When unemployment is present, lower wages for some workers can stimulate renewed employment and -- depending on elasticities -- possibly greater purchasing power as well or at least not proportionally diminished purchasing power. (Each worker earns less but there are more workers employed.) There won't in general be much of a deflation. The hiring of some workers can also lead to an upward spiral in production, employment, and again purchasing power, as outlined by W.H. Hutt in his books on Keynes.Krugman and others wish to argue that the New Deal years were ones of recovery; that is fine but it increases the chance that the Hutt scenario and not the Keynes scenario would apply at that time.
The simplest version of the Keynesian argument on money wages also relies on labor as the primary source of marginal cost (true in many but not all sectors) and lack of market power for retail prices, among other assumptions about market structure. Yet another scenario is that some nominal wages fall and entrepreneurs (with some market power) invest more in response and hold retail prices relatively steady.
I believe Keynes's "falling nominal wages-falling prices-constant real wages-constant unemployment" scenario does hold for some of the 1929-1932 period and indeed I have argued as such in print. But once we get into the Roosevelt era, we have government propping up some wages above market-clearing levels and thus higher than necessary unemployment. Note that the Roosevelt policies applied only to some workers and by no means to all or even most workers, which again suggests the Hutt analysis is more relevant than the Krugman/Keynes analysis.
Roosevelt's lunatic cartelization schemes could have been better executed than they were, but even perfectly executed, they would have failed, because it is not possible for the government to prop up all wages and prices; even Soviet Russia didn't manage it. If the nominal price of labor is too high, much of it will move into the black market. It was even harder for Roosevelt, because he lived in an era where record keeping was somewhat slapdash--I was just reading a travel memoir from the fifties where the author goes to apply for a passport and finds he has no birth certificate. Now, if they really wanted to, the government could send someone to the address last associated with your social security number and inquire what you were doing with your days.
Which is a disturbingly good argument agains the most prominent relic of the New Deal. But I digress.
There is one market in which the government can effectively prop up the price of labor: national defense. The government controls both the demand for the products of the defense industry and the supply of those products. It's an interesting case, because even a war launched on false pretenses generates real demand.
The broken window fallacy would seem to apply, but only if the non-financial costs of the war (collateral damage and economic destruction) are born domestically. You can make money if you fight the war in someone else's country.
In his column in last week's NY Times, Cowen offered a handy New Deal crib sheet.
"Which is a disturbingly good argument agains the most prominent relic of the New Deal. But I digress."
I'm tempted to say that 'It's not even wrong'.
If we can apply the broken windows concept from Megan's previous post, I suggest a Broken Windows Theory of Wingnut Hackery, which suggests that all it takes is one eloquent hack to poke a finger in the eye of a universally-recognized liberal success story for the rest of the hacks to pile on.
The relevant case here is FDR -- the hacks the likes of Amity Shlaes and Tyler Cowen. Soon, their minions, including our Megan.
All Shlaes has to do is twist some labor statistics from 75 years ago and publish some spurious arguments in a book -- and suddenly FDR is worse than Hoover!
Then Megan calls the New Deal an EPIC FAIL. Irony, that.
The current crisis, to the extent that it is more than a run-oft-the-mill recession, will be solved through macroeconomic activities. These activities will be criticized by wingers using microeconomic drivel. Since macro is ascendant and micro grouchy, our country will prosper. When the opposite has been the case, we get the Bush years.
All of the rest of this noise is the wingers preparing to claim they were right all along, when in fact they are consistently wrong.
But what do I know? I'm just some anonymous troll taking my direction from the ur-troll, who is in turn a mutated humanoid living in the belly of an ordinary-looking man on Mars.
I don't see "lunacy" in cartels when dealing with commodities (i.e., oil, agricultural products). "Rationalizing" capitalism was a theme of the 20's and was part of the conventional wisdom of the times. A long quote:"In this country we have developed a higher sense of cooperation than has ever been known before. This has come partly as the result of stimulation during the war, partly from the impulses of industry itself. We have ten thousand examples of this cooperative tendency in the enormous growth of the associational activities during recent years. Chambers of commerce, trade associations, professional associations, labor unions, trade councils, civic associations, farm cooperatives -- these are all so embracing that there is scarcely an individual in our country who does not belong to one or more of them. They represent every phase of our national life both on the economic and the welfare side. They represent a vast ferment toward conscious cooperation. While some of them are selfish and narrow, the majority of them recognize a responsibility to the public as well as to their own interest.
The government in its obligation to the public can through skilled specialists cooperate with these various associations for the accomplishment of high public purposes. And this cooperation can take two distinct directions. The first is in the promotion of constructive projects of public interest, such as the elimination of waste in industry, the stabilization of business and development of scientific research. It can contribute to reducing unemployment and seasonal employment. It can by organized cooperation assist and promote great movements for better homes, for child welfare and for recreation.
The second form that this cooperation can take is in the cure of abuses and the establishment of a higher code of ethics and a more strict standard in its conduct of business. One test of our economic and social system is its capacity to cure its own abuses. New abuses and new relationships to the public interest will occur as long as we continue to progress. If we are to be wholly dependent upon government to cure every evil we shall by this very method have created an enlarged and deadening abuse through the extension of bureaucracy and the clumsy and incapable handling of delicate economic forces. And much abuse has been and can be cured by inspiration and cooperation, rather than by regulation of the government."
FDR in 1933? No, Herbert Hoover in 1928.
MM's blog is mainly just silliness masquerading as serious thought. She touches upon issues with the lightness of a conserative fairy mixing her own personal observations with judicious snippets of other peoples work in a lame attempt to substantiate her hypotheses rather than doing the hard work that would require facts and well thought out hypotheses, not to mention conclusions. This blogging seems to me to be a pretty good gig. Does it pay well?
FDR pursued a mildly expansionary fiscal policy from 1933 to 1937 and obtained fairly good results in terms of reviving the economy. He turned to a more orthodox fiscal policy in 1937, following which the economy collapsed. The economy then came back to health under the stimulus of heavy defense spending in the early stages of WW II.
To Amity Shlaes, George Will, and the marginally less insane Tyler Cowen, this demonstrates the failure of Kensian economics. I don't understand their logic. Maybe Megan can explain.
Amity Shales? She needs to go on a diet. She is really getting fat.
She touches upon issues with the lightness of a conserative fairy mixing her own personal observations with judicious snippets of other peoples work in a lame attempt to substantiate her hypotheses rather than doing the hard work that would require facts and well thought out hypotheses, not to mention conclusions.
On the up side, she uses commas.
From Stan:
Above is the silliest assertion made over and over again by even people that should actually know better, but it is useful in that it highlights one the major misunderstandings in all of economics- that high employment means a healthy economy.
Stan, the key function of a healthy economy is that it supply the goods and services that lead to consumer contentedness. Warfare does nothing of the sort, and the goods it provides are not consumer goods or capital goods, but are, in fact, anti-consumer goods and anti-capital goods- they make the world more poor. Any survey of the consumption of Americans during the war reveals that consumption did not rise at all during the war, and actually fell once it started (and this shouldn't surprise anyone since goods and services were actively rationed by government decree). Saying that war production led to a healthy economy is equivalent to saying that someone had a good economic year because he suddenly had spend resources to hire and arm security guards to protect him.
Why do free market proponents view this bust as undesirable? The fact is, believe in the free market means believing in boom and bust cycles and accepting the seemingly arbitrary results that they may bring. When Schumpeter talked about creative destruction, he meant it, although he didn't think that citizens of a democracy would tolerate the government standing idly by while their whole world goes kablooey. It is very likely that had we retained all of the Rooseveltian regulatory structure in place to this very day, we perhaps would have avoided alot of this bust, but we would have avoided alot of the boom as well. Liberals of course don't like this kind of thing, but at least they aren't intellectually dishonest about their view on government action. Conservatives though seem to want to believe that there is some magic positive force that can be ascribed to markets, and tax cuts for that matter, as if by freeing up the markets we can avoid the kinds painful episodes that we are currently experiencing. It would be nice if competition was a good thing, but for the person actually doing the competing, it often sucks. It's often much better for them to lock in a monopoly rent rather than see their profits erode and have to squeeze (or even lay off) their workers, just to remain competitive. But that isn't how it works. If you believe in the free market, then celebrate the busts as well as the booms because it is all part of the cyclical nature of things. For every season....blah blah blah, but also remember that it is human nature to try to stop the negative effects of the market by locking in advantages, structural and otherwise. And to do this you will need regulation, otherwise some people will succeed in locking in their advantage and will eliminate competition. Uh oh.
Yancey, the Depression ended in the late 30's and the early 40's. I said this was due to stimulation of the economy through orders for weapons. If you think defense spending did NOT play a key role in ending the Depression, please explain what did.
Stan, a lot of those "orders for weapons", and probably to a greater extent orders for material to be used in weapons, where from Europe. If the US government orders weapons, it takes from the US taxpayer, to pay for the weapons order. But if a foreign company buys weapons from us, then they are paying for the weapons, so you don't have a "broken windows" issue.
Bill Harshaw,
The Wall Street Journal's Holman Jenkins has made a similar point in the past about the domestic airline industry, i.e., that the hyper-competition is irrational and destructive in that industry.
Stan,
I think Yancey's making a different point: that although unemployment virtually disappeared, economic growth resumed, people earned money, etc., (i.e., the Depression was over) in real terms, Americans weren't better off during the Second World War. Several million men were slogging their way through the battlefields of Europe or the Pacific, and Americans on the home front faced shortages of all sorts of goods which were consumed by the war effort. They had jobs and money that they didn't have during the Great Depression, but there wasn't a lot they could spend that money on beyond bare necessities, which were rationed. Their consumption was deferred until the war ended.
Stan, the depression ended after the war when all the price controls and most of the other really bad aspects of Roosevelt's policies were discontinued, but probably the main reason is that the accumulated bad debts were finally liquidated and forgiven after 15 years.
To assert that spending on weapons of war, goods that have no purpose other than destruction, is a way to bring greater prosperity is astonishing ignorance. By that kind of reasoning we, today, could build 10 trillion dollars worth of weapons today and take them out the ocean and sink them to the bottom of the sea and get a better economy that was obtained during WWII by simple virtue that the weapons aren't used for destruction of anything other than the resources used to make them. Or we could spend 10 trillion dollars digging and filling holes and have a more beneficial effect.
Tim, France and the low countries were knocked out of the war in June of 1940, and Great Britain ran out of money early in 1941 and had to be bailed out by FDR's lend-lease program. The USSR also received lend-lease aid, a lot of it, and so did China. The US paid for our own weapons and for a substantial portion of the weapons used by our allies. I don't know what you mean by a "broken window issue", but I have a feeling that your argument against it is weak.
DaveinHackensack, I didn't say that Americans were better off because of World War II. I was too young then to understand much, but I knew it was awful. Nevertheless, it ended the Depression. And I'm firmly convinced that the Depression could have been ended earlier if Roosevelt had understood Keynesian economics and acted on his understanding.
In fairness Yancy, if by "depression" you mean "depressed output," the war ended it. If by "depression" you mean something like "low standard of living," then clearly it lasted until 1946 or so.
It's the new right wing talking point. W/ Reaganomics finally discredited, they have to whine about how FDR didn't end the depression. Essentially, they're afraid the Obama admin. will actually provide universal health care & we'll all become socialists, so they want to stop any more "increases in gov't." by discrediting Roosevelt.
Rob, the domestic standard of living during WWII was low but tolerable. People couldn't get new cars and hospital beds were scarce. But, and this is a big "but", mass unemployment was a thing of the past. Everybody could get work and people could afford food if they were willing to eat vegetables and less desirable cuts of meat. Many people (including my parents) no longer feared poverty. I didn't experience the depression except as an infant, and I was too young during the war to understand much of anything. But everybody I talked to later said that for people at home the war years were a paradise compared to the depression except for the constant worrying about the safety of their loved ones in the armed forces and the very real fear that we'd lose.
Rob,
Depressed output is depressed when it doesn't actually supply the everyday items people want (I know you know this, but I am venting since I run into the WWII-ended-the-dression-argument all the time). Note how Stan still focuses on employment, completely and utterly ignoring the fact that such employment is meaningless to economic growth unless those being employed are actually producing goods and services that others will pay to consume. Sure, being employed may be spiritually better than being unemployed, but if you are not producing things to the benefit of others (things others are willing to pay for), then you have added nothing to economic output, and worse, the resources consumed in your undesired output are also a net subtraction from wealth.
By Stan's argument, paying one set of people to dig holes and another to refill them will reduce unemployment, thereby leading to economic growth because those people now have money to buy consumer goods. This is economic silliness. The government can spend on infrastructure items that add to wealth, and it sometimes does, but weapons of war are not such items.
One might argue that we haven't actually accounted for the costs of the industrial expansions and the government supports of industry after WWII; the tab for pollution and industrial production hasn't, to my reckoning, ever been calculated; it's been a false economy, not a free-market economy.
A good example would be the current health-care problems; due in part to the western diet, which is heavily subsidized by some governments. Climate change is another example, where polluters contribute, and their pollution is subsidized by a number of policies, including tax breaks that allow shifting businesses around the globe to the cheapest production country. (Please note, I asked about pollution, not CO2.)
A third example is loss of soil fertility, a precious resource necessary to grow food, which I never even hear you non-farmers consider. Yet to my mind it's as important as clean air and water. You can't grow food without. And chemical fertilizers kill it. Fast. (This is about the only thing I have in common with the Palin born-again crowd.)
In a real free market economy, wouldn't those costs, which place an extreme burden on society, be included in the costs of goods? Being an ignorant farmer, I'd really like to know the answer.
Yancey, it's not just my argument that World War II ended the Depression. Check unemployment figures for the period 1937-1940 and compare them with unemployment during the late 40's. If war spending didn't end the Depression, what did?
As far as your point that "paying one set of people to dig holes and another to refill them will reduce unemployment, thereby leading to economic growth because those people now have money to buy consumer goods" is silliness, how does this differ from reducing income taxes, the economic stimulus remedy favored by Gregory Mankiw and other conservative economists? Or temporarily ending payroll taxes, also endorsed by Mankiw? Is everybody crazy but you?
Stan,
Income tax cuts not backed by reduced government spending are a wash, in my opinion- I am not a believer in fiscal stimulation, I am more concerned with the waste of resources by government actions. However, any increase in incentive to work at producing something that someone else desires enough to pay for is an economic benefit- how could it be otherwise?
As for what ended the depression, I have already given you my answer- the depression ended the with an end of almost all price controls after the war, and the end of a lot of the other more egregious interventions practiced by Roosevelt.
My main point is this- if increased economic activity isn't supporting more of the consumption that people desire, then it isn't really a worthwhile increase- it is just a waste of resources, including that of wasted labor/leisure time. This is why the war-spending-ended-the-depression agitates me. If you are going to pay people money to produce non-consumer and non-capital goods, then it is far, far better to just give them the money for nothing- at least that way you don't compound the problem by the additional resources wasted producing the unwanted goods.
Yancey,
By your logic, should Boeing's sales of commercial airliners be included in GDP calculations, but not its sales of military planes? That doesn't make much sense to me.
Also, the digging holes/filling them analogy seems to miss a point about military spending: weapons of war may not satisfy "the consumption that people desire" but it satisfies other things most people desire: national security, deterring wars, defending sea lanes vital to trade, defeating military threats when they can't be deterred, etc.
Stan- Tim, France and the low countries were knocked out of the war in June of 1940
And they (and the UK) where buying from America before (and in UK's case after) 1940. The purchases for the war started before the war.
and Great Britain ran out of money early in 1941 and had to be bailed out by FDR's lend-lease program
From 39 to early 41 is time for a lot of money to be poured in to the US, as the European countries (the UK for the whole period, others for less) to rearm themselves.
Also the UK was still funneling money to the US after early 41. Yes we sent them lend lease. But we still sold a lot to them. Their money isn't a simple pile of cash or gold that got used up leaving them with no more. There where in financial difficulty, and they did borrow, lease, or just take possession of, US equipment, supplies, and money. But they where also funneling their own budget to buy arms, and to buy equipment for weapons and for industry generally, and also to buy food and fuel, and a lot of that money went to the US.
I don't know what you mean by a "broken window issue"
http://en.wikipedia.org/wiki/Parable_of_the_broken_window
or see Yancey Ward's comments about building weapons and tossing them in to the see, or paying people to dig holes, and paying others to fill them in.
how does this differ from reducing income taxes
It differs in that reducing income taxes is letting people and companies who produce useful things, keep more of their own money, and thus have more incentive to invest money and time in to produce more useful things.
Digging holes and filling them in again (or producing weapons and then sinking them in the middle of the ocean) isn't producing anything useful in most cases.
It would be simple to have very low unemployment. Eliminate unemployment benefits or welfare (except perhaps for the severely disabled) and then give everyone who wants a job but can't get a real one a make work job, like digging holes and filling them in, or for those unable to do manual labor you could have them do something useless over the phone or on a computer. But even though unemployment is lower, the economy isn't any better off. You have to actually produce something useful to make people better off, creating something useless, or creating something and then immediately destroying it doesn't help the country. It probably makes it worse off (as your using up resources, including labor, that could be used to do something more useful).
Keynes, “The General Theory”, chapter 24, pages 381-83:
“I have mentioned in passing that the new system might be more favourable to peace than the old has been. It is worth while to repeat and emphasise that aspect.
“War has several causes. Dictators and others such, to whom war offers, in expectation at least, a pleasurable excitement, find it easy to work on the natural bellicosity of their peoples. But, over and above this, facilitating their task of fanning the popular flame, are the economic causes of war, namely, the pressure of population and the competitive struggle for markets. It is the second factor, which probably played a predominant part in the nineteenth century, and might again, that is germane to this discussion.
“I have pointed out in the preceding chapter that, under the system of domestic laissez-faire and an international gold standard such as was orthodox in the latter half of the nineteenth century, there was no means open to a government whereby to mitigate economic distress at home except through the competitive struggle for markets. For all measures helpful to a state of chronic or intermittent under-employment were ruled out, except measures to improve the balance of trade on income account.
“Thus, whilst economists were accustomed to applaud the prevailing international system as furnishing the fruits of the international division of labour and harmonising at the same time the interests of different nations, there lay concealed a less benign influence; and those statesmen were moved by common sense and a correct apprehension of the true course of events, who believed that if a rich, old country were to neglect the struggle for markets its prosperity would droop and fail. But if nations can learn to provide themselves with full employment by their domestic policy (and, we must add, if they can also attain equilibrium in the trend of their population), there need be no important economic forces calculated to set the interest of one country against that of its neighbours. There would still be room for the international division of labour and for international lending in appropriate conditions. But there would no longer be a pressing motive why one country need force its wares on another or repulse the offerings of its neighbour, not because this was necessary to enable it to pay for what it wished to purchase, but with the express object of upsetting the equilibrium of payments so as to develop a balance of trade in its own favour. International trade would cease to be what it is, namely, a desperate expedient to maintain employment at home by forcing sales on foreign markets and restricting purchases, which, if successful, will merely shift the problem of unemployment to the neighbour which is worsted in the struggle, but a willing and unimpeded exchange of goods and services in conditions of mutual advantage.”
The only discussions I know of this and related passages in the GT (including in chapter 23) on Keynes’s belief in economic causes of war and that his economics might help promote peace are:
- Hyman P Minsky, “John Maynard Keynes”, Columbia University Press, 1975, page 159
- Donald Markwell, “John Maynard Keynes and International Relations: Economic Paths to War and Peace”, Oxford University Press, 2006, pages 178-190
It's also worth looking at http://hypocrisy.com/2008/11/23/tanya-white-reminds-us-of-economist-keynes-paths-to-peace/
Thanks to Arthur James for the reference to Hyman Minsky on Keynes on war and peace. It’s only a couple of pars - remmber Minsky was writing in 1975 -
“Conflict among nations
Keynes also believed that ‘if nations can learn to provide themselves with full employment by their domestic policy … there need be no important economic forces calculated to set the interest of one country against that of its neighbours’ (GT, p. 382). Keynes viewed the tensions among the affluent nations of Europe and America as stemming from the felt needs to export in order to protect domestic employment, if not to raise domestic employment by ‘beggar my neighbour’ policies.
For the first twenty-five years after the Second World War, this view of Keynes was borne out by relations among the affluent capitalist countries. Aside from vestiges of past colonialism, such as the Vietnam involvement by first France and then the United States, there was an absence of war and even of serious tensions among the countries that were both capitalist and affluent. The ideological Cold War is not a question of economic conflict. The ability to sustain domestic markets by monetary and fiscal policies eliminated pressures for countries to ‘compete’ for controlled markets or advantageous positions in world trade.”
How relevant is this again today!
The reference to Markwell is also interesting. He gives a detailed account of how Keynes came to write in the General Theory about the effect of his economics on the chances of war and peace. Fascinating that Keynes was responding to a debate in New Statesman on “does capitalism cause war?”
As Arthur James said, there's an interesting discussion at http://hypocrisy.com/2008/11/23/tanya-white-reminds-us-of-economist-keynes-paths-to-peace/