The Washington Post reports on how economists are still debating the 1930’s. We are, but I bet I could get a pretty broad swath of economists, left and right, to agree to the following:
1. The steps that Roosevelt took to reverse the monetary contraction, including going off gold and stabilizing the banking system, were the policies that had the greatest positive effect on the economy. Those policies did the most to contribute to whatever recovery took place.
2. Fiscal policy moves were tiny by recent standards. Therefore, it would be unwise to try to gauge the effect of fiscal policy by looking at the 1930’s experience.
3. The attempts at central planning and cartelization via the National Recovery Administration were a mistake.
Interest readers are encouraged to consult Randall Parker’s two books of interviews with economists, Reflections on the Great Depression and The Economics of the Great Depression.
READER COMMENTS
Rui
Feb 12 2009 at 8:56am
Prof. Kling,
In my limited research regarding the Great Depression and the effects of monetary, tax and fiscal (employment) policy on the economy, I have found it extremely difficult to obtain an objective point of view from the author(s). They ascribe to the different “schools of thought” and their research or data that is included in their books or articles reveals that bias. I recently read Mr. Kasriel’s essay, to which you provided a link, and Lawrence Reed’s “Myths…” as well as other papers; but I come away disappointed with the fact that each one of them omitts certain factors that may have contributed to and prolonged the Great Depression (whatever those may have been). All of this really leads to me to question whether the field of economics can provide a “straight” story on that subject matter, researching every point of view that these particular “schools” espouse but in the end results in a balanced account. Perhaps, I am expecting too much; however, in my mind this has resulted in ideology being thought rather than “just the facts” as Mr. Kasriel put it.
fundamentalist
Feb 12 2009 at 9:06am
Rui: “All of this really leads to me to question whether the field of economics can provide a “straight” story on that subject matter, researching every point of view that these particular “schools” espouse but in the end results in a balanced account.”
What you have discovered is the vastness of historical data. The amount of data is so large, the variables so numerous and the interactions so complex that it’s difficult for humans to comprehend. Because of this complexity, any crackpot idea can find support in historical data if the owner is selective enough.
The solution lies in Mises’ epistemology: you must have sound theory before you approach historical data or you’ll become nothing but confused. If you try to just “look at the facts” and derive theory from the historical data, you will end up in the mess that modern macro is in.
fundamentalist
Feb 12 2009 at 9:09am
I can’t agree that going off gold and stabilizing the banks helped at all. How does theft of citizen’s gold by the state help? Taking the dollar off gold, confiscating gold from citizens, and breaking contracts for bonds specified in gold was nothing but pure theft. It contributed enormously to uncertainty and a reluctance of businessmen to invest. And Roosevelt’s bank stabilization was much like that of Japan in the 1990’s. I think it’s pretty obvious that both policies prolonged the depression.
liberty
Feb 12 2009 at 9:35am
1. I agree with fundamentalist about the gold theft. It was sudden and shocked people, I do not think it helped. It created an incredible lack of confidence– what would the dollar be worth tomorrow? How could anyone save, so how could anyone invest? At least that is how it is recounted by Garret Garrett and others writing at the time.
2. I am not sure how you can say that fiscal policy was tiny compared to modern standards. As a percentage of GDP, the first New Deal was about the same size as the new “stimulus” package. Then FDR went on to do more, in the second wave. How is that a tiny “stimulus” if in fact government spending could possibly be a stimulus? I think you are falling for the old Keynesian lines… they also say Japan’s was too small despite being, as a percent of GDP, equivalent to in America more than $1 trillion per year for 4 years.
Comparing the Stimulus to the New Deal:
http://www3.signonsandiego.com/stories/2009/feb/10/5545510253-how-obama-plan-ranks/?zIndex=50904
Carl The EconGuy
Feb 12 2009 at 10:19am
Even if we accept Arnold’s claims that his points are agreed on by a “broad swath” of economists (however many that might be!), it does not logically follow that the same interventions would work the same way now. During the Great Depression, the institutional framework of government — spending, redistribution, taxes, borrowing, regulations — was vastly different than it is now. We have a social safety network in place that didn’t exist then. We have a vastly different and much more sophisticated financial network in place. And our economy is mostly human capital based, where shovel ready projects won’t help much.
Comparing the macroeconomy of the 1930s with that of 2000s is like comparing the 1933 Chicago Bears with the 2008 Pittsburgh Steelers. It’s not the same game anymore. We have not only built in stabilizers that didn’t exist 70 years ago, but we have a set of interventionary tools that simply did not exist then. Why, then, should we draw any conclusions from the simple environment for that of today? And why, why in the whole world, should we after only a year of a recession that is nowhere near as bad as the one Carter caused in the 1970s spend time trying to draw lessons from the 1930s?
The current hysteria is quite amusing, except that it’s costing us wealth and human suffering. The economic policies proposed and tried so far have been nothing less than mind boggling. People seem to be pretending that an outbreak of the flu is another Bubonic Plague.
Greg Ransom
Feb 12 2009 at 10:21am
What’s most remarkable right now is the bogus history of “Keynes” and “Keynesian economics” that is current today — among even economists who should (but don’t) know better.
Compare David Laidler’s _Fabricating the Keynesian Revolution_ with the stuff coming from economists and journalists, and you’ve got to wonder what planet these economists and journalists are living on.
Greg Ransom
Feb 12 2009 at 10:34am
A giant thing missing from the histories is the effect of the deficiency of aggregate demand / under consumption theory of Foster & Catchings on Hoover, Sen. Wagner and FDR. Public works and other interventions were all the rage for pumping up the economy in the _1920s_. Yes, that’s not a typo. The 1920s.
The “ideas of Keynes” were essentially already current in the form of the massively influential work of Foster & Catchings.
Hoover wrote an introduction to a Foster & Catchings deficiency of aggregate demand / underconsumption in the 1920s.
Almost every economist discussed their work, none found any real flaw in it.
The great and influential economists of the 1930s were Foster & Catchings, not Keynes, who was almost no influence at all in America, until after WWII.
Michael Thomas
Feb 12 2009 at 10:49am
Number one is by far the most interesting.
I note that Kling does not say that stabilization of banks and going off the gold standard led to recovery, just “whatever recovery took place,” leaving the empirical question of recovery to the specific measure chosen and the analysis of that measure.
This seems like a reasonable start to getting agreement on the story of the Great Depression. Then it becomes a debate over which measures of recovery are the correct measures. It also, only after such a move, would be the place to bring up concerns over what are the long-term effects of the permutation of capital structure.
I imagine that reasonable people could agree to disagree about the trade-off between short-run crisis management (revolution insurance) and the commutative justice of managing long-run capital structure.
Tim Baka
Feb 12 2009 at 11:01am
Here are the facts about the Great Depression vs what is happening now —
THEN —
1.) The stock market boom/bust was facilitated by excessive leverage;
2.) Protectionism (Smoot-Hawley) made things worse;
3.) Screwing with the finance system (zapping the gold standard) made things worse;
4.) Jacking up taxes on businesses and the wealthy made things worse;
5.) Choking the money supply made things worse;
6.) Farm prices and industrial production had already bottomed out and turned upward before FDR’s inauguration — the 3-year downward slide cost the economy 60% of it’s value, but before any of the New Deal programs were in effect, over half the losses had ALREADY been regained;
7.) The WPA was not enacted until 1935, and didn’t really get a lot of folks employed until 36-37, by which time the economy was already into recovery — arguably, the WPA was robbing workers from the private sector . . . the only beneficiary of this diversion was organized labor.
NOW —
a.) Our current bust was facilitated by excessive leverage;
b.) The Obama stimulus contains protectionism;
c.) We’ve got Barney Frank telling banks how to do business, who to loan to, what to pay their people, where to hold corporate meetings;
d.) Obama and Pelosi want to pay for this socialism by taxing corporations and the wealthy;
e.) Floating a trillion dollars worth of treasury bonds is NOT going to help market liquidity;
f.) None of the stimulus incentives is going to be in place for months, and much of it stretches out over several years . . . whatever it does accomplish, it won’t address the current recession;
g.) The wage determination provisions of the stimulus are the biggest boon to organized labor in last half century;
g.) This entire drill was smoke and mirrors to jump-start Obama’s health care, education, labor and green initiatives. It also makes history as the first President to pay off every special interest that got him elected in less than a month.
Bottom line — Obama quite rightly compared the financial criticality potential to the Great Depression. Unfortunately, he’s confused how to cause one with how to prevent one — because every thing he is rushing to do right now is every thing that was done wrong 75 years ago.
Bob Murphy
Feb 12 2009 at 12:35pm
Arnold, I agree that you’ve got a consensus on (1) through (3), but I personally only endorse (3). I’ll send you a review copy of my forthcoming book that explains the other two…
ssendam
Feb 12 2009 at 1:00pm
So what originally caused the GD in the first place?
Richard A.
Feb 12 2009 at 1:16pm
In other words it was Roosevelt the Monetarist and not Roosevelt the Keynesian that helped pull the US out of the Great Depression.
dearieme
Feb 12 2009 at 2:33pm
Or: it was Roosevelt the Monetarist who stopped the GD getting worse, and Roosevelt the Keynesian kept the US in Depression until Hitler pulled it out.
fundamentalist
Feb 12 2009 at 3:04pm
Kling: “I bet I could get a pretty broad swath of economists, left and right, to agree to the following:”
The emphasis on consensus is what’s wrong with mainstream economics and much of the social sciences. How much importance do the natural sciences place on consensus? Not much, because any many points in history the consensus was flat wrong. Radicals who opposed the consensus made much of the progress.
We arrive at truth through reason and observation, not through consensus. Consensus is a refuge for laziness and for hiding the lack of reason and evidence for a position. If an idea is wrong, no amount of consensus will make it right.
Dewey Munson
Feb 12 2009 at 4:49pm
Finally! Valid discussions of 30’s and FDR which face the fact that FDR hadn’t seen the “70’s and 80’s etc.
I’m 87 and lived thru the whole period.
Money is a measurement! ALL our weights and measures maintain a standard. Back to the GOLD STANDARD.
Arnold, please expand this thread.
Lord
Feb 12 2009 at 5:26pm
Austrians won’t agree to 1. For them, the problem is not deflation but not enough deflation. All deflation, all the time. Crises like this have occurred from time immemorial, under gold standards and not, yet they insist it is the solution but can’t identify the problem. Depressions are the way things are supposed to be.
They will always be on the fringe, tedious zealots.
Bill
Feb 13 2009 at 12:13pm
Lord: “Austrians won’t agree to 1. For them, the problem is not deflation but not enough deflation. All deflation, all the time.”
Really? Maybe you could direct me to some Austrian works that tout this view?
I think Austrians are averse to a central monopolistic monetary authority that can artificially push either inflation or deflation. *Slight* deflation from productivity gains would seem to be the natural state of affairs, ceteris paribus.
Here is a pretty good article on the topic of deflation from George Selgin:
http://www.amconmag.com/article/2009/feb/09/00014/
laurenWCU
Feb 18 2009 at 3:19pm
I agree with the fact that Roosevelt contributed greatly to the United States’s recovery during the Great Depression. I also agree that his involvement in the free market heavily influenced the creation of jobs and programs to get the economy back on its feet. However, I do not agree with point “1” stating “The steps that Roosevelt took to reverse the monetary contraction, including going off gold and stabilizing the banking system, were the polices that had the greatest positive effect on the economy. Those polices did the most to contribute to whatever recovery took place.” Yes, these polices helped in recovery, but they did not have the greatest effect in the recovery of the United States. What did? World War II. The war is what brought the United States completely out of depression. Without the war, there would have not been the drastic, quick, total recovery starting on September 1, 1939.
World War II brought the United States out of the Depression in late 1939 because the U.S. participated in the rearmament of Europe after a period of relative peace and a great amount of political unrest in Europe. This rearmament created jobs in factories throughout the U.S., it gave all of Europe the weapons that they needed so they could blow each other up. (What did United States care? They are 2000 miles away.) After all, the United States was now one of the world’s largest exporters, supplying to all of Europe and all of Latin America, creating a great amount of economic stimulus.
When the United States entered the war at the end of 1941, it stimulated the U.S. economy even more, putting the Depression even further in the past. The declaration of war on Japan created additional jobs; men entered the military, women became nurses, and the Women’s Army Auxiliary Corps was created. These new jobs left factory positions open to employ people at home to generate the additional arms and supplies required by the United States involvement in the war. By early 1942 the effects of the Great Depression were gone. The rest of the world was looking to the United States for economic support.
Even though eliminating the gold standard was an important step in getting the U.S. out of the Great Depression, WWII was ultimately the most significant stimulus to ending the Depression. While professor Kling has some excellent ideas, he completely fails to mention World War II.
laurenWCU
Feb 18 2009 at 4:02pm
It appears that I made a mistake in my argument. I meant to say that the U.S. participated in helping supply Europe with goods that would in turn help them rearm. They were active in trading with Italy early in WWII because Italy was not actively fighting. Italy was aligned with Germany who eventually got U.S. goods.
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