Item One: Even a dead cat will bounce if you drop it from a high enough height. GDP contracted by nearly a third during the acute phase of the crisis, from 1930-32. It wasn't actually going to continue to contract indefinitely. This is basically the pattern you see in most countries with major financial crises: severe contraction, and then rapid climb back towards former output levels.
Item Two: Remember how we talked about increasing a measurement by increasing one of its components? Government spending went up, which naturally pushed the measurement up. But that didn't mean the economy was healthy, and no reputable economist, left or right, claims that the Great Depression ended before 1940.
Item Three: The statistics point to a lost decade.
Unemployment:
GDP:
The economy basically recovered to the same level of output it had enjoyed in 1930, with much higher unemployment (17% in 1939). Indeed, FDR had more years of 20+% unemployment than Hoover. But of course, during that time, the population had grown somewhat, so GDP per capita was slightly lower than in 1930.
An economy with 17% unemployment is not healthy. And economy with GDP fluctuating around the same level it was at ten years ago is not healthy. A healthy economy would have displayed new growth and much lower unemployment.
FDR's programs may have helped alleviate the pain of the Great Depression, but they did not cure the underlying economic malaise, which was alive and well as we headed into World War II.
But, if GDP had recovered to prior levels, but employment was lower, then per-hour productivity had risen dramatically! Per-hour productivity is the preferred left/liberal measure for evaluating the economies of contemporary Europe and the New Deal. Although, strangely, it is a metric never mentioned in evaluating the economy under George W. Bush.
Megan,
A dead cat bounce is listed on wikipedia as "a figurative term used by traders in the finance industry to describe a pattern wherein a spectacular decline in the price of a stock is immediately followed by a moderate and temporary rise before resuming its downward movement"
By this metric, how is the 1938 rise in unemployment or the 1938 fall in GDP a "dead cat bounce"? In each case, the 'resuming [of] downward movement' lasted only a year, and did not come close to erasing the gains of what you call the 'dead cat bounce'. It seems obvious that 1938, not 1933-37, was the real 'dead cat bounce'.
The economy was a lot healthier in 1940 than in 1932. 1932 was the year before the implementation of the New Deal. 1940 came at the end of the New Deal but before the (even bigger) New Deal of government spending for World War II.
If CEO A runs a company for 3 years, and the stock declines from $80 to $10, and then CEO B comes in and runs a company for 8 years, and the stock rises from $10 to $50, how can you say CEO B was not successful? Sure, the company was not 'healthy' by the standards of $80/share, but it was a lot better off than it had been before and heading in the right direction.
Regardless of the truth of this statement (I don't dispute it), this is argument by appeal to authority, a logical fallacy... As a fact of the matter things were a lot better in 1940 than the start of 1933.
When you have a 50% contraction of GDP before X policy is implemented, then the fact that X policy only managed to restore the original level of GDP, and did not result in wild gains from that original level, technically counts as a "lost decade."
But let's be serious here. It was only a lost decade because of the years 1929-33. If you exclude those (pre-New Deal) years, then it is not a lost decade at all. The decade from 1933-43 saw the fastest economic growth of almost any decade in US history.
There is only one data point of fluctuation: 1938. Excluding this 1938 data point, the indicators all point in one direction- steady and catastrophic deterioration before the New Deal, and steady improvement afterward. So your entire argument rests on 1938. But the 1937-38 recession occurred in part because the New Deal was relaxed during those years. It's an example of taking the crutches off too early-- it's not that the crutches weren't working, but they take time to work.
This is not exactly the same statement as
The latter statement suggests that stimulus spending was totally ineffective; the former statement acknowledges that it "helped alleviate the pain", but did not address some "underlying economic malaise."
In policy discussion, this distinction is important, because something that helps alleviate the pain, even if it doesn't solve all our problems, may be worth trying on its own, whereas something that was merely ineffective is not.
This historical revisionism is getting absurd, frankly. It's not just Megan, but Cal Thomas, John Ensign, Amity Shlaes, and pretty much every right-of-center journalist or politician these days when speaking of the Depression. It's pure revisionism.
What's worse is that their argument is that "World War II" is what lifted us out of the Depression-- but World War II was just the New Deal on steroids.
Anonymous,
Some of us can understand the analogy of the dead cat without tying it to the wikipedia definition you cite. The point is that the economy had cratered, and so the "amazing growth" you cite came from a severely depressed baseline.
Whether the economy recovered because of FDR's policies, or in spite of them, is beyond my expertise, but your bold-text assertion is unconvincing.
Anonymous did the heavy lifting.
I'll just add that the reason it took WW II to finally end the dperession is a war was the only type of government spending at the level that was required tnat didn't have political opposition. If you spent the same amount of money and hired the same number of people to build infrastructure you would have gotten out of the depression and had something to show for it. How much more economic growth would there have been in the 50s if we had started with the interstate highway system already for example?
What he said.
This, frankly, is why McMegan is very hard to take seriously. You're either arguing with a strawman or you're deliberately misrepresenting the "opposition" viewpoint. After all, any good Keynsian would agree with most of your conclusions and assumptions here, and would pin the blame on the effort at deficit reduction and pulling back the government reins in 1937-38, yet there's no mention whatsoever of the change in fiscal policy in your post. That wouldn't pass a History 101 course.
We can't arrange a good war to bounce this dead cat back because we exported all our manufacturing. It's impossible to have another WWII as our economic crash cart.
I think we should all aspire to thrift and genteel poverty. If you're going to be poor, might as well keep your manners. No sense acting like trailer trash.
liz,
That is the point, you don't need a war, better to spend on something productive.
Basically WW II was a perverse form of Keynes "pay them to dig holes, then pay them to refill them" We paid a bunch of people to blow up all of Europe and then spent a bunch more money rebuilding it.
Anonymous got it in one. If WW2 tells us anything, its that even bigger and more sustained stimulus was needed to get us out of the GD. Again , its not like there are a lot of debate about this among the economists. Its only in libertarian world that you hear that fiscal stimulus doesn't do any good, that government spending is all bad and wasteful, etc. Their arguments are all refreshingly free of evidence but full of homey little metaphors like "the economy is like someone who swallowed bad peanut butter" or the "federal government should balance its budget , like I do at home". Why on the other thread, someone even argued that we should cut the federal budget, because cutting spending is what he does in tough times. Its just a total lack of economic understanding.
How DARE I claim that stimulus spending didn't get us out of the Great Depression? GDP growth was really, really high under FDR!!!!...FDR's programs may have helped alleviate the pain of the Great Depression, but they did not cure the underlying economic malaise, which was alive and well as we headed into World War II.
Who actually is claiming FDR's spending policies during his first two terms got us out of the Depression? I thought there was near unanimity among proponents of Keynesian measures that it was the massive deficit spending/pump priming of '40-'45 -- when public debt doubled as a percentage of GDP -- that got us out of the Great Depression (hence Krugman's warnings against the dangers of making the stimulus package too small).
We can't arrange a good war to bounce this dead cat back because we exported all our manufacturing. It's impossible to have another WWII as our economic crash cart. I think we should all aspire to thrift and genteel poverty. If you're going to be poor, might as well keep your manners. No sense acting like trailer trash.
Considering your premise is false (the US actually has more manufacturing output now than at any previous time in history, it just so happens that the services sector grew even faster thereby dwarfing it on the GDP charts), the rest of your argument is on shaky ground. Moreover, even considering how many manufactured goods the US does import, most defense contracting involves US or at least North American suppliers and subcontractors.
And if you need additional manufacturing capacity fast, then just do what was done in World War II: commandeer civilian manufacturing centers for war output. Ford once made airplanes, and I daresay at this very moment GM would happily donate a very large quantity of floorspace and labor without being prompted. If WWIII really were at hand, I doubt the government would have any qualms about nationalizing some very large capital infrastructure possessions of Toyota, Honda, Nissan, and Hyundai, either. What are they going to do? Sneak the parts and tools out overnight and convince their majority-American workforce to sabotage the rest?
Not that I'm advocating any of this, but do stay grounded in reality here...
How much more economic growth would there have been in the 50s if we had started with the interstate highway system already for example?
Good point. And herein lies some reasons for hope: if WWII pump-priming worked its magic in spite of the diminishing/reduced returns associated with (relatively) wasteful military spending, just think how much more bang for buck we'll be getting this time around.
This historical revisionism is getting absurd, frankly. It's not just Megan, but Cal Thomas, John Ensign, Amity Shlaes, and pretty much every right-of-center journalist or politician these days when speaking of the Depression. It's pure revisionism.
Yup. At least Megan is sufficiently in touch with reality to have seen the merits of opting for Obama over McCain. I therefore really have a hard time believing she can't see in her heart of hearts the compelling nature of the case in favor of massive stimulus given the seventy-year old case study available for review.
So why would a war get us out of a depression? Massive government intervention?
If the New Deal didnt get us out of the Depression, total and complete control of the economy did?
I am not an economist, but it seems to me that the wage and price controls instituted during the 30's and the virtual command economy of the war years would make it an 'apples and organges' problem when you try to compare GDP statistics of the pre and post-depression years to the 30's and 40's.
I would think unemployment figures would be more reliable, but even those numbers become pretty meaningless in 1941. Has anyone done work on comparing actual household consumption as a measure of when the economy can be said to have recovered?
As a cat owner (ownee?), I greatly dislike the term "dead cat bounce." I propose replacing it with "dead human bounce." Thank you.
I am not an economist, but it seems to me that the wage and price controls instituted during the 30's and the virtual command economy of the war years would make it an 'apples and organges' problem when you try to compare GDP statistics of the pre and post-depression years to the 30's and 40's.
RobB: If you want to investigate the claim that the massive Keynesian stimulus of WWII is what finally got us out of the Great Depression, then the thing to do would be to compare the eleven years (the duration of the Depression, that is) prior to 1940 with the eleven years after the events in question (ie., 1946-1957).
I suspect you'll find the contrast rather striking. Sure, maybe the fact that in 1940-1945 the government borrowed a sum equal to 70% of GDP and used it on a wild spending spree had nothing to do with the vastly improved conditions prevailing in the second period. But I doubt it.
So why would a war get us out of a depression? Massive government intervention?
It wasn't the war as such that got us out of Depression. It was rather the fact that in order to fight and win said war, the government borrowed ten trillion bucks (adjusted for inflation and today's larger economy) over four years and put millions of people to work. I'm not saying, mind you, that we need to or should borrow anything like such a sum this time around. Presumably we're not going to shut down international trade. And we're a vastly wealthier country now than then. And critically, government stabilizers that didn't exist in Hoover's day do exist in ours, and so the current decline has not been and will not be as severe as the initial drop of 1929-1933. Moreover, monetary policy is more sophisticated and effective nowadays. And finally, stimulus money spent on things like aid to state governments and highway repairs should be considerably more effective than spending on things like bullets and bombs. Still, the path is clear. I'm just thankful its the party of FDR and not Hoover that's calling the shots.
Now if we can just figure out a way to have Japan's, Europe's, China's, South Korea's, Taiwans's, and many other manufacturing bases vanish over the next four years, THEN we will have a situation similar to what the United States faced in 1946.
Who knows? Maybe if we ask "pretty please" the Euro can be replaced with Hershey bars and American cigarettes!
The graphs presented at the start of this post use a definition of unemployment that counts WPA, PWA, and CCC employees as unemployed. Maybe they should be counted in this way, but I think it would have been more honest if Megan had explained how she treated her data. She's using the Amity Shlaes definition of unemployment, and she should have stated so.
My second point is that her argument is counterfactual history. She seems to be arguing that if Andrew Mellon or somebody like him had been elected in 1932, everything would be as right as rain. It's possible, but it's also possible that American capitalism, and possibly American democracy, wouldn't have survived the 30's if the New Deal hadn't provided all those make-work jobs, the kind that kept my home town going during my early years.
Finally, and this is directed at Will Allen, what exactly do you think the government should do? What would you do if you had the power?
Okay, I'll just go ahead and hog the thread, since my cynicism can only be restrained infrequently these days. Economics, as discussed in this thread, and by many, if not most well known economists, is to empiricism as Bernie Madoff is to fiduciary duty. The frequency with which people use the tiniest historical sample sizes imaginable, historical sample sizes which contain huge numbers of uncontrolled variables, to "prove" one thing or another, thus making it possible for them to just "know" that policy or event A resulted in outcome B, would be laughable if it were not so pathetic. Nobody really "knows" a goddamned thing, and everybody who pretends that they do, or even pretends that they reasonably can have strong confidence in their suspicions, is either a dolt of the highest order, or more frequently, is simply engaged in self-dealing, in pursuit of power, prestige/ego gratification, or cash, or some combination thereof.
Have a nice evening!
So, FDR comes in and dramatically reverses the economic trends, leading to a recovery down the road. That's by any reasonable reading of those graphs.
That's an argument against his policies in exactly what way, again?
Stan, I shudder at the thought of me having such power, and I suspect a large part of our current travails is due to the exercise of power concentrated in too few, and extremely arrogant, hands. I understand the argument for throwing excrement againt the wall, in an effort to keep the wall from toppling on oneself, and who knows? Maybe that's the best thing to do. I just prefer the turd-flinging to not be described as an exercise which was the result of deep critical thinking.
Thanks for giving me a timely example, Chet.
So Megan finally gives us the full-blown assault on Keynes we always knew she wanted to deliver. She is apparently unaware that nobody wants to buy her Libertarian hula-hoops, so she continues whirling her under-educated MBA hips, hoping that there will be a sudden revival of popularity for Herbert Hoover's tough love economic policies.
It is OVER, Ms. McArdle. The goofy quasi-libertarianism you espouse is fully discredited and as popular as Ebola. Your continued existence as an Atlantic blogger is a hangover from a time when your editors were impressed by Grover Norquist and Karl Rove, the men who destroyed the Republican party.
Yes, yes, Megan. Herbert Hoover had it right and Franklin Roosevelt deceived America. Tell us another one.
I'm just jumping in, without going through the whole post, but responding to people's comments about WWII.
Doesn't the large-scale loss of life radically affect resource distribution and the number of available jobs?
416,000 men, while not even 1% of the population, is still the population of a bigger city than modern-day Pittsburgh, PA... additionally, with the millions killed in Europe and the destruction of competing infrastructure, isn't it safe to say that American goods were the only show in town for most of the war, and even when we "forgave" allied debt, etc, we still came out of it with a lot of money to throw around both privately and from the government...
it's certainly not fair to compare Keynesian pot-hole patching to the repaving of the global economy that was WWII, leaving America the only major show on the road for half a decade...
but i'm not speaking from numbers or data, so feel free to rip me a new one or ignore, etc... if someone else with more academic resources could find something about these aspects of the WWII vs. New Deal economic impacts it might contribute something to the discussion, at any rate.
It's pure revisionism.
How is that an argument? Sometimes revisionism is healthy.
I think you are all missing the point of Megan's post. What needs to be understood is that the history of the New Deal shows that the New Deal, as a package, took far too long to restore a healthy economy than this country and its voters are willing to tolerate.
The problem for today's analysts is, the New Deal was a mish-mosh of policies that pulled in different directions. It could be the case that one could isolate elements of the New Deal and say, "Those pieces worked, these other pieces did nothing, and these pieces over here undermined the good stuff and prolonged the pain."
The New Deal wasn't merely a "stimulus package." It was also an effort to regiment the economy in an effort to counter deflation by fiat. It was also a thoroughgoing legal attack on the power of business and corporations. It was also the realization of organized labor's wish list, to a degree that hasn't been seen since in this country. It was also the creation of a social safety net for older Americans. It was also an attempt to complete the electrification of the US. Which of these pieces should Obama emulate? Certainly not all of them. Some he can't do -- they were ruled illegal by the Supreme Court. Others have no political support nowadays. Others aren't relevant to today.
The history of the New Deal is neither an argument for nor against the stimulus package or anything else Obama might want to do. It's too bad, I suppose. It would be nice if there was a clear path to follow.
The thing I don't like about the stimulus package is its embodiment of Rahm Emmanuel's observation that "we shouldn't let a crisis go to waste." I feel insulted that the Democrats think they can get Americans to support programs they have previously rejected if they're slipped into a stimulus bill and redefined as stimulus. The hell with that.
I think there is a common understanding of stimulus to mean a jolt of money into the economy that will be spent. By definition, the jolt's effects need to be concentrated on a short period of time, 12-18 months, although we know we can't limit every form of stimulus to that initial period. But that should be the ideal: To spend money now without committing us to spending money later when the expenditure stops being stimulus and becomes inflationary instead. There is no room for, or tolerance for, trickery in this matter. Show the public how you're going to use the stimulus as stimulus, and if it ain't stimulus, remove it from the bill regardless of its other attributes.
Yeah, xyz, libertarian thinking was fully consistent with Hoover's support for raising taxes and his signing of Smoot Hawley.
Can this thread get any more stupid?
Vail, thanks for your reasonable contribution, and I shall endeavor to emulate your temperate tone.
Liz: "We can't arrange a good war to bounce this dead cat back because we exported all our manufacturing. It's impossible to have another WWII as our economic crash cart."
FAIL.
We manufacture plenty of stuff.
http://research.stlouisfed.org/fred2/series/OUTMS
If you want to investigate the claim that the massive Keynesian stimulus of WWII is what finally got us out of the Great Depression, then the thing to do would be to compare the eleven years (the duration of the Depression, that is) prior to 1940 with the eleven years after the events in question (ie., 1946-1957).
Right. But if we did that, then we couldn't have blog posts that stop measuring results at the 1939 mark, even though that clearly is several years short of the appropriate window.
I think there is a common understanding of stimulus to mean a jolt of money into the economy that will be spent. By definition, the jolt's effects need to be concentrated on a short period of time, 12-18 months, although we know we can't limit every form of stimulus to that initial period. But that should be the ideal: To spend money now without committing us to spending money later when the expenditure stops being stimulus and becomes inflationary instead. There is no room for, or tolerance for, trickery in this matter. Show the public how you're going to use the stimulus as stimulus, and if it ain't stimulus, remove it from the bill regardless of its other attributes.
The problem is tax cuts or Megan/John Bronte's 3,000 dollar money drop do not have a stimulating effect. You dont even need to go back far in history to show this. You can just go back to Bush's last stimulus attempt last year. That had practically no stimulating effect, and the situation has become much much much worse and the majority of people are far less likely to spend any portion of that - they will cut debt and save (And the banks, being insolvent, wont be lending this out, and private companies arent investing they are slashing costs and saving). Things like food stamps, and unemployment benefits however are effective stimulus because you cant save food stamps, and unemployed people dont really have the resources to save.
Now, unlike Japan, there are a large number of areas that we have chronically underfunded (like infrastructure) that can be started in a relatively short time (The CBO report says something 78% of the money will be spent within two years), and will provide productive benefits (Japan already had incredibly good infrastructure, we have a massive defict in infrastructure, from repairing bridges to improving freight rail capacity etc, to rebuilding our electric grid - Its like comparing the TVA to the bridge to nowehere, both are infrastructure, but otherwise totally different.) and can be economically stimulating (employing people and resources that wouldnt otherwise be employed)
The major issue is that economic crises leave governments with massive debts. However, the majority of this debt comes not from government efforts to stimulate, but from rapidly shrinking tax returns. The goal of a stimulus is stop the bleeding, and thus limit the amount of tax income lost (no jobs, no profits = no tax income). The overall price tag of the stimulus may seem large, but so long as it prevents more losses than it costs, its a good investment even if it goes as high as 2 trillion dollars.
You can see Angry Bear for another thorough fisking of Megan's theories: http://angrybear.blogspot.com/2009/02/econ-101-and-public-investment.html
Maybe the postwar boom was caused by the same reasons as the baby boom. All those hormones running wild! I propose a stimulus package that is a true stimulus, a release of pheremones in major cities around Valentine's day.
It makes just as much sense as anything else I see these days.
I think it would be more instructive to see how other countries in the 1930s got out of the Great Depression before the major stimulus of the major world war. Because I would rather have a Depression than a total world-wide war again, thanks.
What I see in these graphs is that unemployment was on the decline and that GDP was on the rise.
But the bigger point is that government Spending DID get us out of the Great Depression. It was called World War II. It might be that the only problem with the earlier government spending was that it simply wasn't large enough. Whose to say that if FDR hadn't raised government spending up to war levels back in 33 that it wouldn't have had the same effect?
And remember that the "official" data doesn't include people who were given "emergency work" by the government. The government gave people jobs that earned them real money, but such jobs don't figure into the numbers of who had jobs because they weren't "real" jobs. Is it surprising that if you don't include the jobs created by the government then you'd conclude that the government didn't create many jobs?
But the REAL question is, if stimulus is such a horrible idea what do we do instead?
Let me guess, "cut taxes". After all, if the economy is doing well, the answer is cut taxes. If its doing bad, the answer is cut taxes. If the government is running a deficit, we should cut taxes. If its in surplus, we should cut taxes. It doesn't matter what the problem is, the right wing economic think tanks will ALWAYS come to the conclusion that the one and only solution is to cut taxes. Who cares if the people really badly off don't even pay taxes to begin with. The answer is, and will always be, "cut taxes", and I'm highly suspicious of any answer that is always the answer, no matter the question.
Megan, your tables go to 1939. Convenient year for your thesis.
The US entered WW2 on Dec. 8, 1941.
In 1940 US defense spending was just 1.7% of GDP.
GDP growth in 1940 was 8.8%.
In 1941 US defense spending was up to 5.6% of GDP -- higher than before, but nowhere near the 38% it reached in 1944. (About the same as now, actually.)
GDP growth in 1941 was 17.1%.
Did the New Deal end the Depression? Most economists say no. But picking your years to create a "lost decade" effect is tendentious; extend the line out to the date when the US actually entered WW2, and instead of a "lost decade" you've got an economy surging ahead to new heights.
GDP growth figures available at http://www.bea.gov/national/xls/gdpchg.xls. Defense spending available at http://www.truthandpolitics.org/military-relative-size.php.
Anticipating a counterargument: it wasn't exports to European countries at war that caused the GDP growth in 1940 and 1941.
US exports did grow -- by $2 billion, from $3.2 billion in 1939 to $5.2 billion in 1941, in nominal dollars. Nominal GDP grew from $92 billion to $127 billion.
That would have to be a helluva multiplier for $2 billion in exports to cause a significant part of $35 billion in growth.
The problem with all of this analysis is that we do not know what would have happened if the government had done nothing at all, or had done something different from the New Deal.
It should be pointed out that Hoover did pass stimulus plans, etc., and despite those and the New Deal, we see unemployment raging until 1939 at 17%. I don't know about you, but I would like to see some improvement on that record.
Also, while spending a bunch of money on tanks is productive, using them to blow up European factories probably helped our 1950's numbers, I'd think, while probably hurting Europe's. (But no, their GDP growth rate was FANTASTIC then - hey, let's blow up America's production so we can rebuild it! Yeah! High GDP growth rate does not equal high GDP - see China)
Incidentally, reviewing all this 1940-41 data, I see that while the rise in defense spending in 1941 (3.9 percent of GDP) can't seem to explain the much larger rise in GDP (17.1 percent), the rise in defense employment explains a big chunk of the drop in unemployment in 1941. The military added almost 1.7 million people in 1941, going from employing 1.3 percent of the labor force to 4.1 percent -- most in the active duty services. So they added about 2.8 percent of the labor force, and total unemployment dropped from 14.4 percent to 9.9 percent, a drop of 4.5 percent. Presumably rising defense procurements and multiplier effects explain much of the rest of the drop in unemployment.
But that still doesn't explain how defense spending growth of 3.9 percent of GDP, and a drop of 4.5 percent in unemployment, would lead to a 17.1 percent overall growth rate. Especially since so much of the drop in unemployment consisted of people getting jobs in the very low-paying infantry sector. Either a lot of that GDP growth was unrelated to government and would've happened without WW2, or that government spending had a huge multiplier -- in which case, well, the government stimulus concept looks like a pretty good idea.
But the REAL question is, if stimulus is such a horrible idea what do we do instead? Let me guess, "cut taxes".
Uh...sorry to break it to you, but the Pelosi plan cuts taxes. Cutting taxes is universally regarded as a stimulus tactic. I realized you must've gotten quite a cackle at yourself after writing this, but it's uninformed.
You have to remember that we were also rearming Europe; their defense spending became our GDP.
You have to remember that we were also rearming Europe; their defense spending became our GDP. - Megan
Then it should show up in our exports. But it doesn't. Exports only rose $2 billion from 1939 to 1941.
I am starting to feel like the conventional economic story I learned ("the New Deal helped, but it was really only WW2 that got us out of the Depression") does not focus enough on 1940 and 1941 and what actually happened then.
The cyclical trough of the Great Depression was in March 1933. Hoover's term ended and FDR's term began in March 1933. Does this suggest anything?
Thanks for making me put my breakfast on my keyboard. Would this be the party that has been running the economies of our major cities with such success?
Proudly progressive California is nearing default and losing population. Something that would have been hard to imagine a few years ago. California is joining New Jersey as the only states to lose population. Any ideas why? It sure doesn't have anything to do with right wing economics.
Any ideas why? It sure doesn't have anything to do with right wing economics. - Brian
Do you actually know anything about California fiscal politics? Let's begin with Proposition 13 and move up through electricity deregulation to the Governator's elimination of the vehicle license tax and resulting titanic budget shortfall.
It has everything to do with right wing economics.
I suppose you could say that Proposition 13 was right-wing economics. But it seems truer to say that it was the failure of left-wing economics, or rather of left-wing politics. As I understand it, older people were being forced out of their homes by rising property taxes, and Proposition 13 was intended to solve that problem.
The Democrats didn't like it, but as far as I know, they weren't doing anything to solve the problem. The right responded to a problem and solved it. The left didn't do anything. Correct me if I'm wrong here.
JFP,
Does that mean that the stimulus is the failure of right-wing politics?
World War II did not "get us out of the Depression". It gave us temporary relief by giving large numbers of people jobs producing weapons and serving in the military. But those jobs were paid for by debt and only lasted as long as the war. As soon as the war ended, things would have gone back to the same had it not been for two factors. First, the opening of world trade again. Second, all of Europe and Asia needing to be rebuilt. We had a wonderful confluence of open markets, pent up world demand to rebuild and a huge competetive advantage. That is what got us out of the Depression. In the end, you theorize all you want. But all the macro theory in the world can't change the basic facts that open markets, stable government and stable currency are the only thing that lead to prosperity.
"JFP,
Does that mean that the stimulus is the failure of right-wing politics?"
Could be.
World War II did not "get us out of the Depression". It gave us temporary relief by giving large numbers of people jobs producing weapons and serving in the military. But those jobs were paid for by debt and only lasted as long as the war.
The war served as a means to finance the creation of substantial amounts of business infrastructure, which private enterprise was able to use after the war to generate profits and jobs. It's not as if they burned down all the factories and started over again once the war ended.
The military also trained millions of men to give or follow orders, which served the evolution of corporate America, and provided financing programs that allowed returning soldiers to chase the American Dream (read: keep them motivated to show up to work in order to make those mortgage payment.)
Meanwhile on the home front, rationing and war bonds had created a substantial forced savings program that was able to fund consumption once the war had ended. Consumers used their newfound cash and debt capacity to improve their lifestyles, which gave the corporations customers to whom they could sell.
One has to ignore a lot of facts to dismiss the positive role of the government in all of this. Government drove investment and consumption that otherwise wouldn't have occurred.
That being said, a 21st century stimulus program will not be nearly as large, so the value of WWII as a proxy is limited for what we can expect this time around. Given the structure of the modern economy, we will be far more dependent on consumption this time around. We can't simply duplicate what FDR did and expect the same outcomes.
. . . it tells me that, as Rogoff notes in his FT piece, the average length of a financial crisis is 2 years. The economy stopped contracting just about on schedule.
It's not as if they burned down all the factories and started over again once the war ended.
No they burned down all of their competitors factories instead.
One has to ignore a lot of facts to dismiss the positive role of the government in all of this. Government drove investment and consumption that otherwise wouldn't have occurred.
I don't disagree with this, but WWII was (hopefully) sui generis. I don't know that, as an example, it carries much weight. Japan in the '90s seems far more relevant.
How about if, instead of going to war, we go to war rationing? Every family would get their modest share of food and fuel, and things like cosmetics and luxuries would just go away for a few years. Conserving and recycling would be easy -- we've already been programmed to do those things.
Surely the pent-up demand would cause a surge of economic activity once people were allowed to buy nice things. Why, Congress could even time it so that we all started shopping again right before a big election! What could possibly go wrong?
"The war served as a means to finance the creation of substantial amounts of business infrastructure, which private enterprise was able to use after the war to generate profits and jobs. It's not as if they burned down all the factories and started over again once the war ended."
True. But once the war ended, those airplane and tank factories could only be converted back into civilian production because of the civilian demand. That civilian demand was in no small part driven by the opening up of world markets and the demand created by them. Take away the opening up of the markets and the return of world trade and those factories would have disappeared when the war ended.
"The military also trained millions of men to give or follow orders, which served the evolution of corporate America, and provided financing programs that allowed returning soldiers to chase the American Dream (read: keep them motivated to show up to work in order to make those mortgage payment.)"
What we didn't have corporations and skilled labor before 1940s? Americans didn't work hard and were layabouts until the government gave them mortgages? That statement is utter nonsense. Certainly, the GI bill had a long term positive effect on productivity and education. But who is to say that colleges wouldn't have opened up to the increased demand for a skilled workforce any way? Further, the GI bill set us down the road to the education debt bubble we are currently facing. Moreover, even with its obvious successes, the GI Bill is about .01% of the activist programs of the New Deal. That is a pretty small hook to hang your hat on.
"Meanwhile on the home front, rationing and war bonds had created a substantial forced savings program that was able to fund consumption once the war had ended. Consumers used their newfound cash and debt capacity to improve their lifestyles, which gave the corporations customers to whom they could sell."
No question, the war created a lot of pent up demand. First, that is one hell of a nasty way to do it. I think given a choice I would take the 250,000 American lives back and the time millions were forced to spend in the military and the huge amount of wealth that was spent on that war back in give up the savings. Second, if everyone buying savings bonds and forgoing consumption to splurge on all of the pent up demand in a few years was the way to get out of the Depression, why didn't FDR just do that in the 30s? Why wait for the war? In the end, all of that deferred consumption, was just that deferred not created wealth. Yes, if you stop producing cars and instead make tanks for a few years, a lot of people are going to buy cars the first year you start producing cars again. But that doesn't mean that the total number of cars produced in the aggregate over those years is any higher. You just waited and took all the wealth in one year rather than over a few years. The amount of wealth is still the same. Merely putting it off doesn't make it any larger.
You can't get around the fact that government consumption has to be funded from somewhere. The government can't create wealth. It can only create the conditions for the private sector to create wealth or redistribute that wealth via taxes, debt, and spending.
That civilian demand was in no small part driven by the opening up of world markets and the demand created by them.
The pent up demand was created by rationing and the cash put into their hands thanks to all of those subsidized jobs.
What we didn't have corporations and skilled labor before 1940s?
Is strawmaning par for the course on this blog site?
Obviously, the military and GI Bill were a massive training subsidy. Surely we can acknowledge the obvious without trying to pretend that these produced no benefit.
No question, the war created a lot of pent up demand. First, that is one hell of a nasty way to do it.
Nasty or not, it worked at the time. And no one is suggesting that we should do this again today.
The whole point here is to note that Ms. McArdle's efforts to prove her point by ignoring a relevant time period is a bit much. Revisionism was an appropriate description for that effort.
As I noted above, I don't see us repeating the FDR effort today for a wide variety of reasons. But that doesn't mean that we should start rewriting history to serve the political theory of those who don't care for the historical evidence.
For those who cite the GDP and unemployment figures from the Great Depresssion and WWII era when making arguments, how you do address the arguments of guys like Higgs?
His views are summarized in an excellent podcast offered at the Econtalk podcast archives. Just put "Econtalk" "archives" and "higgs" into Google.
Quickly reviewing the podcast notes, it appears that pretty much every argument advanced by the FDR-got-it-right crowd on this blog is addressed by Higgs. Before the sneering begins, I am not taking sides (I think Will Allen's point about not enough sample to be certain is dead on). I woudl say, however, that the rock-ribbed absolutism of the FDR-got-it-right side of this argument is misplaced. Some humility is in order, guys.
No, I am not a paid shill for Econtalk....
"The pent up demand was created by rationing and the cash put into their hands thanks to all of those subsidized jobs."
But that demand was just that, pent up. It wasn't anything new. To the extent that demand increased after the war, it only increased because we had forgone so much during the war. That is not a net gain. It is just deferred gradification. Why did the demand sustain itself rather than flame out after a year or two when everyone had new cars and refrigerators and had spent all the money they made in the war? Because world markets opened up and we were making things and selling them overseas. On top of that we had a huge competetive advantage since the rest of the world had had their industrial bases destroyed. Take those two factors away and we would have been right back to 15+% unemployment and lousy growth by 1948.
Again, show me how borrowing from ourselves and making tanks and rifles does anything to actually create wealth. If it could, then the Soviet Union with its five year plans and forced industrialization would have succeeded.
It should also be noted that the US was nearly broke at the end of the war. Its last few war bonds drives were not successes. It is not clear at all that the US could have sustain the war effort for the additional two years that would have been necessary to conquer Japan absent the atomic bomb.
The bottomline is that you can't not borrow and spend your way to prosperity. Eventually you run out of places to borrow and the jig is up. If you could borrow and spend and achieve wealth by puting everyone on the planned government payroll, the Soviets would have won the cold war.
Matt
What about the capital/durable goods investments in manufacturing capacity that would have likely been on hold across the war industry (the defense moniker came after WWII) before 1940 because that money would have been "inadvisable" (like executive) in the missives of the Central Planners to be spent on stuff if we weren't spooling up for conflict until Lend-Lease began to inexorably pull us towards one side of the war?
It may not account for all of the growth, but when there's a sudden influx of money, and holds on capital investment that don't necessarily create large numbers of jobs but might dramatically increase GDP are lifted.
Again, i have no numbers and this is speculation, but isn't it a possibility w/r/t the 1940-41 numbers?
So California is bankrupt in part because of electricity deregulation and a failure to tax vehicles licenses? You got me, I am speechless. Illegal immigration and the related costs have no bearing? Spending is out of the picture?
Did Proposition 13 hamper California's decision to spend $3 billion on stem cell research to much fanfare?
Compare California to Texas. Texas has one of the lowest tax burdens in the nation. They are going through tough times but they are not in California, New York, or New Jersey's situation. States where the tax burden is far greater. States that are now losing population.
It takes a big stretch to blame right wing anything for California's problems. How long has it been since there was a right wing government in California?
You got me, I am speechless. Illegal immigration and the related costs have no bearing? Spending is out of the picture?
Is California's state/local spending appreciably higher (as a % of GSP) than the national average? I was under the impression that's it's not particularly high by national standards. I could be wrong. But it would be nice to see statistics employed when making such arguments. My impression is that California's budget woes aren't primarily a function of spending (which is pretty average by US standards) but rather by the fact that the state's constitution and political culture makes it unusually difficult to raise sufficient revenue.
My impression is that California's budget woes aren't primarily a function of spending (which is pretty average by US standards)
http://www.usgovernmentspending.com/downchart_gs.php?year=1992_2010&view=1&expand=&units=b&fy=fy09&chart=F0-total&stack=1&size=m&title=&state=CA
Government spending in CA went from $160 Billion to $460 Billion from 1992 until 2010 (projected). That is over a 200% increase in less than 20 years. In what world does increasing spending 200+% in less than 20 years not contribute to your budget woes? Contrast that to Texas which spends less than half of what California does, yet has just as large of an economy and nearly as large of a population.
Now if we can just figure out a way to have Japan's, Europe's, China's, South Korea's, Taiwans's, and many other manufacturing bases vanish over the next four years, THEN we will have a situation similar to what the United States faced in 1946.
Will Allen: Your metaphor holds only if the post war situation (bombed out cities, devastated industrial plant, etc) helped US growth in the years in question. I see no evidence this is the case. AFAIK US growth rates in the decade or so after WWII were not abnormally high (US per capita GDP growth was higher in the 60s than it was in the 50s IIRC). Rather, US growth in the post war period was ordinary. The Keynesian stimulus of the war years didn't lead to a boom. It lead to a return to normalcy. Had we been able to magically repair the damage to Japan and Europe with the wave of a wand in a single instant in October 1945 , I suspect the US would have been wealthier by, say, 1957, than was actually the case. Of course, the composition of US economic activity in the preceding years would have been different, and perhaps we would not have seen the compression of income disparity we experienced then.
Government spending in CA went from $160 Billion to $460 Billion from 1992 until 2010 (projected). That is over a 200% increase in less than 20 years.
John: As you no doubt are aware, your figures prove nothing. How large was the expansion in California's economy over these twenty years? How large was the expansion of California's population? Is the 2010 "projection" accurate? (one suspects not). If state and local spending in the US averages, say, 12% of gross state product (I have no idea what the actual figure is) and in California the corresponding figure is, say 25%, then I'd say it's reasonable to conclude California has a serious spending problem. If, on the other hand, the cost of government in California is comparable to other states -- especially other wealthy, advanced economy states -- then the case gets a lot weaker.
Contrast that to Texas which spends less than half of what California does, yet has just as large of an economy and nearly as large of a population.
Texas most certainly does not have "just as large an economy" as California, nor is its population "nearly" as large.
How can anyone seriously argue that world war 2 is a keynes stimulus?
The whole government paying people to dig a ditch and filling it back in thing is supposed to work because it stimulates aggregate demand for the normal variety of goods. As in, the ditch digger uses his pay to live his life as he would if he was privately employed.
War, particularly WW2, absolutely does not follow this model. The ten million plus military members absolutely did not stimulate the regular economy. A lot of them were overseas living in conditions that, absent fighting the war, we would consider poverty. Back home there was rationing, war bond buying, price controls, shortages in goods and housing etc... Non-military people didn't buy the normal variety of goods either.
So, what everyone seems to be saying is that "Keynesian stimulus" can work if we demand that everyone massively curtail their spending and heavily invest in government bonds and do so for years.
But, in what possible sense of the word, is that a "stimulus?" You're aren't stimulating demand, you're just about completely stopping it for several years. You're telling the entire country to completely reverse the habits of the past three decades and change into a savings/spending ratio that has only ever existed in extreme wartime.
It's not even possible in modern times. We couldn't pull off such a switch today. Commuting, by 1930s standards, was heavily curtailed by the gas rationing. How would it work now? Especially considering the massive housing shortages, in pre-war homes (small!) in urban areas! Cars were rationed too(and hardly any built for the civilian market anyway).
The comparision is just silly. WW2 was not a "stimulus."
Jasper,
Use the link I provided you. It also gives GDP information. In 1992 California $819.389 billion GDP and spent $160.24 billion. Governemnt spending was 19.5% of GDP. In 2009 GDP is $1963.31 billions and government spending is $429.80 billions. Spending today is 21% of GDP. In contrast, Texas spends 13% of its GDP on government. It is most assuredly spending that has gotten California in trouble. It had an economic boom in the 90s and 2000s and still managed to increase the size of government in real terms from an already large 19% to 21%. Despite its obscene tax rates, California is facing bankruptcy and giving out IOUS for tax returns while Texas has a multi billion dollar rainy day fund.
So, what everyone seems to be saying is that "Keynesian stimulus" can work if we demand that everyone massively curtail their spending and heavily invest in government bonds and do so for years.
Don't be absurd. What proponents of Keynesian measures are saying is that if it worked back then -- despite lots of imperfections necessitated by war (rationing, tax hikes, price controls, forced savings, etc.), just think how much better it will work without wartime conditions.
You're aren't stimulating demand, you're just about completely stopping it for several years.
Of course demand was stimulated. It's just that people were temporarily curtailed from translating that demand into consumption. Once those curbs were lifted, consumption skyrocketed.
In 1992 California $819.389 billion GDP and spent $160.24 billion. Governemnt spending was 19.5% of GDP. In 2009 GDP is $1963.31 billions and government spending is $429.80 billions. Spending today is 21% of GDP.
John: So, a significantly wealthier polity boosts spending by -- gulp! -- one and half percentage points of gross state product over two decades! You've made my point. Thanks. California's spending is not "out of control." It simply lacks the political ability to finance an extremely modest increase in the size of government.
Texas spends 13% of its GDP on government.
So? Chad spends 8% of its GDP on government. Your point?
Don't be absurd. What proponents of Keynesian measures are saying is that if it worked back then -- despite lots of imperfections necessitated by war (rationing, tax hikes, price controls, forced savings, etc.), just think how much better it will work without wartime conditions.
It is absurd. You're saying the war proves it worked, but then turn around and say look how much better it would work without the war.
Of course demand was stimulated. It's just that people were temporarily curtailed from translating that demand into consumption. Once those curbs were lifted, consumption skyrocketed.
I reiterate: You're not stimulating demand by completely thwarting it. The whole point of a keynesian stimulus is to give the unemployed an income to avoid the paradox of thrift. The whole point is that excessive savings in a recession leads to a decrease in aggegrate demand which lowers the values of the savings because the economy shrinks. It also creates a nasty feedback effect wherein people save more because they're afraid they'll lose their job and more and more people lose their job because everyone's saving and no one is spending.
n fact, Paul Krugman just said this! Megan just posted it. Personal savings rate is increasing, but personal incomes are declining.
This is extremely basic keynes, and you've completely misunderstood it. You're literally arguing for MORE savings when this is the very thing that a stimulus is supposed to ameroliate.
Hell, you just said that we should avoid the negatives of the war such as "forced savings," then you say that it was a good thing that consumption is curbed (by the government, through forced savings). Huh? WTF dude?
You guys no longer have any clue why you're arguing what you're arguing. You're so obssessed with the solution that you've forgotten the problem it was supposed to solve.
Jasper,
My point is that Texas is not going bankrupt. California is. For a state with no defense or foreign policy responsibilities to spen 21% of its GDP on government is obscene. Californians currently pay over $5,000 per person in taxes. Contrast that with Texas where every person pays $3580 per person. Just how high are taxes supposed to be in your world? Taxes right now are so high in California that they cannot be raised anymore without killing more revenue that is created. Yet, California despite its natural advantages and huge economy, still is going bankrupt.
Increasing spending two percentage points as a percentage of GDP would not be a big deal, if California hadn't already been sitting at 19%. But when you are already near the top of your sustainable rate, that two percent is a lot.
Is there any level of fiscal irresponsiblity that you wouldn't endorese? Or is it always just a question of the greedy suckers not willing to cough up enough money?
You're saying the war proves it worked, but then turn around and say look how much better it would work without the war.
I'm certainly not saying "the war proves it worked." I'm saying the economic conditions prevailing after the Keynesian stimulus plan called World War II (ie., the fact that we were no longer in Depression) proved that said "plan" worked. Now, I would certainly concede that without the threat of national annihilation it would have been politically pretty difficult to enact a Keynesian stimulus plan the size of the one we actually got in the early 40s. But yes, I stand by my point: militarily spending doesn't work as well as civilian spending when it comes to stimulating the economy, and the various consumption curbs mandated by the government during the war years almost certainly reduced the stimulative benefits flowing from all that borrowing and spending. In short, we would have been better off using the money to build the interstate highway system, say, or to develop new medicines. Unfortunately, spending the money on bombs and tanks wasn't optional.
For a state with no defense or foreign policy responsibilities to spen 21% of its GDP on government is obscene.
So you say, but "obscene" to my mind implies something out of the ordinary. I doubt California is out of the ordinary, especially when compared to other wealthy, advanced economy states. Texas, as I'm sure you'll agree, doesn't qualify for membership in this group.
Is there any level of fiscal irresponsiblity that you wouldn't endorese?
New York strikes me as a place with bloated and excessively large government.
The problem is tax cuts or Megan/John Bronte's 3,000 dollar money drop do not have a stimulating effect. You dont even need to go back far in history to show this. You can just go back to Bush's last stimulus attempt last year. That had practically no stimulating effect,
Bush's last stimulus attempt last year was not a tax cut. It was a one-time rebate. Huge difference. If I'm in debt and I get a $500 check, I'll send it to the credit card co. If I get a tax cut of some duration, however, I'll save/pay down with some of it, but I'm likely to spend some of it as well.
I'm starting to think the food stamp model might be the best stimulus, and just apply it to every other consumer good. House stamps, car stamps, furniture stamps, vacation stamps...just like money, except you can't save it.
So you're saying that the phenomenon itself proves your selection of causative factors?
That's sort of an unconvincing argument.
I also reject, once again, the idea that WW2 was a "Keynesian Stimulus." It absolutely did not stimulate aggregate demand and thus it was not what Keynes meant, described, or intended.
World War 2, once again, had the highest personal savings rate in modern history. The current thought behind a stimulus, and Keynesian theory as advocated just today by Paul Krugman, is to reverse the tendency towards savings.
You are, in effect, advocating the polar opposite here.
"Texas, as I'm sure you'll agree, doesn't qualify for membership in this group"
Only in bizzaro world. Texas has four of the ten largest metro areas. Is consistently near the top of all states in yearly GDP growth. It currently ranks 20th among states in per capita GDP despite absorbing millions of unskilled poor from Mexico. All of this despite having a brutal climate and few of the natural advantages a place like California does.
Only if you are provential hick who has not seen much of the country could you not think of Texas as one of the most robust and advanced states in the country.
"New York strikes me as a place with bloated and excessively large government."
New York currently spends $287 billion a year on government and has a GDP of $1269.11 billion giving it a government to GDP ratio of 22%. Nearly exactly equal to that of California and much smaller in absolute terms. Thank you for conceding my point.
I may be missing something here so apologies ahead of time. But Texas is not going bankrupt. They have a very robust IT industry, as well as abundant natural resources. They led the nation in net jobs gained in 2008. They do not have a personal income tax.
With regards to the "New Economy." As an example, for years now Texas has been on a tear creating wind farms. I believe the state has the largest amount of wind farms in the nation. Ironic since most people think of oil when the state is mentioned.
How are they not a wealthy, advanced, economy?
. . . it tells me that, as Rogoff notes in his FT piece, the average length of a financial crisis is 2 years. The economy stopped contracting just about on schedule.
Posted by Megan McArdle | February 4, 2009 11:16 AM
Not sure what you're replying to here. First you said the New Deal didn't pull the US out of the Depression, only WW2 did. Given evidence that by the end of the New Deal the US was, in fact, out of the Depression, and not because of WW2, you say, well, that would have happened anyway. But you have no evidence for that claim; it's just a sort of negative counterfactual (nothing anyone did actually mattered because regardless, things would most likely have turned out the same).
I think many of the folks commenting on this post are missing the point. They are arguing about whether or not the economy actually recovered under FDR. Of course it recovered somewhat. The real question is: was the recovery better or worse than it would have been without FDR's policies, or with another approach?
I think there are two ways to at least get some handle on this: 1) comparison to recoveries from other recessions/depressions, in which the same massive intervention was not practiced, and 2) comparison to other countries for the same time period.
My impression, from some casual reading, is that the recovery in the US was much slower from this depression, and also slower than in other industrialized countries, like UK and Canada, over the same time period. But, I cannot quote any actual numbers.
I would be interested to hear Megan's comments on this. Presumably, she has ready access to the pertinent data.
I'm not a trained economist, but my overall impression is that FDR's policies probably did prolong the depression, or at least did not help. And I am not too impressed by most of the pro-FDR comments I have read, many of which seem to amount to, "How dare you question the great FDR!?"
The cyclical trough of the Great Depression was in March 1933. Hoover's term ended and FDR's term began in March 1933. Does this suggest anything?
Indeed it suggests something to me, AT. Causes must precede effects, so if the effect is an increase in the economic growth rate in March 1933, the cause must be something that happened before March 1933. During Hoovers term. In particular, economic growth in 1933 can not have been caused by money spent in April 1933 or later.
It certainly can not have been caused by any decision FDR later in his Presidency (which is to say, almost all of it).
If you want to investigate the claim that the massive Keynesian stimulus of WWII is what finally got us out of the Great Depression, then the thing to do would be to compare the eleven years (the duration of the Depression, that is) prior to 1940 with the eleven years after the events in question (ie., 1946-1957).
Perhaps we should also look for the massive Keynesian stimulus of other wars, at least in countries that were not invaded, bombed or blockaded to any extent. I propose WWI Britain as an example. Bombing was negligible due to the less effective aircraft of the time and attempts to blockade the country were worrying only in 1917. And government spending went from something like five to fifty percent of GDP. What effect did that have on the economy?
For that matter, what effect did Americas preparation for the war have on its economy?
It seems improbable that massive spending increases will have greatly beneficial effects in countries that are exactly like America in c1940 or 2009, and little effect in any other circumstances. So we should look for other massive spending splurges, and see what the effects were.
Why did the demand sustain itself rather than flame out after a year or two when everyone had new cars and refrigerators and had spent all the money they made in the war? Because world markets opened up and we were making things and selling them overseas.
The data disproves this thesis. The US ran only modest trade surpluses after 1945. During their peak in 1947, the trade surplus was $10.8 billion, out of total GDP of $244.2 billion, and it only declined from there.
Trade had almost nothing to do with it. Domestic consumption shot up after the war, and investment increased dramatically, presumably to take advantage of the postwar recovery and years of pentup demand and deprivation that was finally converted into spending.
If you look at the numbers, the only conclusion that can be reasonably reached is that most of our dollars were being swapped among ourselves. The temporary massive boost in government spending between 1942-1945 appears to have had a lot to do with it. It was an unintended stimulus program, to be sure, but it worked.
If you look at the numbers, the only conclusion that can be reasonably reached is that most of our dollars were being swapped among ourselves. The temporary massive boost in government spending between 1942-1945 appears to have had a lot to do with it. It was an unintended stimulus program, to be sure, but it worked.
Or, obviously, if you force a personal savings rate of over 20% and ration and restrict the availability of all big-ticket items (housing, cars, appliances and furniture) for over three years, domestic consumption will shoot up like a rocket once you end the restrictions.
Penting up demand for 3 years isn't a stimulus. It's retarding the economy for years and forcing people to live in a state of unwanted deprivation. And that, fairly obviously, had more to do with the post-war boom than anything. If they hadn't saved up the money and not bought anything for years what good would the government spending have done?
This scenarios is also, as I've said, the exact opposite of what stimulus champions are saying we should do. The current stimulus bill does nothing of the sort, and Paul Krugman is arguing that the current rise in personal savings is part of the problem.
You guys are saying that polar opposites are both stimuluses. That's absurd. No wonder you say a stimulus worked with such ridiculously flexible parameters for what you call a stimulus.
Perhaps we should also look for the massive Keynesian stimulus of other wars, at least in countries that were not invaded, bombed or blockaded to any extent. I propose WWI Britain as an example.
I reckon that's a pretty poor example unless Britain's economy in 1913 had been plagued by a decade of depression. A better example might be the US in Reagan's first term: a massive increase in deficit spending leading pretty directly to a minibooom by 1984.
Is consistently near the top of all states in yearly GDP growth.
Meaningless. Surely you realize it is per capita GDP growth that counts. Texas doesn't seem to be making much progress in getting richer. Anybody is going to have inflated aggregate growth figures if population is rapidly increasing. Look, I've got nothing against Texas. Terrific place to visit. Awesome food. Great music. Colorful culture. Nice weather. It's just not a particularly wealthy state, and like other red states it has followed the path of small government, low taxes, and low wages. And it tends to exhibit pretty poor social indices (poverty rate, educational attainment, etc.). It's certainly not in the same league as a California, New Jersey or Massachusetts. I'm just not a big fan of the Texas model. Others are free to disagree.
New York currently spends $287 billion a year on government and has a GDP of $1269.11 billion giving it a government to GDP ratio of 22%. Nearly exactly equal to that of California.
I don't have time to verify your figures. But if they're valid (I have my doubts), they only mean that New York, too, maintains a reasonably sized public sector relative to the size of its economy.
Penting up demand for 3 years isn't a stimulus. It's retarding the economy for years and forcing people to live in a state of unwanted deprivation.
Throughout the 30's, demand was pent up due to the fact that not many people had much money.
For consumers to consume, they need to have money and credit. For businesses to produce, they need to have customers (or at least the hope of having customers), money and credit. Businesses tend to wait until there are indications that there are reasons to invest.
WWII spending accomplished both of those. When it would have happened without the war is difficult to say, although GDP did begin to take off during 1940 and 1941.
The problem with the Great Depression was that it was created by an unprecedented asset bubble propped up with such an extreme degree of leverage that massive deflation was inevitable. I'm not sure that we'll ever quite have a comp that compares in degree to the magnitude of that circumstance. The Depression was a unique event that may have required extreme measures that wouldn't be necessary or even desirable today, let alone possible.
Throughout the 30's, demand was pent up due to the fact that not many people had much money.
The economy was coming back in the years before the war, as consumption increased and unemployment decreased in 1939-1941.
WWII spending accomplished both of those. When it would have happened without the war is difficult to say, although GDP did begin to take off during 1940 and 1941.
WWII spending provided credit for the post war economic boom? Really? Here I was thinking it created a bunch of bombs, guns and tanks for which US consumers were the creditors.
I could see the argument that it provided money for the post-war boom because it forced people to save comparatively vast amounts of money, but credit?
Where did you even get that notion?
I could see the argument that it provided money for the post-war boom because it forced people to save comparatively vast amounts of money, but credit?
My "both" reference was to consumption and investment, but certainly the GI Bill, Fannie Mae and FHA all contributed to the post-war housing boom.
The big question about the Great Depression in the US isn't "What ended it?" but "What made the damned thing last so long?" -- far longer than anywhere else in the world, and far longer than after prior comparable sized slumps in the US.
As to that, I'll mention the work of Cole and Ohanian again.
Then how did World War II contribute to end the Depression? The #1 thing that nobody else here has mentioned is that wage-and-price controls during the war years wiped out the 25% overpricing of wages and products in major industries above market clearing levels, that the New Deal policies had sustained.
If you fix prices and wages 25% above market clearing levels, what happens to employment and production? If you later reduce prices and wages from that high fixed level to market clearing levels (by getting rid of "minumum price" laws, starting to enforce anti-trust again, controlling wages and prices downward) what happens??
To this add the enforced savings during the war, the pent up demand for civilian products that industry hadn't produced for years ("I want my new Studebaker!") and all the rest.
"How are they not a wealthy, advanced, economy?"
--Because they vote Republicans. Everyone knows Republicans are trogledyte anti-science hooligans or their greedy, cyncial oil-rich masters who control them through misinformation and start international wars to make a few hundred thousand dollars for their already multi-millionaire selves.
Jeez, get an Obama clue. By which I mean none at all.
Jasper obviously has no idea what he's talking about. Texas is the second-richest state in the nation measured by Gross State Product (GDP equivalent).
As to that, I'll mention the work of Cole and Ohanian again.
I'll mention the fact that they fudged their numbers pretty pathetically.
from Delong:
The detailed answer I will outsource to Peter Temin (2008), "Real Business Cycle Views of the Great Depression and Recent Events," Journal of Economic Literature 46:3 (September), pp. 669–684 http://tinyurl.com/dl20090202a:
Cole and Ohanian use the general equilibrium growth model to explain the Great Depression in the United States. They summarize their procedure as follows:
We conduct the analysis by assuming that the capital stock in 1929 is equal to its steady-state value, and then we feed in the sequence of observed levels of total factor productivity as measures of the technology shock . . . . The measured decrease in productivity between 1929 and 1933 generates a Depression in the model that is similar to the actual data: output in the model falls about 23 percent relative to trend in 1933, compared to the actual 38 percent decline. This similarity disappears after 1933. As a consequence of rapid productivity growth, output in the model is almost back to its trend by 1936. In contrast, actual output remained 25–30 percent below trend during the recovery (p. 31).
This is the starting point of their analysis, but it is hard to know how the comparisons in this paragraph were derived, since the footnoting is nineteenth-century in its brevity. Cole and Ohanian present their table of TFP levels in the 1930s with a footnote that says only, “Data from Kendrick 1961.” I went to John W. Kendrick (1961) and found the data on TFP in the 1930s reproduced here in table 1. I include Cole and Ohanian’s TFP estimates for comparison. Their estimates do not agree with any of the estimates by Kendrick. Cole and Ohanian state in the paragraph just quoted that productivity was back to its trend by 1936, indicating that their series is taken relative to a trend. Subtracting a 2 percent trend from Kendrick’s series, however, does not come close to reproducing their estimates. The three detrended Kendrick estimates for 1936 are 92.1, 96.8, and 73.4—far below Cole and Ohanian’s detrended estimate of 99.5.
This discrepancy is disorienting....
The #1 thing that nobody else here has mentioned is that wage-and-price controls during the war years wiped out the 25% overpricing of wages and products in major industries above market clearing levels, that the New Deal policies had sustained.
If you fix prices and wages 25% above market clearing levels, what happens to employment and production?
This is key.
Obama has never said he's going to emulate every jot and tittle of the New Deal. So far, he's merely going for a big stimulus. (A poorly-crafted one, but that doesn't discredit the notion of doing one.) The artificial price and wage supports in the NRA are not only stupid in retrospect, they were eventually outlawed.
I think the liberals are trying to fight too many fronts in this debate. Finding authority for Obama to act in the perceived success of the New Deal, and thus fighting to preserve its holy historic aura, is a bridge too far. Just stick to the basics. Stimulus needed now.
It's actually helpful, ultimately, to Obama's eventual success if the dreaded revisionist histories of the New Deal are allowed into the discussion, because he can say -- we all can say -- "I've studied the New Deal and frankly, while I admire FDR's adventurousness and zeal for experimentation, it has to be said that some of what he tried to do prolonged the Depression. We can learn a lot from FDR: What to do, and what not to do. I intend to rigorously apply those lessons."
Oops, in the above post, the italics should have continued into the second graf. My stuff starts with "This is key."
FDR's New Deal lowered unemployment by 40% in his first administration, before he listened to the wrong people to get fiscally conservative in 1937; my question is, did George Bush's enormous tax cuts for the wealthy reduce unemployment by 40%?
I reckon that's a pretty poor example unless Britain's economy in 1913 had been plagued by a decade of depression.
Jasper, America in 2009 has also not been plagued by a decade of depression. So presumably its experience in c 1940 is also not relevant.
If you have a theory of how the economy responds to massive increases in government spending during abnormal conditions, you should also be able to make some predictions of the results of massive increases in government spending during normal conditions. We have so much more experience of normal conditions to go into constructing our theories.
For that matter you should also be able to make some predictions of the results of massive decreases in government spending e.g. immediately after a war.
So you should be able to use those circumstances to test the theory.
I gather that testing theories in macroeconomics is difficult. That’s why I view it with great suspicion.