It's taking me longer than usual to get together my thoughts on Eric Rauchway's response; sorry for the delay. But there's sort of a side issue that's relevant to that, which is what to think of Amity Shlaes'a The Forgotten Man.
The thesis of the book, for those who don't know it, is that government intervention made the Depression worse by heightening uncertainty. Obviously, this is an explanation much in vogue with conservatives.
Nor do I think it entirely untrue. Certainly, the reports that I'm now hearing from Wall Street of firms sitting on the sidelines until they figure out what the *#&! the government is finally going to do, bolster the plausible belief that if
a) the government is flailing around doing a lot of stuff
b) all of that stuff has a major potential to affect your returns on investment
You will get less investment.
The problem is that Shlaes way, way, way overstates her case. There is an academic argument that the National Recovery Administration prolonged the Great Depression; I'm on the run right now, but will find the link later. But the Great Depression is complicated, and it's hard to make the case that government intervention was the main problem with the economy. As economic history, the book is interesting if one sided. But as an argument, it leaves a lot to be desired.
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Even the claims about the NRA look pretty unpersuasive to me. Yes, the NRA was not a very good bill. But it was only in effect 2 years, it resulted in 1/5 the number of regulations we have now, and most importantly, the Depression was a global phenomenon, and it strains belief that the NRA affected the economies of Western Europe, for instance.
Further, you can't judge the New Deal by isolating one program. The New Deal also included a lot of things that were very good ideas in a big-time Depression, such as the various work programs (the WPA, CCC, TVA, REA, etc.), which also built needed infrastructure, as well as safety net programs like Social Security and ADC. The fact that the NRA was a bad bill isn't dispositive-- attaching undue weight to it is like arguing our World War II policy was a failure based solely on Pearl Harbor.
Lastly, it's worth noting that FDR's critics have no positive program that would get us out of a Depression. You could cut taxes and cut all the regulations you want-- in a circumstance where there is 20 percent unemployment, massive displacement, and no consumer confidence, it isn't going to make any difference.
And what FDR's program did do is convince people that the government cared about their problems and was on their side. The alternative to FDR isn't libertarianism, but violent revolution. FDR saved capitalism.
In addition to overstating her case, Shlaes also distorts data and cherry picks statistics to overstate her case. For example, using the Dow Jones Industrial Average as a measurement for how well the economy is, rather than, say, GDP.
Thank you for addressing this. I've been wondering about this work, since the only exposure I've seen has been an editorial by Shlaes in the Wall St. Journal and uncritically approving links from the Corner.
I read the forgotten man. Some thoughts:
Too long. Too much petty detail. Too much time devoted to fleshing the people implicated in FDR's economic team and their fascination with the USSR and their 1920s trip to visit it.
Underdiscussed points:
She is incredibly critical of Hoover...every bit as much FDR if not more in proportion considering he is only involved in 4 years of her story and FDR in over 10.
She spends much time on the underdiscussed harm to a bad situation caused by the Dust Bowl.
Schlaes does spend time arguing what FDR did right in her estimation...like finally inflating the money supply. She attributes a lot of the recovery to this anti-deflationary measure.
She commends the long run effects of creations like the FDIC and SEC.
She was however somewhat critical of banking and the regulatory structure worsened the debacle that ensued during the panics...especially of the dissolution of the jewish bank. I can't remember the details there.
She says that as unhelpful as many of his efforts were in actually combating the Depression, his efforts eased people's minds and prevented an a more serious turn toward stiffer socialism.
FDR, in her estimation was un-ideological. In this sense, he was willing to try anything. The problem was, to Schlaes, that he tried too many different things and never let the market react with confidence to twists and rules. In short, the ability for American Business to exhale and say "OK, is THAT it now??...can we get on with it???" was lacking. This is of course, the main thrust of her book along with well-covered topics on Shechcter (sp?) and the NRA which was thankfully struck down by the Supreme Court.
Did she overstate her case about too much unmeasured and inconsistent meddling which wrought uncertainty and partial paralysis in investment and confidence? Perhaps. But that was her theme. It has some merit. She spent quite a bit of time showing WHY many the programs did not work and caused unintended harm. It is this set of programs that more favorable FDR historians and economists steer around and give less weight to while more hostile FDR ones give more weight to.
However, there is, like I said above, understated agreement on some of the long run benefits in programs like the FDIC, the SEC and the good bit of PR for capitalism. While it didn't do much actual good for capitalism in a free enterprise sense, it did much good for the cooling of public passions into wanting something disastrous in its place from which may never have recovered.
"it's worth noting that FDR's critics have no positive program that would get us out of a Depression."
Huh? The orthodox liberal answer is free trade and massive deficit spending (which FDR did not do: his "pump priming" involved very modest deficits, as taxes were raised to cover most of his spending programs) The orthodox conservative answer is free trade and monetary expansion (which wasn't tried at all).
The program that did eventually get us out of the Depression was World War II; I would have preferred it if either the conservative or liberal programs had at least been tried.
Shlaes' book is more of a narrative than an argument, and I don't think it's accurate to describe the bit about regime uncertainty as its thesis. She's critical of many (though not all) of the New Deal policies, but uncertainty is only one among many of her criticisms (her stuff on the Schechter case, for example, which is at the heart of her critique of the NRA, has very little to do with regime uncertainty).
The academic criticisms of FDR, the New Deal, and the NRA seem...fairly strong to me actually.
Cole and Ohanian - economists at UCLA - argue that the impact of Roosevelt's policies on prices and wages prolonged the Great Depression by seven years:
http://newsroom.ucla.edu/portal/ucla/FDR-s-Policies-Prolonged-Depression-5409.aspx?RelNum=5409
Or for a different take, in todays New York Times noted Roosevelt-basher Krugman argues that Roosevelt's policies...did NOT end the Great Depression. Krugman's blames insufficient stimulus, and says what actually saved the economy is WWII. If we take that at face value, and also assume that there existed some set of policies which would have caused a recovery sooner...then that's about a harsh a condemnation of Roosevelt as one could ask for.
http://www.nytimes.com/2008/11/10/opinion/10krugman.html?partner=permalink&exprod=permalink
Megan claims that it is "hard" to make the case that government intervention was the main problem. That's probably true. Making the case that government policy taken as a whole was the main problem is fairly easy.
Meagan if you don't like Amity Shlaes, check out Bob Higgs stuff.
Huh? The orthodox liberal answer is free trade and massive deficit spending (which FDR did not do: his "pump priming" involved very modest deficits, as taxes were raised to cover most of his spending programs) The orthodox conservative answer is free trade and monetary expansion (which wasn't tried at all).
I was referring to the conservative critics, and no, free trade doesn't do anything in the short term (and I say this as a believer in free trade). Monetary expansion can work to a limited extent, but too much of it and you can get caught in a trap (e.g., Japan in the 1990's).
The fact is that once you are in the Great Depression, you are stuck for awhile. And that's something that many libertarian economics types, with their beautiful theories about the free market, can't accept, because it means the best thing to do is to use the government to ease the pain (as FDR did).
y81, could you or anyone else explain the orthodox conservative understanding why it is that the massive deficit spending of WWII pulled us out of the Depression, but massive deficit spending on public works programs would have been unable to accomplish the same thing? Is there something magic about the government putting people to work building bombers rather than building bridges?
Because to me, it seems obvious that putting people to work building bombers is an inferior method of jump-starting an economy to building bridges, provided you have the option to choose. Bombers aren't good for anything, they don't improve people's quality of life or have any knock-on effect of improving other aspects of the economy (whereas bridges make transportation more efficient, making it easier to get milk to market, leading to higher dairy productivity, etc. etc.). You just have to melt the bombers down for scrap once the war's over, and while they're functioning, their economic effect is to destroy other people's homes and factories, making those people poorer and less able to buy our products.
So if government spending in WWII pulled us out of the Depression, wouldn't it have worked just as well for the government to spend the same amount of money by building the interstate highway system in 1936 instead of 1956, building subways in LA and Kansas City, tripling the size of the nation's universities (as happened shortly after WWII), etc.? What exactly is the conservative argument here? What, on the conservative view, is magic about war spending that doesn't work if you do it when you're at peace?
I mean, to apply the apparent conservative "critique" of FDR to the current situation: the accusation seems to be that FDR's efforts at setting wages and prices centrally were a big flop. Fine. Since Obama and the Summers/Geithner/Goolsbee economics crowd have evinced no interest in wage or price controls, that seems irrelevant to the current moment. The rest of the critique is that FDR's stimulus wasn't big enough to have an impact. And this implies...? Think it through, people.
I also think it likely that having the rest of the world's industrial base bombed, until it was reduced to rubble, was somewhat helpful in creating greater demand for America's industrial output. No, breaking a window won't make the neighborhood where the window is located more wealthy. It will make the overseas window maker wealthier, however.
@brooksfoe,
One conservative critique would be that FDR (and Hoover) should have printed money and injected it directly into the banks. The deflation seen in the early years of the Depression meant that real interest rates were huge, even though nominal rates were very low.
Instead, FDR focused on relief of people through the New Deal. But he wasn't really an enthusiastic deficit spender, and he kept the high tax rate from 1932 in effect to pay for some of his programs. And of course, price and wage fixing exacerbated things a bit.
To apply the conservative critique to today's situation, one would say that racking up debt is a consequence of good policy during a downturn, not the end goal. Spending on social programs won't help the economy, but expansionary monetary policy will.
Two points, one question
1. At what point we came out of the depression (WWII) is not a direct indication of what got us out of the depression. With zero intervention would we have been out 5 years earlier or 5 years later. Without alternate realities, it would be hard to tell.
2. I doubt that massive amounts of uncertainty helped the situation. Libertarian that I am, I still don't mind a little government intervention but it should be as transparent as possible.
3. The Japanese have not managed to do enough public works projects to get their economy going, How much do you need?
Although I do not often do so, I will note that Will Allen is actually right on this one. Yes war in a completely foreign theater that caused demand for America's products to rise, and which demolished any significant competition to U.S. business for many years was very, very good for the economy.
Perhaps too good, in the final analysis.
Brooksfoe - I'm not y81, nor am I an orthodox conservative. I believe, however, that the conventional take is:
Public works tend to be wasted. It's all very well to say "hey, let's build bridges, not bombs", but when you actually implement it, you end up with terrible terrible waste. The Japanese example is instructive here; they've spent huge amounts of money building bridges nobody uses and paving the bottom of lakes. (Not a joke, sadly.) It's been amazing for the cunstruction industry, amazing for their bought-and-paid-for politicians, and not so amazing for the country or economy as a whole.
Also, there might have been one or two other effects of WWII other than just ending the Great Depression. An orthodox conservative might well be in favour of some of them. :-)
In short, if you frame the issue as "useful public works versus useless bombers", it's very clear the former is better. If you frame it as "useless public works versus winning WWII", it's fairly clear the latter is better.
y81, could you or anyone else explain the orthodox conservative understanding why it is that the massive deficit spending of WWII pulled us out of the Depression, but massive deficit spending on public works programs would have been unable to accomplish the same thing? Is there something magic about the government putting people to work building bombers rather than building bridges?
Actually, it's pretty simple. We ran a far, far bigger full employment deficit making bombers than we did with the public works programs.
Here's a nice graph:
http://krugman.blogs.nytimes.com/2008/11/10/fiscal-fdr/
I might add one thing to Professor Krugman's claims, though. While the huge stimulus worked in 1942, that doesn't necessarily mean it would have worked in the 1930's. There were huge consumer confidence issues with the economy and the dust bowl and the bread lines in the 1930's. People lost their life savings in the stock market. (Bear in mind, far fewer people owned homes back then.)
I suspect the reality is that nothing would have immediately gotten us out of the Great Depression. Any rememdy needed a lot of time as well as a lot of stimulus.
"y81, could you or anyone else explain the orthodox conservative understanding why it is that the massive deficit spending of WWII pulled us out of the Depression, but massive deficit spending on public works programs would have been unable to accomplish the same thing? Is there something magic about the government putting people to work building bombers rather than building bridges?"
I'm not y81, or even an orthodox conservative, so please forgive me for butting in, but just off the top of my head, I suspect that the answer to this question lies in the realm of psychology rather than economics. The need to pull together against the common danger motivated everyone, from the biggest industrialist to the humblest worker, to put aside all the fears and hesitations that were hamstringing them in peacetime. And when the war was over and victory won, the economy just kept rolling on that momentum. See the speed and efficiency with which American industry switched from peacetime production to the manufacture of military equipment, and the speed and efficiency with which it swiched back at war's end.
So the whitewash of "progressive" "economics" begins.
Intellectual honesty is actually cooler than hanging out with the cool guys.
Given that my economics expertise is substantially equivalent to Ms. McArdle's (a Bachelor's degree from a fancy school, plus a career in financial services), I will refrain from discussing causes and cures of the Great Depression. Try Tyler Cowen and Paul Krugman, if hopeless confusion is your goal.
I think it is worth noting, however, that most economists of left or right don't tout the Roosevelt administration as having ended the Great Depression. Even economists on the left, who may approve of many of the policies of Roosevelt's first seven years, generally don't claim that those policies did much to bring about economic recovery. This is one of those areas of life (like the merits of JFK as president, or the quality of legal reasoning in Brown v. Board of Education) where academic and popular views diverge rather sharply.
I disagree with the whole bizarre Keynesian stimulus argument. However, I would probably not care about that stuff enough to complain about it, if it were actually spent on stuff that had a meaningful long-term benefit.
That means, no piddling crap like bridges, rails, internet access, government buildings. I mean research into fundamentally game-changing stuff like:
Von Neuman Replicators: machines that can automatically produce a wide variety of products, including functional copies of themselves
Friendly Artificial General Intelligence: basically, machines that are capable of doing everything humans can (but better) and serve our interests
Nanotechnology: nanometer-scale robots that can manipulate matter at the atomic level, thus fabricating materials with any desired properties or indefinitely keeping people alive
Space Elevator: a structure tall enough that it can be climbed to get into orbit, which would be much cheaper than current rocketry.
Unfortunately, most of the available work on this stuff is brain work, and thus not capable of employing many average people. :-/
y81, could you or anyone else explain the orthodox conservative understanding why it is that the massive deficit spending of WWII pulled us out of the Depression, but massive deficit spending on public works programs would have been unable to accomplish the same thing?
I may be repeating people here but the arguments I've heard lately (mostly in reaction to Krugman's piece) say "massive deficit spending on public works programs" might have worked. However, it weren't tried. Federal spending went up a lot but so did federal taxes, so the net stimulative effect wasn't big enough.
I'm glad to see a libertarian challenge Shlaes. I have not read her book, but have seen some questionable analysis in her columns. For example, one cites an analysis of Democratic/Republican control on the stock market. It adjusts returns for inflation using gold prices. I've never seen an analysis of stock returns adjusted for gold before, which suggests the author searched for a way to prove his thesis.
A great benefit of World War 2 was the mobilizing of the entire population. People went through military training, technical training, overseas experiences and relocations for factory work. This vast exercise advanced at least half of our adult population. The After-War GI Bill and home loans furthered the recovery. In recent years, America has declined as the benefits of this experience literally die out.
Which country recovered fastest from the Great Depression? Sweden, with zero tax on corporate earnings. Hoover's high tax rates were horrible on the economy, but rarely mentioned. But for the socialists who can't bear to even consider the notion that +60% tax rates on investors might be the reason factories laid idle (in addition, of course, to a severe monetary contraction, bank failures, tariffs and other things that actually decreased economic efficiency and total wealth) then WWII "pulled us out of the depression!" Perhaps adding women to the workforce provided a huge boost, as it did in Ireland's economic upsurge. Perhaps American industry benefited from its competitors bombed to dust. But aside from that, war doesn't seem good for the economy.
If the socialists actually believed that, they'd be discussing how the Iraq war was boosting the American and world economy. But anyone who tried to put that forward would be called crazy and for good reason.
There are no "socialists" here, Ryan W., but:
If the socialists actually believed that, they'd be discussing how the Iraq war was boosting the American and world economy.
The Iraq War is boosting the American and world economy. It's probably one of the least efficient possible ways to do so -- basically paying people to stand around very expensively in a desert and occasionally blow up something extremely expensive, or to walk around in urban neighborhoods watching very carefully and occasionally shooting at someone. There is a multiplier effect for the Iraqi economy, to the extent that safer markets and more oil production in Iraq result from US military action rather than from Iraqi political shifts, but it's surely not as productive to spend $8 billion a month on keeping US troops in Iraq as it would be to spend $8 billion a month on improved schooling for US kids or a fast train from JFK airport to Grand Central Station or broadband access for every neighborhood in America.
There, now I've discussed it. Was that so hard?
A recent argument that the New Deal didn't provide much fiscal stimulus because taxes rose almost as much as spending is by Alex Tabarrok:
http://www.marginalrevolution.com/marginalrevolution/2008/11/understanding-f.html
I can't remember reading a remark as ignorant as this all year:
"it's hard to make the case that government intervention was the main problem with the economy"
Let me recommend that you make this your tag line, so I remember to never to read your blog again.