hard to see how the disruption of trade could have affected output significantly for more than the presumably short period it would have taken domestic producers to change their production.
2.2.2009 9:19pm
David Welker (www):
q:


What makes the great depression stand out, to me, was its length.


Really? The 25% unemployment rate and the total collapse of the banking system are not enough to make it stand out from other recessions in your mind?
2.2.2009 9:21pm
Jestak (mail):
However, it is clear, given the impact of these centerpiece programs, that the NET impact of the New Deal was to make things worse.

To reiterate points I made earlier, 1) it is not definitively settled that the impact of the "centerpiece" programs was contractionary or negative. See the Eggertson research I referenced above for a contrary evaluation by an economist with the NY Fed. 2) When you consider the very large positive effect of leaving the gold standard, as shown by Christina Romer's research (also mentioned above), it is definitely not clear that "the net impact of the New Deal was to make things worse."
2.2.2009 9:24pm
David Welker (www):
Bart,

You are confused. The Cole and Ohanian paper do not compare the Great Depression to "prior panics" but instead to postwar recessions. From Cole and Ohanian:


When we compare the decline and recovery during the Depression to a typical postwar business cycle, we see striking differences in duration and scale. The decline, as well as the recovery, during the Depression lasted about four times as long as the postwar business cycle average.
2.2.2009 9:27pm
David Welker (www):
A response (and criticism) of the Cole and Ohanian paper by Berkeley economist Brad DeLong can be found here.
2.2.2009 9:36pm
Bart (mail):
David:

The Authors also compared the Depression to the prewar 20s panic.

In any case, the only historical economic contraction comparable to the Great Depression was the Panic of 1837, which was also caused by government screwing with the economy through Jackson's destruction of the value of paper currency, triggering a series of bank failures.

Most panics were simply examples of the business cycle at work and were short lived.

The Great Depression was far deeper and longer than other recessions because of a series of very bad economic decisions by the Hoover and FDR administrations raising taxes, engaging in trade wars and artificially raising the price of labor and other goods and services.
2.2.2009 10:39pm
David Welker (www):
Bart,

You just don't get it, do you?

Many New Deal and similarly progressive policies continued to exist during postwar recessions that are the primary baseline of comparison. (i.e. the NLRA, AAA, FLSA, Davis-Bacon, etc.) So, as Cole and Ohanian make quite clear, these laws alone or in combination with each other cannot and do not explain the length of the Great Depression.

It is the Cole and Ohanian thesis that such policies only when combined with weak antitrust enforcement prolonged the Depression.

As far as your point about trade wars, as I noted earlier, Cole and Ohanian explicitly reject the theory that these had a significant effect:


It is hard to see how the disruption of trade could have affected output significantly for more than the presumably short period it would have taken domestic producers to change their production.
2.2.2009 11:18pm
RKV (mail):
Jestak,

No, and no.

Not. Even. Close.

What planet are you living on?
2.2.2009 11:21pm
David Welker (www):
On a related point, this older blog post by Nobel prize winning economist Paul Krugman not only does a little bit of bashing on Amity Shlaes (which is just good clean fun, of course), but also gives his reasons for thinking that FDR's policies which prevented wages from falling did little to prolong the Depression.

For a more technical (although very readable and relatively short) explanation of the same point by Krugman, only using fun little graphs, check out this post here.

Harvard economist Greg Mankiw's response to that note is here. Paul Krugman's response to Mankiw is here.

It is all good stuff. If you want to really understand this debate, check out these links.
2.2.2009 11:37pm
David Welker (www):
RKV writes:


So, here's a (trick) question "[Is] raising the price of labor in a period of high unemployment counterproductive?" The assumption here is that high unemployment is to be avoided, and raising taxes on labor in a recession has the equivalent effect of a price rise. I guess if you can use it to scare your constituency into voting for you because you've ensured their jobs from the public til, then a politician might say that it would be "productive." Be careful of your answer, because all I'm really saying is "Does the demand curve for labor have a negative slope (ceteris paribus)?"


Check out the links in my previous post, especially this one. Krugman discusses the slope of the aggregate demand (AD) curve and why you cannot assume that it is downward-sloping when you are in a liquidity trap, as we are now, and as we were during the Great Depression.
2.2.2009 11:48pm
David Warner:
"The argument that more sophisticated anti-government ideologues are (predictably) trying to make is not that the New Deal turned a recession into a depression, but that the New Deal somehow acted to prevent us from recovering from that depression sooner."

Not somehow, they're pretty specific on the how.

BTW, Welker, thanks so much for spamming our comments section with your high-handed pedantry. We would never have had access to the arguments of the likes of Krugman and DeLong without your enlightening influence. Likwise, we join in your good, clean bashing of Shlaes. Care to take a dump as well while you're here?
2.3.2009 12:20am
ll (mail):
I have it on "good authority" that the following definitely refutes the 2004 Cole and Ohanian article:




Was the New Deal Contractionary? (Gauti Eggertsson, Federal Reserve Bank of New York, June 2008)


Can government policies that increase the monopoly power of firms and the militancy of unions increase output? This paper studies this question in a dynamic general equilibrium model with nominal frictions and shows that these policies are expansionary when certain “emergency” conditions apply. These emergency conditions–-zero interest rates and deflation–-were satisfied during the Great Depression in the United States. Therefore, the New Deal, which facilitated monopolies and union militancy, was expansionary, according to the model. This conclusion is contrary to the one reached by a large previous literature, e.g. Cole and Ohanian (2004), that argues that the New Deal was contractionary....


2.3.2009 12:22am
LN (mail):
I know there's nothing I look forward to mor in a Volokh thread than David Warner incessantly commenting on how "liberals aren't liberal." Well, except for DangerMouse comments about liberal baby-killing. Those are the best.
2.3.2009 12:37am
David Welker (www):
David Warner,

Okay David Warner, since you are so smart and think the links I have provided so useless, why don't you explain why Krugman is wrong about the shape of the aggregate demand (AD) curve.

If you are not up to that, then why don't you just shut the f*ck up about how my comments do not count as contributions.

Loser.
2.3.2009 1:06am
Randy R. (mail):
Indeed, it wouldn't be home without them.
2.3.2009 1:07am
David Welker (www):
Careful II:

You shouldn't provide links to outside sources in the comments section. You might be accused by David Warner of pollution. After all, we could have looked up this Eggertsson article on our own. Google and all that.

Come to think of it, I bet David Warner is pissed of at Ilya Somin for linking to the original WSJ article and the associated academic article. After all, we could have looked it up ourselves. Doesn't anyone know how to use Google?

P.S.

Though, on the other hand, when David Warner goes on the attack, at least he will prove himself entirely incapable of substantive comment, which will be amusing at least. =)
2.3.2009 1:13am
Dilan Esper (mail) (www):
But I think there are very strong arguments that they unnecessarily deepened the recession to such a point that it became a depression.

You may think that, but there's been a boatload of recessions since then, and they didn't turn into depressions despite intensive business regulations a la the NRA, farm subsidies a la the AAA, and the Wagner Act still being in place. Sure seems weird that all those recessions didn't become depressions while we had a whole bunch of recessions that did turn into depressions back when we didn't have these things.

But one thing about conservative ideology-- it's like communism, its immune to empirical data.
2.3.2009 4:38am
Brett:
But one thing about conservative ideology-- it's like communism, its immune to empirical data.


I think I must be hallucinating, because I could swear I just saw Dilan Esper -- a guy so thoroughly marinated in hacktacular liberal orthodoxy that folks like Henry Waxman would think him a creepy ideologue -- cracked wise about conservative ideology being immune to empirical data.

Either that or irony is truly dead.
2.3.2009 6:01am
Hoosier:
Dilan

Isn't it at least a nice thing that both libs and cons have an NRA that they support? Can't we all just get along?
2.3.2009 6:55am
David Warner:
LN,

Many progressives and even a few leftists manage to be quite liberal, temperamentally and even ideologically. This site is blessed with an unusual number of them (LM, MarkField, Loki, Dilan, and several more I apologize for omitting), indeed more than most left sites.

Alas, some do not rise to that standard, although even Welker has been unusually substantive (for him) on this thread, before descending into his usual tiresome posturing (the pronouncements from such members of the Progressive College of Cardinals as DeLong and Krugman ae already widely posted throughout the land, thanks).

Regarding this thread, if one wishes to emulate FDR, I'd think one would devise an actual New Deal, instead of conducting an endless rearguard action defending a 75-year-old one. Unless, of course, one is a conservative, but I don't think that's what you, or Welker, consider yourselves, correct?
2.3.2009 8:32am
RKV (mail):
Well David, some folks don't much agree with Keynes or Krugman as to aggregate demand having a positive slope - or that we're in a liquidity trap, or that such a thing even exists. http://mises.org/story/3266

It well behooves economists, even "professional" ones with endowed chairs and/or academic prizes to note the lack of predictive power of their "science."

And as to an "actual" New Deal, God preserve us from such rot.
2.3.2009 8:59am
Anderson (mail):
BTW, Welker, thanks so much for spamming our comments section with your high-handed pedantry

Sub: "Thanks so much for bringing your knowledge of the subject, complete with helpful references and links, to this blog thread, sharing your learning with others.

There, fixed it for you.
2.3.2009 8:59am
David Warner:
It's ironic that the comment culture thread came to the conclusion that Bart's ideological stinkbombs sunk the Balkinisation comments section, complete with absolution paid by Bart himself, and yet Somin's threads invariably feature the same from a different direction, often from the very ones decrying Bart.

I fail to see what Prof. Somin has done to deserve such treatment, short of threatening some sacred cows that have passed their due date (I'm sure a migrant worker appreciates being forced by law to pay a "prevailing wage" three times his own to get a school built for his kids - labor cartelization is in competition with good government, not its compliment).

Anderson, I'm sorry that you haven't kept up with your Progressive catechism, the rest of us have been left little choice. It got old a long time a ago.
2.3.2009 10:26am
LN (mail):
Thanks David Warner for raising the level of debate -- liberals are tiresome, liberals are posturing, the New Deal is old and tired, this comment thread is ironic, poor Professor Somin, liberals have blind faith in their religion, sacred cows are being slaughtered. It's just so substantive, you know? Also it's original and completely unpredictable. You're awesome. I can see why Welker's long thoughtful responses really get your goat.
2.3.2009 11:52am
George Smith:
This is like talking to Vogons - CRITICISM OF THE NEW DEAL IS USELESS!
2.3.2009 12:34pm
loki13 (mail):
David Warner,

I consider myself (somewhat) conservative economically. I am in favor of balanced budgets and low (but progressive) taxation. I am in favor of free-market solutions whenever possible. What I really hate, having some economics training, is when people (such as the authors of this study) cherrypick data to support a pre-determined conclusion. What I hate even more is when their (somewhat moderate, even considering their mistakes) conclusions are parroted by (somewhat responsible) people like Prof. Somin and (completely irresponsible) people like Amity in order to score cheap, and wrong, ideological points.

To re-cap:

1. In addition to the many methodological problems with their "analysis" that have been pointed out so many other places, I'll give you the two most glaring. The first is that they choose the timing of their data selectively, without taking into effect such well-known concepts as the lag effect of fiscal policy. How is it that they chose the time interval that both a) manages to make the numbers look as bad as possible and b) manages to look FDR as a bad as possible? Is it a coincidence? Does it help when you know that once the "experiment" (I use the term loosely) is set up, it is easy to change the data sets? The second problem, of course, is their choice of unemployment statistics. They don't count any of the people employed through the various programs set up by the government (including the WPA). While some programs (building and refurbishing schools and highways) were undoubtedly helpful, some indeterminate (making a new Montana capitol building) and others "make work" as defined by our libertarian friends (paying artists to create work) it makes no sense to count them as unemployed. A government job, where you are paid for your work, counts as employment. I'm not sure an ex post analysis of what every job did would help (unless you apply the same criteria to the private sector- I've had a few jobs that were make work; perhaps I was unemployed?).

2. Extrapolating from their wrong, yet nuanced conclusions, Prof. Somin writes:

However, it is clear, given the impact of these centerpiece programs, that the NET impact of the New Deal was to make things worse.


Really? Assuming much? As pointed out, supra, the part of the New Deal (the NIRA) that Prof. Somin finds so objectionable (and, for that matter, so do I) was struck done within two years. Other parts continued and did not seem to worsen the recessions that the authors are using to compare the Great Depression to. But this is besides the point- Prof. Somin, without evidence, is arguing that these were the central component of the New Deal (despite his main objectionable element being struck done). This doesn't quite make sense, as it ignores the many fiscal measure (the "make work" provisions for our infrastructure) and regulatory changes (SEC, FDIC ad infinitum) that were implemented. His argument, then, is that this small piece of the New Deal, struck done after two years, was the centerpiece, and since it was bad, the New Deal was bad. QED. I know Prof. Somin to be very intelligent, so I won't say that there is a village in need of an idiot, but his chain of reasoning doesn't follow- just because he really, really wants it to be true doesn't make it true.

3. All of the above makes real questioning of certain measures of the New Deal harder. Everyone is stuck in the their default "New Deal = Awesome" or "New Deal = Statist Attempt to Destroy Fun-Lovin' America". This keeps the rational discourse from happening. What if we could realize that the New Deal was, on aggregate, a good thing (given the particular problems faced by the economy), but that it had some horrible missteps (the NIRA) and learn from it? I know this complexity isn't good for ideologues on either side, but it might provide useful lessons for, I don't know, today?

4. Given the above, this analysis still sidesteps normative questions. Economics can answer efficiency arguments. Politics (and morals and what have you) is needed for other questions that fall into the normative sphere, such as allocative arguments. Or, if we do want to do an economics argument, we at least have to price things correctly. What is the value of keeping people alive and families together? How long would we allow people to starve, and at what cost, until the economy became "normal"? What would the future economic impact of that be? What would the political impact of that be? What value do we place on keeping our political system intact? That is why the economic argument is tougher- there are costs that are not being accounted for (the counter position- what was the cost of the creation of the administrative state, if you're American P.?).
2.3.2009 12:35pm
Harry Eagar (mail):
Professer Somin, let me get this clear. It is your position that the United States Supreme Court did not strike down Agricultural Adjustment Act and the National Industrial Recovery Act?

RKV, please address the position in 1922-1941 of primary producers, including the 10 million sharecroppers. Explain how the New Deal drove down their wages.

Sheesh.
2.3.2009 12:38pm
Jestak (mail):
Jestak,

No, and no.

Not. Even. Close.

What planet are you living on?


I live on a planet where people respond to specific points in a post or comment they disagree with, rather than just dismissing it as "not even close."
2.3.2009 12:41pm
The Unbeliever:
Michael Ejercito:

Then they mostly rose steadily from 1933 to 1940 (except for a downtick in 1938).

If GDP was rising during those years, then the Great Depression ended the year the GDP went up.
So the Great Depression ended before FDR ever implemented the New Deal... therefore Hoover effectively ended the Great Depression?!?

I think you're charting some radical new departure in Depression narrative here.
2.3.2009 2:43pm
Hoosier:
George Smith

But please feel free to enjoy the shouting.
2.3.2009 9:52pm
David Warner:
LN,

"Thanks David Warner for raising the level of debate -- liberals are tiresome, liberals are posturing"

I am a liberal, Einstein. I said that exactly one liberal is tiresome and posturing, although you are rapidly gaining on him. That would make two.

Loki13,

Thanks for taking the time to write all that - I'm chewing things over. I think some perceive this whole question as merely a proxy fight for present political advantage, and I'm sure that's going on too, but my concern actually is with the broader historical and policy questions, as I have no dog in the present fight, at least politically, though of course I lean libertarian ideologically.
2.4.2009 1:35am
David Warner:
Loki13,

"just because he really, really wants it to be true doesn't make it true."

I think I'm in the same boat as Prof. Somin on that one.
2.4.2009 1:39am
Christopher Cooke (mail):
Well, I for one found the comments and the links to outside sources helpfu, until people started the name-calling.

We are really in a difficult situation. The fact is that large, prolonged Keynesian stimulus has not been fully tried. We just do not know if it will work. I heard Alan Blinder make this very point on an NPR interview. Of course, the alternative is to do nothing, let the economy try to sort itself out. But, there are gross distortions already in the economy, too numerous to mention, so we are not in a pure free-market capitalist structure. And, the short-term costs in human suffering may be too much to bear, even if things turn around by themselves in 4 years' or 10 years' time. That is what Keynes meant by his famous quote "in the long term, we are all dead."

My take has always been that government interventions may help smooth out the ups and downs in the economy --making the booms smaller and the busts less severe but possibly, also, prolonging the time it takes to recover. The interventions do this --whether it be through New Deal or WWII spending, for example-- by introducing stability, but at the expense of inefficiency (e.g., making it harder to fire workers, lower/raise prices).

The bust we are in now is largely because a whole vast segment of the economy --CDOs, mortgage-back securities, CDS, --has been largely unregulated in terms of the risks that large institutions were allowed to assume, under the belief that the free market created the proper incentive for businesses to accurately assess these risks better than the government. Greenspan, for one, has admitted that that belief in risk assessment has been proven wrong.

I think the answer is not even less government on matters economic --the private sector will simply file for bankruptcy after bankruptcy if we let the banks and brokerage firms reveal themselves to be truly insolvent, and take their lumps in the market place. Does anybody truly believe that consumer confidence and wealth will increase if that happens?
2.4.2009 4:20pm
David Warner:
C. Cooke,

Links of course are always good, and I think I overreacted to the verbiage in which the links were introduced and other links disparaged. Also, Krugman and DeLong's position is already widely known, but it can't hurt to make sure all are aware of dissenting views to the original post.

As for the stimulus, its seems to me that past intervention (as distinct from regulation) that has been sold on its smoothing benefits has morphed into a more or less constant stimulus, similar to an athlete using steroids.

Not only have we likely reached the point of diminishing returns, where further stimulus doesn't do as much as it used to, but the distortions arising from the stimulus process itself threatens the long-term health of not only the economy, but the society, as the beneficiaries of the stimulus are more widely separated from those who will bear the burden of paying it. I'm thinking primarily of intergenerational strife, but all those immigrants we're importing to prop up Medicare surely won't be happy paying all those bills being run up by the representatives elected by Anglo retirees.
2.4.2009 6:21pm
Christopher Cooke (mail):
David

Here is one point I don't understand: the anti-Keynesians (pro-monetarist) economists always state that WWII, not the New Deal, lifted the US out of a recession. If true, doesn't that prove Keynes' point: massive government spending can have a stimulative effect on the economy in real and absolute terms? If government deficit spending during WWII lifted the US out of the Great Depression, doesn't that argue for a huge government stimulus, comparable to WWII expenditures, to jump-start the economy now?

By the way, I share your concern with deficits, the focus on them in the early 1990s that Ross Perot, for one, caused to take place in politics was a very healthy thing, and led to changes in US government policies that brought about surpluses for a time. What the libertarians, supply-siders ignore is that the surpluses came about because Clinton raised taxes, which resulted in greater revenues, and eliminated the deficit.

All of this argues, to me, in favor of long-term structural reforms of the entitlement programs --Social Security and Medicare/Medicaid-- and re-vamping the tax system --making it simpler, with fewer deductions, but with rate reductions too, to make sure we are collecting more efficiently--and probably expanding the social safety net to include health care, to remove that burden from business and bring down overall healthcare costs. I think Obama should seize the initiative to make long-term structural changes to all of these areas, maybe introducing them over the next 4 years, to put the US government on a healthier footing long-term.

For the next 2 years, though, I see no realistic alternative to trying to pull the economy out of its severe slump by deficit spending. Virtually all economists agree, they just disagree on where the money should be spent or how it should be injected into the economy (tax cuts vs. government spending, and in what areas).
2.4.2009 7:23pm
David Warner:
Chris,

I wrote a long reply, but because it contained the word kasino spelled correctly, not only was it not submitted, but it was lost in the interether.

Suffice it to say, I don't believe that Keynes himself would be a Keynesian as that term is now understood if he were alive today. He was far too unconventional for that. Krugman, on the other hand, has evidently gone native.
2.5.2009 6:42pm
Harry Eagar (mail):
Can I introduce some history?

In the 1930s, the problem was deflation (and destitute primary producers). We are not there, yet, so comparisons of a Keynesian program now to an (alleged) Keynesian program then are farfetched.

That the Second New Deal was a failure has been known since, well, since the Second New Deal. That's why FDR wanted to pack the Court. He wanted to try the First New Deal, which was never tried.

Whatever your predilections may be about markets, interventions etc., there are facts, they are easy to learn and people (like, say, Shlaes) who yammer on without knowing them do not impress.

Rex Tugwell wrote several books about the frustrations felt by himself and other New Dealers about the failure of the Second New Deal.

He contended that the First New Deal was working until it was murdered. I believe that, although it would be imprudent to be dogmatic about it, he has the better of that argument.
2.5.2009 6:56pm
David Welker (www):

Suffice it to say, I don't believe that Keynes himself would be a Keynesian as that term is now understood if he were alive today. He was far too unconventional for that. Krugman, on the other hand, has evidently gone native.


This is a very substantive contribution. All conclusion, no facts to back it up. Unclear meaning about what the conclusion means i.e. "gone native." Excellent job!
2.5.2009 8:46pm

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