"The New Deal Didn’t Always Work, Either"

I agree with some of this, but I don't think the main thrust of Tyler Cowen's lessons from the New Deal are the same as mine (e.g. see "Validating Fiscal Stimulus"):

The New Deal Didn’t Always Work, Either, by Tyler Cowen, Economic View, NY Times: Many people are looking back to the Great Depression and the New Deal for answers to our problems. But while we can learn important lessons from this period, they’re not always the ones taught in school. ... I would start with the following lessons:

Monetary Policy is Key As Milton Friedman and Anna Jacobson Schwartz argued in a classic book,... the single biggest cause of the Great Depression was that the Federal Reserve let the money supply fall by one-third, causing deflation. Furthermore, banks were allowed to fail, causing a credit crisis. Roosevelt’s best policies were those designed to increase the money supply, get the banking system back on its feet and restore trust in financial institutions. ...

Today, expansionary monetary policy isn’t so easy to put into effect, as we are seeing a shrinkage of credit and a contraction of the “shadow banking sector,”... So don’t expect the benefits of monetary expansion to kick in right now, or even six months from now.

Still, the Fed needs to stand ready to prevent a downward spiral and to stimulate the economy once it’s possible.

Get the Small Things Right ...Roosevelt instituted a disastrous legacy of agricultural subsidies and sought to cartelize industry... Neither policy helped the economy recover.

He also took steps to strengthen unions and to keep real wages high. This helped workers who had jobs, but made it much harder for the unemployed to get back to work. One result was unemployment rates that remained high throughout the New Deal period.

Today, President-elect Barack Obama faces pressures to make unionization easier, but such policies are likely to worsen the recession for many Americans.

Don't Raise Taxes in a Slump The New Deal’s legacy of public works programs has given many people the impression that it was a time of expansionary fiscal policy, but that isn’t quite right. Government spending went up considerably, but taxes rose, too. ... When all of these tax increases are taken into account, New Deal fiscal policy didn’t do much to promote recovery.

War Isn't the Weapon World War II did help the American economy, but the gains came in the early stages, when America was still just selling war-related goods to Europe and was not yet a combatant. ...

While overall economic output was rising, and the military draft lowered unemployment, the war years were generally not prosperous ones. As for today, we shouldn’t think that fighting a war is the way to restore economic health.

You Can't Turn Bad Into Good The good New Deal policies, like constructing a basic social safety net, made sense on their own terms and would have been desirable in the boom years of the 1920s as well. The bad policies made things worse. Today, that means we should restrict extraordinary measures to the financial sector as much as possible and resist the temptation to “do something” for its own sake. ...

Our current downturn will end as well someday, and, as in the ’30s, the recovery will probably come for reasons that have little to do with most policy initiatives.

Update: Tyler Cowen adds:

For critical responses, perhaps you can try the comments section at Mark Thoma's. For reasons of space, it was not possible to specify that I was praising the proposed Obama middle-class tax cut.  I do not, however, think it will do much (if anything) to end the current recession, although tax hikes could make things worse.

Update: Eric Rauchway responds.

Comments

[Gegner]

Aye yai yai! Yet another attack on the 'New Deal?'

I thought professor Krugman had soundly debunked the right's critique of the New Deal.

What does Mr. Cowen propose we do, put the entire indebtedness of commerce upon the taxpayer?

Simply put, our economy is 'out of balance' we need to balance workers with production.

How does Tyler boy expect us to do this without 'government intervention'?

Which is to ask ,"Where is the 'supercharged' economy that the Bush taxcuts were supposed to provide?

Worse, Mr. Bush has spent $5 trillion dollars + and we have zero to show for it!

Where did that money go?

when historians write about this chapter of history it will be revealed that we had suffered under the most corrupt administration ever!

It will also mark a 'turning point' in public awareness.

People will start asking themselves 'what are we doing'?

With the government handing out bailouts to everybody but those that need it...it will produce a 'time of reckoning'.

Simply put, we are headed towards a 'return of feudalism'...is the public ready to accept that?

I'm hoping the answer is no...but I can't say that for sure.

I'd like to think that being 'owned' is unacceptable to the public at large but will they realize what's happening before it's too late?

Sadly, the answer is no, they won't.

[James Kroeger]

Don't Raise Taxes in a Slump...[New Deal] Government spending went up considerably, but taxes rose, too. ... When all of these tax increases are taken into account, New Deal fiscal policy didn’t do much to promote recovery.This has got to be the single biggest fallacy promoted by Republican economic mythologists. In truth, tax hikes can be---and usually are---expansionary, not contractionary. It all depends on who you tax.

If taxes are increased on poorer people---people who spend all of their income---the net result is no economic stimulus. This is because the government collects money from people who would have spent the money, themselves, and then spends it. The amount of increased G spending is = the decrease in consumer spending (because poorer people typically spend all of their income.

Lesson: If the government raises taxes during a recession, the worst thing that would happen is neither a stimulus nor a contraction of the economy. One form of spending is simply replaced by another. Tax hikes are NEVER CONTRACTIONARY.

BUT, if taxes are increased on the richest people---people who save most of their income---then the net result is a pure economic stimulus (increase in aggregate spending). This is because money that would have been taken out of the economy by rich people (saved) is collected by the government instead and spent. The increase in G is greater than the drop in C.

This is something that all economists should recognize since is an example of the Balanced Budget Multiplier that every Econ Prof teaches to intro students.

When the economy is facing a severe economic contraction, government spending needs to be increased and there is only one group of citizens who have the money we need to save the economy, and that is rich people. Who is in a better position to make a sacrifice for the good of the national economy?

Hoover's Republican Congress may have increased taxes in the months leading up to FDR's election victory in November 1932 (tariffs were increase a couple of years earlier), but this was after the economy had collapsed and unemployment was 25% or so. Tyler Cowen is not just wrong re: his statement on taxes: he is in fact spectacularly wrong.

[ken melvin]

If only this were the way things work. I suspect that monetary contraction had little or nothing to do with the great one and less to do with the recovery. Simple minded methinks to think that one can provide money and voila factories will be built and goods produced (about a simple minded as the whole entrepreneur schmear). More the case that a market develops and people find a way to meet the demand. Sometimes, for a variety of reasons, there simply isn't the demand.

[ndd]

Monetary Policy is Key As Milton Friedman and Anna Jacobson Schwartz argued in a classic book,... the single biggest cause of the Great Depression was that the Federal Reserve let the money supply fall by one-third, causing deflation.

There has been a strong counterargument raised against this point, as set forth at fuller length at Jess'es Cafe Americain:

There was definitely a hole in Keynes' theory of the Great Depression. This has thankfully been filled by the article "Fisher, Keynes and the Corridor of Stability" by Robert Dimand (American Journal of Economics and Sociology, Vol. 64, No. 1 (January, 2005), pp. 185-199).

This article is I think the missing link that established that the Keynesian Liquidity Trap that characterised the Great Depression was a result of debt deflation as described by Fisher. This establishes that Friedman and Schwartz's view of the great Depression has the causality reversed - the economic contraction led to the contraction in monetary aggregates, notably M3. The Fed or its the equivalent could do little to avert this.

I think averting the process of debt deflation cannot be accomplished through monetary policy (Bernanke following Friedman believes the opposite). This again points to the contrast between Keynes and Friedman.

Evidence in support of the incorrectness of Friedman's view is seen in the experience of Japan in the 1990s where the government succeeded only in increasing M1 while M3 continued to shrink (see paper by Krugman (1997 on this) and asset prices, notably housing, continued to fall. The reason why monetary policy cannot avert debt deflation is that asset prices are bid up to unrealistically high levels during booms based on the same "animal spirits" that govern investment. When markets turn then so do expectations which cannot easily be reversed and certainly not by monetary policy.

Actually, M1 ended 1929 higher than 1928. I have written an essay exploring the chronology of how the small recession that started in 1929 progressed into a major downturn, called 1930. The "autonomous decline in consumer spending" is crucial. In this regard, the financial sector's calamity of the last few months frightens me not nearly so much as the sudden downturn in consumer spending that began in mid-September. How much of it has been lack of access to credit, and how much was due to Washington's ill-advised panic-mongering in connection with the Bailout?
_______

On a secondary point:
unemployment rates that remained high throughout the New Deal period

Unemployment was cut in half, from 25% in 1933, through 1937. When the facts have a liberal bias, mislead your readers.

[assman]

"BUT, if taxes are increased on the richest people---people who save most of their income---then the net result is a pure economic stimulus (increase in aggregate spending). This is because money that would have been taken out of the economy by rich people (saved) is collected by the government instead and spent. The increase in G is greater than the drop in C."

Wrong. Very wrong. You forgot one letter, I. Rich don't spend money on consumption goods but they do spend on investment. Investment is just as expansionary as consumption. Even the Obama and the Left believes that which is why they spend on infrastructure. Investment also has another benefit which is that it leads to increased future wealth and GDP. Consumption spending does not increase the future wealth of society.

[Ninja Zombie]

James Kroeger, you make a ridiculous number of fallacies in your post.

You make the following fallacies:

1) you assume you can change one thing in isolation (e.g. tax rates and government sending) without affecting anything else (e.g., production levels).

If you take money from me and give it to someone else as welfare, I may work less. The person accepting welfare will also not go get a job. So we lose the output of some of my labor and all of theirs.

2) You assume that the goods/services purchased by the government provide just as much utility as goods/services that would have been purchased by consumers.

This is false; with my tax dollars, the government purchased some Iraqi killing services. I gain negative utility from this. I would have purchased marijuana, lap dances and video games, which I gain positive utility from.

3) You assume savings are hoarded. However, they are usually invested, i.e. given to businesses as loans. Do we really want to dry up the supply of business loans right now? I thought we were in a credit crunch.

[David]

Tyler is correct about monetary policy being very important, both for the 1929-1933 downturn and for the 1933-1935 recovery. (Take a look at the Christina Romer paper Tyler talks about here). In fact, it was Roosevelt's devaluing the dollar and the fear-of-Hitler flight of of gold into the U.S. that fueled the 1933-1935 recovery. (So thank Roosevelt and Hitler for the recovery!)

And then there is the monetary explanation for 1937-1936 recession. Monetary Policy mattered during this time.

[ndd]

David, you second link doesn't work.

Re: primacy of monetary policy vs. autonomous decline of consumer spending in 1929-32, I would be interested in any link or info setting for monthly or quarterly M1, since I am only able to find yearly numbers.

[assman]

"Tax hikes are NEVER CONTRACTIONARY."

Bullshit. You have no empirical evidence to back this up just theory. And your theory is wrong. You assume that government will not pay back its debt. You also assume no dead weight losses and no response to incentives e.g. in your world 100% income tax is not contractionary and neither is a large increase in consumption taxes. And you assume government won't misspend the money it receives.

Lets consider an extreme scenario to illustrate the absurdity of your position. Lets say the government taxed everybody at 90% and used its revenue to fund a massive program to dig holes and fill them back in again. This would be massively contractionary.

[hari]

Tyler belongs to (old) Alcatraz - needs a lot of brain-washing after his Libertarian juncket for decades....

[Lafayette]

Management Mantras

TC: Today, President-elect Barack Obama faces pressures to make unionization easier, but such policies are likely to worsen the recession for many Americans.

Presumptive piffle. Tyler Cowen has evidently never been a union member. If he believes the above BS, he's been listening for far too long Misguided Management Mantras.

Unions have not done as well for the American worker as they could have, but to claim (as Top Management has for centuries) that unions cause workers to have exaggerated wages or reduced productivity, which inevitably cost jobs is nonsense.

Had the unions been represented on the Board of the Big3, is it impossible that they would have militated for a change in product strategy? Of course, we will never know, in the American corporate world of labor relations dictated by the "US" and "THEM" mentalities. Never the twain shall meet ... or agree.

For decades, the corporate heads of the Big3 have driven their respective companies into the ground by bad product management -- that is, precisely, building SUV gas-guzzlers because the American public liked them and the vehicles had solid profit margins. Hey, that's a perfect formula for success, isn't it? What can go wrong?

Plenty, as we have seen. A functioning Board has a good adversarial contingent that forces the management to think of adequate responses to "what if?" questions. For instance, "What if oil goes to $140 a barrel?" "What if the Japanese consistently make better cars that erode our market share?"

In the one instance the GM did try to answer that last question, they came up with a separate operation to make cars, called the Saturn. Why could GM not make that venture work to compete well with Japanese imports?

Any responses?

En passant

I have one. Right now -- in the midst of this Present Mess -- lies sleeping an excellent opportunity to make an historic Transformational Change in American labor relations. Big3 management should invite union representatives onto the Board and offer workers a part of the profits if they realize specific production-performance targets (which are mutually negotiated), including cost per vehicle objectives.

If this could be done by offloading health care benefits onto a Medicaid-For-All (regardless of age, or class or payment into the system), then that would be a Minor Miracle.

[mickslam]

Ninja,

"If you take money from me and give it to someone else as welfare, I may work less."

This is not true in a high unemployment situation, like for example the one we are facing right now. In fact, you would probably work harder for fear of losing your job. I would.

[2 Scenarios]

"Today, expansionary monetary policy isn’t so easy to put into effect, as we are seeing a shrinkage of credit and a contraction of the “shadow banking sector,”... So don’t expect the benefits of monetary expansion to kick in right now, or even six months from now."

The situation is wildly different from the Great Depression era. Back then, actively employed savers stuffed dollars in mattresses instead of loaning them out (velocity fell). It was a simple matter of convincing them to loan them out again, so new business could get funding (restoring the circular flow). Public borrowing/spending put some back in circulation temporarily, but this alone did not result in private business start ups. Restoring confidence in loans as safe long term storage of value was needed. FDIC and such eventually succeeded.

Today, actively employed savers buy inflation hedges instead of lending. All loans (of surplus production) must therefore come from overseas. Overseas lenders are now keeping their surplus production at home, and in the short run, it becomes a matter of convincing them to make private loans here again. Public borrowing is bringing some overseas surplus production here, but public work projects will not fund new private businesses.

In the long run, it will be necessary to convince actively employed savers to loan some of their excess production, instead of buying inflation hedges with it. Restoring confidence in loans as a reliable long term storage of value is needed. FDIC doesn't offer any inflation guarantees, so it does not solve the problem. Today, this means positive real after tax interest rates must become the norm for domestic savings. Legitimate business can profitably borrow at a penalty rate.

[Denis Drew]

assman,
In a recession there is not much to invest in because demand is low -- savings get parked -- the shortfall in demand has to be addressed first.

Tyler Cowen (NYT),
Didn't Keynes point out in the Great Depression that keeping wages low was the last thing you wanted to do to increase employment?

See:
The Greatest Explanation for the Great Depression?

At which Professor James Livingston argues that if business squeezes too much money out of labor, then, demand drops and business has no healthy place to invest its excess profits (plant and equipment) and heads out in search speculative paper which the only alternative (dot.com start ups with no realistic business model, risky real estate): leading us from bubble to bubble.

Ditto for Bush's tax breaks for the already too rich being invested in, guess what, real estate paper.

Anybody's common sense solution: raise American labor's price via doubling the minimum wage to half the "true" ($25/hr) average wage and adopt sector-wide labor agreements (like French Canada's?) here. Underpricing American labor and not under-priced wage competition (outsourced to or imported versions) has been the long ongoing emergency that some day our progressive elite might just wake up to appreciate -- much more dreadfully harmful to the lower paid half our labor force than any recession.

See Livingston at:
http://hnn.us/articles/55614.html

[James Kroeger]

Wrong. Very wrong. You forgot one letter, I.No, I didn't forget anything. At no point did I recommend increasing the corporate excess profits tax (incorrectly called the corporate 'income' tax). The very reason why you would want to raise taxes on rich people (to finance big increases in government spending) is so that the government can/will spend the money on PUBLIC INVESTMENT, which is a true, economic investment that produces real economic growth.

As just about anyone who is not a Republican can tell you, cutting business taxes generally does not lead to increased investment when the economy is in a deep recession and the demand for firm output has been dropping. It's called pushing on a string.Rich don't spend money on consumption goods but they do spend on investment. Investment is just as expansionary as consumption.Here you are guilty of conflating the two definitions of 'investment.' Rich people, generally, do not spend money on economic investments, but only on financial investments. While it is true that some financial investments (made by firms) are also economic investments, most financial 'investments' by rich people are not.

The purchase of a piece of land, for example, is a financial investment if it appreciates in value over time, but it is not an economic investment if it just sits there, undeveloped. Purchases of stocks in secondary markets (e.g., NYSE, NASDAQ) are clearly financial investments if the stocks appreciate in value, but they are not economic investments because they involve nothing more than exchanges of titles of ownership of already existing assets. They do not typically put any money into the hands of firm managers that could be used for economic investments. That normally happens only when stocks are first sold to underwriters, prior to an initial public offering.

Supply-Side theorists have long taken advantage of the impreciseness of the word 'investment' to craft tax policy proposals that sound as though they are beneficial to the economy, but actually are not. The famous Capital Gains Tax Cut, for example, is frequently promoted as an incentive that would stimulate 'investment.' Of course, the only 'investment' that such tax cuts ever stimulate is increased financial investment in stocks and other real assets. One financial investor hands money over to another financial investor for a piece of paper. Very little if any of the money involved in these transactions ends up being spent on capital goods that would increase output or the productive capacity of the economy.

The very last thing we need in the current economy is more financial investments. Taxing the rich more is the single best way to increase real economic investments in the economy while also pulling the economy out of the hole that Bush, et al., dug for us.

[James Kroeger]

James Kroeger, you make a ridiculous number of fallacies in your post...

1) you assume you can change one thing in isolation (e.g. tax rates and government sending) without affecting anything else (e.g., production levels).

If you take money from me and give it to someone else as welfare, I may work less. The person accepting welfare will also not go get a job. So we lose the output of some of my labor and all of theirs.You accuse me falsely, sir/madam. True, if you are rich and your taxes went up dramatically, you might work less, or you might throw yourself off a cliff or you might blow your brains out. But if you are not mentally ill, and all of that disposable income was important to you, you just might actually work harder, which is what the vast majority of people would do if the loss of money was important enough to them.

Your welfare comments are a hilarious joke. If the federal government were to do as I am suggesting, it would use ALL of the money it gets from rich people to build new roads and bridges and state of the art sewerage systems and to clean up the environment and improve the health of the American people and increase their economic security. Your argument is utterly without foundation.

I think I already answered (2), here's (3):You assume savings are hoarded. However, they are usually invested, i.e. given to businesses as loans. Do we really want to dry up the supply of business loans right now? I thought we were in a credit crunch.I do not assume that all savings are hoarded. It is demonstrable beyond any reasonable doubt, however, that only a small fraction of the money that is saved is used for economic investment. Let me ask you this question: Where do you think the trillion or so dollars is that the federal government is planning to borrow for this rich banker bailout?

Ultimately, I'm just saying that if critics are going to complain about the ridiculously high levels of debt the government is taking on (I happen to agree) then why not simply obtain the money directly from the rich people they plan to borrow from? That is how you increase government spending levels high enough to save the economy without 'burdening future generations' with an extraordinary debt burden.

[bakho]

The 1936 contraction had both a contraction in monetary policy and less real dollar outlays. There was a real drop in fiscal spending.

Compare this seat of the pants Cowen essay to the previous Sachs essay. Recessions cannot be strictly creations of monetary policy. Otherwise it would be too easy to fix. Recessions occur during periods of economic shock when technological or structural transformation is required. Oil shock recessions (we just happen to have a financial crisis on top of our oil shock recession) require changes in energy efficiency. Energy efficiency changes don't produce anything new, they just better utilize scarce resources. Therefore the economy can stagnate until the energy fix is complete.

Too much attention is paid to tweaking the monetary models and not enough attention to energy shock and economic transformations.

[Ninja Zombie]

Mickslam: "This is not true in a high unemployment situation, like for example the one we are facing right now. In fact, you would probably work harder for fear of losing your job. I would."

That's ridiculous. High unemployment may induce me to work harder, but higher taxes on top of that will not enhance this effect. Why would I work harder because of getting less money?

Besides, if I know that I have a generous safety net, why should I worry about losing my job?

[All Mi T]

just lets me know folks need to be concerned about the pres. elect safety

[datadave]

hey, I just have to chime in....about tyler's inability to take any heat for the monetarist's accumen in injecting govt. funds (the Bail-Out of Wall Street). He stated that he wants all critics to post here and indeed for some reason I can't post there after one mild criticism a few days back.

The rewriting of history simply will not do. Every graph shows a steady increase of employment from '33 on proving that FDR's New Deal did some good, while Mellon's leadership at Treasury in the 20's certainly led to huge job loses. Why is the Great Depression on top of most people's reading lists now? Because the extreme use of leverage and wide gap of income classes of our decade matches that of the 20s. We are intune with the Great Depression because the causes are so similar. Now we want to get out of it. And we know now that 'free market' Republicans utterly failed then as they do now. Thus the election. Main Street is far ahead of Wall Street this time in seeing how bad it is. Back to Tyler's argument The Libertarians admit that Huge Outlays of public financing for the War brought us out of the Depression finally but they refuse to admit that the modest outlays during the New Deal also helped. So the conclusion is that we all agree that a larger than '33-'37 percentage of govt. stimulus is needed to bring this "sucker" out of it's tailspin. Or do we really want to "balance the budget" upon the desparate lower middle class many if not most w/o unemployment benefits. (e.g. most truck drivers and construction workers are considered 'self-employed' due to the freeagency revolution in employment ...or the blind eye to IRS regs by many small businesses and big ones too like FedEx)

Or the few might say let the blood flow, let the middle class sink and I ask how many millions they have socked away? Obviously, Bob Rubin's and Henry Paulson's families needn't worry about their comforts and privleges but the rest of us on Main Street see a no buying future bleakness that is harrowing to behold. Demand is just about gone from the vast Middle Class.

[mrrunangun]

To the extent that New Deal policies were successful, they were practical solutions to the problems of unemployment and lack of production due to capital loss. To the extent that New Deal policies were unsuccessful or for that matter Hoover administration policies were unsuccessful may have been due to their ideological nature and their inapplicability to what were practical problems resulting from capital loss. Balancing budgets and protectionism were policies that had worked well for the country when the problems were lack of capital formation and weakly capitilized industries. Those were not the central problems of the banking panic or credit crisis brought on by the shock of deleveraging to the financial system. World war II resulted in an increase in the American capital stock and the destruction of much of the capital stock of our erstwhile industrial competitors. This immense change underlay the postwar leadership and prosperity of the USA.
The Bush administration has given us similarly unworkable ideological solutions to practical problems. International terrorism could not have been stopped by democracy building in Iraq and Afghanistan even if such constructions were possible. Practicalities were entirely ignored. Similarly the concept of privatizing the social security system was predicated on the apparently unexamined assumption that the easy credit American economy and the consequently ever-rising stock market were permanent. I hope the Democratic government learns the easy way that the errors of the past resulted from ignoring practicability and not just that the wrong ideology underlay the failed policies of the recent and distant past.

[Ninja Zombie]

James Kroeger: "But if you are not mentally ill, and all of that disposable income was important to you, you just might actually work harder, which is what the vast majority of people would do if the loss of money was important enough to them."

Only one problem with your theory: the last dollar I earn is not very important to me. The last dollar holds about the same value to me as the time I spent to earn it. If you increase the time it takes me to earn that dollar, the cost of earning it will go beyond it's value to me. Then I won't work for it.

This is not a theoretical consideration. I turn down work regularly.

Let me put this in concrete terms. Say I have two hours to allocate between work and play. If one hour of labor buys me extasy, Moby tickets and overpriced club booze, I'll produce for 1 hour and consume for the other hour. If one hour of labor no longer buys me all that, I'll play soccer or hit the mixed weapons studio for two hours.

As for fallacy (2), you explained why roads are better than welfare (ignoring the externalities of increasing auto usage). You did not explain why devoting resources to building roads is better than devoting resources to producing cheese fries, beer or bicycles.

Incidentally, how do you plan to "improve the health of the American people"? You realize that playing games with medical spending won't do this, right? Only lifestyle changes will.

"Where do you think the trillion or so dollars is that the federal government is planning to borrow for this rich banker bailout?"

China. Eventually, we will repay the money in inflated dollars. I'd rather rip off the Chinese government than American investors. Even better, I'd rather NOT SPEND THE MONEY.

[anne]

http://www.huppi.com/kangaroo/Timeline.htm

1997

The New Deal and the Great Depression

Contraction & Growth

(%GNP)

1929 Hoover era, contraction begins
1930 - 9.4
1931 - 8.5
1932 - 13.4
1933 - 2.1 Roosevelt era, contraction ends
1934 + 7.7
1935 + 8.1
1936 + 14.1
1937 + 5.0 Recession begins, May
1938 - 4.5 Recession ends, June
1939 + 7.9

[anne]

http://economistsview.typepad.com/economistsview/2007/01/the_new_deal_an.html

January 10, 2007

The New Deal and the Great Depression

Rates of Unemployment

1929 - 3.2% Hoover era begins, March
1930 - 8.7%
1931 - 15.9%
1932 - 23.6%
1933 - 24.9% (20.9%) Roosevelt era begins, March
1934 - 21.7% (16.2%)
1935 - 20.1% (14.4%)
1936 - 16.9% (10.0%)
1937 - 14.3% ( 9.2%) Recession begins, May
1938 - 19.0% (12.5%) Recession ends, June
1939 - 17.2% (11.3%)
1940 - 14.6% ( 9.3%)
1941 - 9.9%

Numbers in brackets correct for employment in New Deal programs.

Thomas M. Geraghty
University of North Carolina

[anne]

http://www.huppi.com/kangaroo/Timeline.htm

1997

The New Deal and the Great Depression

Government Receipts & Spending

(%GNP)

1929 Hoover era, contraction begins
1930 ( 4.2) ( 3.4)
1931 ( 3.7) ( 4.3)
1932 ( 2.9) ( 7.0)
1933 ( 3.5) ( 8.1) Roosevelt era, contraction ends
1934 ( 4.9) (10.8)
1935 ( 5.3) ( 9.3)
1936 ( 5.1) (10.6)
1937 ( 6.2) ( 8.7) Recession begins, May
1938 ( 7.7) ( 7.8) Recession ends, June
1939 ( 7.2) (10.4)
1940 ( 6.9) ( 9.9)
1941 ( 7.7) (12.1)
1942 (10.3) (24.8)
1943 (13.7) (44.8)
1944 (21.7) (45.3)
1945 (21.3) (43.7)

[robertdfeinman]

Why post (yet another) Cowen essay?

1. It's in the NY Times so is, ipso facto, important.
2. The liberals that inhabit this site will want to tear it to bits, and this is a welcoming venue for such an effort.
3. Our host likes to watch the ensuing discussion which is bound to follow (and it also may help drive traffic to the site).
4. Discussion may lead to new ideas being developed as people debate. These can then be fed back into the larger community and help refine other's thoughts.
5. Misinformation needs to be countered every time it appears.

I could make the same points about Jeff Sachs essay immediately below this one.

The most frequently heard pundits all have fairly rigid positions and one can pretty well predict what they will say on any topic that they have addressed in the past. (I admit to this fault in myself, and I'm far from a popular pundit.)

What I think this shows is how narrow the world of ideas is currently in economics and public policy. I don't know if there just aren't any far out thinkers, or if they just don't get heard. Certainly there are no viewpoints being heard from socialists or others promoting alternatives to free market capitalism.

I think this is a real problem. Even hopeless idealists can sometimes have useful insights. I keep questioning whether capitalism is the proper economic system for the future. It is ill equipped to deal with an overpopulated world with looming constraints on resources.

I also keep hoping that some new ideas will be forthcoming, but as long as the same people continue to command the most public forums this seems unlikely. Blogs are a perfect place to highlight unpopular viewpoints. They don't have the production costs that newspapers and magazines do, nor the limitations of space.

[Ashish Hanwadikar]

"Purchases of stocks in secondary markets (e.g., NYSE, NASDAQ) are clearly financial investments if the stocks appreciate in value, but they are not economic investments because they involve nothing more than exchanges of titles of ownership of already existing assets. They do not typically put any money into the hands of firm managers that could be used for economic investments. That normally happens only when stocks are first sold to underwriters, prior to an initial public offering."

This is absolutely ridiculous! Could you please explain us what happens to the money paid to buy financial assets (say, stocks on NYSE)? The person who sold the stocks must either spend the money (increase consumption) or fund new real investment(s). The seller can indeed use to money to buy other financial assets but the chain has to end in real consumption or real investment ultimately!

[harold]

Taxes are, or should be, a form of collective investment, not a penalty. Rich people should be ok with that.

[roger]

Kroeger, you are rocking.

Of course, if taxation of the wealthy is going to cause them not to work as much - which is a structurally weird thing to say, what are they not going to work at? Were there really long lines of upper management twits in 1934, deciding that, damn, they are no longer going to shuffle any more papers? - there is, of course, that wonderful reverse when it comes to the lower classes, where getting that union wage doesn't cause them to work more - but takes away from the other poor slobs.

This is a brilliant instance of Galbraith's dictum that conservative economics consists of saying that if you pay the poor too much, they won't work, and if you don't pay the poor more, they won't work. Sounds like Bushworld!

Cowen has perfected the art of saying nutty libertarian things in a soothing manner, like some doctor who believes that bloodletting is the cure to all ills talking about the latest genetic research. I much prefer Ninja's way of putting things, where the irrationality of class warfare and the position that the working and middle class should be permanently crushed is not so hidden. Those poor rich people, deciding not to work anymore, why it brings tears to my eyes. Imagine if somebody like Fuld hadn't thrown himself energetically into running Lehman bros - it would be quite the mess!

Anyway, I am psyched that the right is so nervous about the potential for unionization. One of the things I'm very much hoping for, from this congress, is a sharp turn towards supporting their "special interest", the unions. Knock down right to work laws, make it much easier to unionize businesses, increase the bargaining power of organized labor - I do love the sound of that. The voices of Cowen-like factotums will grow a lot stronger, though, in the media, which, in spite of its so called "liberal" bias, is firmly in the pocket of management.

[roger]

Correction "... if you don't pay the rich more..."

[a]

"Don't Raise Taxes in a Slump"

The money has to come from somewhere. If you borrow it, you're either getting the money from overseas or from rich people. Leaving out the overseas dimension, why is borrowing from rich people better than taxing them? Because it will lesson their incentive to work? If that's really a concern, then tax their wealth, rather than their incomes.

[James Kroeger]

Could you please explain us what happens to the money paid to buy financial assets (say, stocks on NYSE)? The person who sold the stocks must either spend the money (increase consumption) or fund new real investment(s).I don't see where you are pulling this 'real' investment thing from. Is that some kind of act of faith? The reality is that the vast majority of buyers and sellers of stocks purchased on secondary markets are simply wealthy or affluent financial investors who will typically plow any profits they get from their capital gains back into the same 'investment' vehicles. They buy and sell pieces of paper that entitled them to an income stream or real assets like property. In almost every case, there is no real economic investment involved.The seller can indeed use to money to buy other financial assets but the chain has to end in real consumption or real investment ultimately!Actually, it ends in neither. What happens is the extra dollars that the rich pump into the financial sector of the economy after the Republicans have thrown some extra billions at them is that almost all of it gets burned up in a continuing spiral of asset price inflation. No real economic advancement occurs [as a result of this infusion of inflation dollars] because almost none of the money gets used in a productive way. Prices increase, disposable incomes of rich people increase, extremely few additional luxury 'experiences' are made available to those who lust for them.

For all of the dollars that the rich gave themselves through the Republican Party, none of them are actually better off in real terms because nothing was done to reduce the scarcity of luxury experiences. If the Republicans had never been able to succeed in reducing income tax rates from the levels we last saw during the Carter administration, today's wealthy would actually be no less wealthy in real terms than they are right now. They inflated their incomes and now they are deflating a bit. But none of the mansions or yachts or beach front property is going to disappear. They'll all just be cheaper.

[Bruce Wilder]

rdf: "Why post (yet another) Cowen essay?"

You raise some interesting points.

Why have a political discourse at all?

Persuasion and discovery? No one has all the answers, and we enter discussion in the hope of discovering new information and refining understanding. And, we hope to inform and persuade others. Or, is it political warfare by other means?

As rdf notes, most of us appear to be ideologically rigid and predictable -- and the leading voices of our discourse -- when they are not vapid and inane (I'm thinking cable news) -- are, if anything, more predictable, more inclined to repeat cant than the common man and blog commenter.

Someone is open to persuasion and learning, surely, but who is it? Why are they open to persuasion? How are they open to persuasion? What is the point of persuading them?

I often object to Tyler Cowen, not because he isn't bright and charming, but because I sense that his intelligence and charm are deployed to nefarious purpose: he's a bought-and-paid-for instrument of a destructive political force. He writes op-eds as part of a coordinated effort to build an alternative political "reality" friendly to the interests of the selfish, greedy irresponsible rich people.

My inclination is to respond to him with contempt for his purpose, reinforced by my sense is that he seldom plays fair for long. Arguments, as the ancient philosophers knew, are dialectics. The outcome is a joint product. And, who we choose to engage with, determines how the argument will progress. I don't think Tyler is open to persuasion on the main points, but, more importantly, I suspect he feels free to introduce arguments and "facts" he doesn't actually believe, for strategic effect.

I have a sense that people like Tyler are deliberately seeded into the public discourse, as a means of catapulting the propaganda, of displacing other voices and viewpoints, and of drawing the dialectic down dark alleys.

There was this little tidbit thrown into Tyler's piece: He also took steps to strengthen unions and to keep real wages high. This helped workers who had jobs, but made it much harder for the unemployed to get back to work. One result was unemployment rates that remained high throughout the New Deal period.

Today, President-elect Barack Obama faces pressures to make unionization easier, but such policies are likely to worsen the recession for many Americans.

Where have we heard that before? Paul Krugman was warning us the other day about Amity Shlaes. And, in comments on that post, we got to hear about Cole and Ohanian, two UCLA/Minneapolis Fed economists, who argue that the New Deal prolonged the Great Depression by raising wages. Greg Mankiw is always available to instruct us that all good economists condemn the minimum wage for the harm it does to working people.

Cowen is serving his function, as part of movement conservatism, repeating the meme. Others will repeat it, will claim the "experts said it". Its presented as conventional wisdom not open to dispute. It is a meme with a built-in class war deflector -- its unions that made things harder for non-unionized workers; the idea that unions might have taken something away from management and the capitalist class is lost, just as the idea that union standards of hours, wages and benefits might have benefitted non-unionized workers by becoming the general norm is also ignored. And, of course, if someone like me comes along, and points out that Tyler is lying scum to put out this deception, I am being uncivil.

Tyler will say what he says, because he's paid to say it, regardless of the truth. I and many others can confront him with the counter-arguments and the evidence. Occasionally, Tyler might be boxed in. (I note that he has been moved to acknowledge that raising wages actually helps those employed; what a gracious concession!) But, just as Greg Mankiw can forget the efficiency wage hypothesis and the empirical evidence, within minutes of his periodic arguments over the minimum wage -- can forget completely the economists, who disagree with him -- so Tyler will revert to form, for the next op-ed piece.

I resent Tyler's easy grace, born, in my view, of freedom from a concern about the ambiguity of the reality married to a comfortable reliance on the unquestioned, unmentioned purposes of his patrons.

As a final note, I noticed Tyler's assertion: "Roosevelt instituted a disastrous legacy of agricultural subsidies" and cringed. As a matter of historical fact, Roosevelt agricultural policies were wildly successful, and were part of a broad policy strategy that addressed the most serious imbalance in the U.S. economy in the 1920's and 1930's. The Agricultural depression was as central and important a "cause" of the problems manifest in the Great Depression as monetary policy. And, as a partisan Democrat, I feel obligated to point out, that as a matter of public policy, the "disastrous legacy of agricultural subsidies" which are manifest today are mostly a product of Nixon's Agricultural Secretary, Earl Butz, whose "reforms" favored corporate interests and corn and a general pattern of corrupt stupidity. All of this is disappeared, when Tyler Cowen is building an alternate history for his plutocratic masters. And, it disgusts me.

[KThomas]

BW, please chill (and fire up that coffee!). IMO, Tyler has never been anyone's servant. You need not be disgusted, in this case.

[Bruce Wilder]

KThomas: "IMO, Tyler has never been anyone's servant."

He belongs to Charles G. Koch.

[roger]

Excellent points, BW. What is interesting about the discussion of the Great Depression as it is lead by the conservative side is, of course, that it is treated as a singular act that came out of the blue. There is, of course, no discussion of the twenties economic policies that led up to it, as I imagine, in the future, the conservative minions will concentrate on the horrid liberalism of Obama's programs and say not a word about the Bush policies that have given us a boom that helped nobody in the 80 percent income range and a bust that is tearing us apart, all the while singing songs of deregulation and "reform" - as in, let's reform social security! We could, after all, learn so, so many lessons from the private sector in providing for retirement - just look at the fine record racked up by 401(k)s!

But I sense that this fire from the rightwing margins is not going to have the same effect, at the moment, since we all remember that it is the disastrous advice of these people, their unwillingness to even admit that business cycles should enter into governance (where was Tyler Cowen in 2006, urging the raising of taxes during the boom, in order to mitigate the downside that was surely to come?), their raw prejudice against the working class, and their willingness to go through ideological gymnastics to keep the investor class, the top 1 percent, happy and powerful. I'm still enjoying the thought of the overtaxed rich, during the Depression, just refusing to work for that extra dollar more! If only we had had their mighty minds and godlike management skills behind us, how we could have skipped through the downturn!

It is, of course, all pap. And it is very rich, coming from the defenders of the very rich, who use guild like measures at every turn to protect their situations. If only labor unions had the power that the complex of corporate boards and "headhunters", i.e. upper management employment agencies, have! Or the power that the AMA has in deciding exactly the number of doctors needed to keep up the salaries of doctors.

So where are those articles in the NYT about the policies of the twenties, the creation of a mass, growing, unnecessary inequality that eventually sapped the very foundations of consumer capitalism? I'd love to see them. Somehow, though, the libertarian tribe doesn't want to look back there. But if they did,surely they would see that the unions ... were way too powerful! And the workers were paid way too much. If only more poverty had been spread about, the Depression could have been avoided, I'm sure. They were living above their means, the rotten average household, and it was time to liquidate, liquidate, liquidate.

[Massimo GIANNINI]

I wonder why so much interest in making historical comparisons and debating about old times so extensively. Who cares about New Deal and what Roosvelt did? Cannot we see the difference between past and present? It is not a scientific method to say it worked, or not, in the past so let's try now this and that. Past performances are not guarantee for the future...
On the other hand this debate is part of a top-down approach discussing larger aggregates, the "big picture". However these days need a general equilibrium approach to try to give an understanding of the whole economy using a "bottom-up" approach, starting with individual markets and agents, giving solutions to respective problems after some cost benefits analysis.

[MLS]

It's interesting to read comments that whine about Cowen's alleged work promoting the Koch brothers' evil "alternative political reality" while others complain that serious economists need to consider the ideas of "socialists or others promoting alternatives to free market capitalism." Thanks for the laughs.

[OhNoNotAgain]

"Don't Raise Taxes in a Slump"

I'll make Tyler a deal. I'll agree to the above as long as he agrees to never lower taxes when things are going fine.

[Publius]

All economics boils down into just two rules: 1) mass psychology and 2) don't forget rule 1. If the New Deal worked or didn't work according to one's pet ideology is really moot. What matters is people kept believing, supporting and voting in the New Deal because it dealt with effectively with their psychology. That is what made the New Deal successful. To put it bluntly, yes feelings matter. Japan in the 90s is an excellent example of why the "cure" of monetary expansion, ZIRP, and quantitative easing failed when it should have worked according to the prevailing economic theories. A different psychological makeup requires a different set of acting guidelines. To address Tyler's points:

* Monetary Policy is Key: Yes but with an eye towards how people will react. Helicoptering in the cash like Japan in the previous example may not be the cure-all as Tyler has us believe. Getting the Japanese to spend by inflating does not work to a mentality used to thrift. No policy works unless you have the mutual consent of the people.
* Get the Small Things Right: Have to disagree here. The agricultural subsidies worked because it was exactly what farmers needed to beat back the productivity losses incurred during the dust bowl era. Expecting those farmers losing their capital equipment to bootstrap themselves just would have been a monumental disaster with possible mass starvation waiting in the wings. This was an example of good government intervention not bad.
* Don't Raise Taxes in a Slump: Taxes will be relieved for most everybody. The rich, who would most likely see higher taxes, overwhelming voted for Obama so there is consent and buy-in. The middle and lower classes would be sitting pretty. Don't think we'll see tax revolts or class wars. We're all in the same boat here. There is another psychological aspect here--foreign investors. There's a lot of foreign investment in this country and they may diversify away from the US if the Fed lets the dollar drop too far. This foreign investment would not be as critical if the average American consumer or even the US government had positive net savings. But as it is China, Japan, Saudis, etc. pay our bills, so we need them to keep their cash here. If we allow the Fed to pump more liquidity and the Treasury to issue more debt, then we've implicitly chosen to raise our taxes. That's the only way to keep the books balanced.
* War Isn't the Weapon: People are tired of war. They see it as wasteful and want that energy and attention directed back home. The Obama administration seems to be antiwar and look to use diplomacy in future engagements.
* You Can't Turn Bad Into Good: Point is a bit muddled here. Tyler says social nets made sense then but later denounces it as "doing something for its own sake". Well, either it makes sense or it doesn't. The generation that lived through the depression would say it was necessary. Psychologically, they were used to poverty and this extra bit of assurance was there to let them regain trust in the system. I think Tyler had it right the first time when he said they made sense.

In a rational world (some rational worlds anyway), Tyler's proposed guidelines would work. The key problem is that people aren't always rational and especially so in today's environment. So the best policies will address people and not any one policymaker's ideological assumptions. The New Deal was ultimately a success but you don't need me to say that. And even more so when you consider the alternative: mass riots, rebellion, civil war, a "regime" change. The New Deal put a minimum floor of stability and that is what the present and future administrations need to address. Deal with the psychology of the American people and the rest will take care of itself.

[Huggy]

If the Democrats raise taxes it will have to be on Universities. Universities are the only ones who made big money this year. Maybe the medical profession too. Looking forward to see how that plays out.

[OhNoNotAgain]

"This is not a theoretical consideration. I turn down work regularly."

And, of course, this personal anecdotal evidence translates to the macro-behavior of the economy, right ?

[bob mcmanus]

We're all in the same boat here.

Yeah, I, George Bush, and Hank Paulson have an equal right to sleep under a bridge.

[John V]

Dr. Thoma,

"I agree with some of this, but I don't think the main thrust of Tyler Cowen's lessons from the New Deal are the same as mine"

What do/don't you agree with and why? Your thoughtful contribution to this thread would help immensely to offset the wildly unfair and Pavlovian invective (upon seeing the words "Tyler"+"Cowen") that dominate it.

For me,

He puts monetary policy front and center and the #1 policy gaffe of the Great Depression and its improved application as the number #1 aid in helping to right the ship . Hard to argue there (although he forgot to mention Smoot-Hawley). Agree or disagree?

He argues against cartelization of industry (and labor for that matter) and says they were unhelpful if not harmful in terms of high unemployment and high prices. I'm assuming he's referring to the NRA in part, which was struck down in 1936(?). Agree or disagree?

After highlighting all the tax increases that took place under Hoover and FDR he says,

"When all of these tax increases are taken into account, New Deal fiscal policy didn’t do much to promote recovery. Today, a tax cut for the middle class is a good idea — and the case for repealing the Bush tax cuts for higher-income earners is weaker than it may have seemed a year or two ago."

Your thought?

Then he says,

"While overall economic output was rising, and the military draft lowered unemployment, the war years were generally not prosperous ones. As for today, we shouldn’t think that fighting a war is the way to restore economic health."

Agree or disagree?

He then talks about the good in having a safety net but the harm in mixing it with bad policies (like some that he mentioned above) in other influential areas. He then urges prudence in dealing with the financial sector. What say you?

In summary, he seems to saying bad/good monetary policy was the primary reason for real economic downturn/recovery...respectively. Agree or disagree?

He then claims our real recovery, like back then, will be mainly due to monetary policy and not the many fiscal/market-regulatory initiatives that will be tried (like back then)

What do you say?

I'd like to see your answers. While I don't have any vehement disagreements with Cowen said, personally, I think he should have said/could have said more on the NRA and its effects on private investment.

[roger]

It would be nice, before going on to project defensively on the "horrible" New Deal, to go over the lessons of the 20s and the 00s - which are basically two, I think. The private sector sucks majorly at allocating capital when it is left free of government interference, and the private sector always sucks at decreasing inequality, or promoting social mobility upwards. Those are two flaws that can be palliated by an activist government. A government that isn't activist, isn't continually expropriating a great percentage of the prestige wealth of the wealthiest, a politically necessary form of hygiene, and isn't continually financing programs to extend the benefits of education and health to all, at a minimum, is a government that sets up the double failure of the private and the public sectors. It is pretty easy, really. What is hard is to reverse negligent governance, as the investor interest will always do what it can to capture and hold the political sector in order to increase its leverage over the producers - the middle and working class.

[anne]

http://books.google.com/books?id=evAMKRRjcawC&dq=peddling+prosperity+paul+krugman&pg=PP1&ots=hFtfqiCwiI&sig=pko4whS7isOrq-8kSuXOhnTofGk&hl=en&prev=http://www.google.com/search?sourceid=gmail&q=Peddling+Prosperity+Paul+Krugman&sa=X&oi=print&ct=title&cad=one-book-with-thumbnail

1994

The Smoot-Hawley Tariff

The Smoot Hawley tariff raised the average tax on imports by about 40 percent, but before the tariff imports were only about 6 percent of gross national product. In other words the effective tax increase was only about 2.5 percent. Yet employment dropped by one third from 1929 to 1933.

-- Paul Krugman

[anne]

http://economistsview.typepad.com/economistsview/2007/01/the_new_deal_an_1.html

January 11, 2007

The New Deal and the Great Depression
By Paul Krugman

I agree that the National Industrial Recovery Act might have raised the structural rate of unemployment * - but the economy got nowhere near the structural level of unemployment during the NIRA period, so what difference could that have made? **

What really puzzles me, though, is the assertion that wage and price rigidity created by the New Deal aborted the natural recovery process. Through what channel could price flexibility have helped? The US spent most of the 30s pretty much up against the zero bound, with interest rates well below 1 percent. A fall in the price level would have had the same effect as an increase in the monetary base - that is, no effect at all - except for the slight wealth effect of rising real balances. And even this slight effect could easily have been outweighed by debt deflation.

You just have to bear in mind that this was, um, the Great Depression - normal rules about monetary policy did not apply. And the same goes for any possible role of price flexibility.

* http://economistsview.typepad.com/economistsview/2007/01/the_new_deal_an.html

** The NIRA was ruled unconstitutional in May 1935. Unemployment was 20.1% not counting New Deal programs and 14.4% with employment in the programs counted.

[anne]

http://economistsview.typepad.com/economistsview/2007/01/the_new_deal_an_2.html

January 13, 2007

The New Deal and the Great Depression
By Paul Krugman

Aha. I see another argument about price flexibility: you needed to get the deflation over, so that the real interest rate could fall. Nice try, but it runs up against an empirical problem: the liquidity trap lasted long after the deflation was over. Deflation ran from 1929-33, then ended except for 1937: http://www.census.gov/statab/hist/HS-36.pdf . Interest rates stayed below 1 percent through the whole period: http://www.census.gov/statab/hist/HS-39.pdf .

[John V]

Roger,

the lessons of the 20s and the 00s - which are basically two, I think. The private sector sucks majorly at allocating capital when it is left free of government interference

How do you explain this?...especially since there was abundant bad interference...or at least abundant interference in many respects that were coupled with measures that amounted to less/no interference.

the private sector always sucks at decreasing inequality, or promoting social mobility upwards.

The first part is not a stated purpose of the private sector so it's kind of hard to blame the private sector for not doing something it wasn't trying to do. The second part is flat out wrong in that it isn't trying to "promote it". However, a vibrant private sector allowed to compete and vie for profit without (or at least as little as possible) corporatist protection, perversion and regulation is unmatched (so far) in providing opportunity for personal advancement. OTOH, the state seems to try overtly to do both and fails miserably at it while inadvertently leaving tools and weapons for the protection of the status quo along with glass ceilings.

You'll need to explain a bit better there. And careful because your answer will probably be wrought with examples government malfeasance and bumbling...which doesn't really address "the private sector".

"Those are two flaws that can be palliated by an activist government."

You mean like the one we have that has been predictably captured by the wealthy and powerful interests since it first started becoming one? Yeah, that one.

[mrrunangun]

roger,
The AMA has no power whatsoever regarding the number of doctors trained in the USA. It may have had such 40 years ago, but not lately. Nor the ABA over the number of attorneys. The plumbers' and electricians' unions have far more power over professional population control and they often have a lot of men on the bench. The number of medical doctors in the USA is determined more by immigration policy and affordability than anything else. The number of places in state medical schools is determined by state legislatures based on how many they choose to fund. Private medical schools charge $50-60,000/year (except for the Mayo Clinic's which is tuition-free) so their spots are limited only by the number of students who can meet the minimum qualifications and are willing and able to pay the freight. Immigration, especially from the mideast, is restricted. This is based on federal policy uninfluenced by AMA. One of our town's docs has been trying for several years to help a mideastern cardiologist immigrate without success. Many physicians born in the third world practice here and there are more who would like to do so. In our small midwestern industrial exurb we have very few American-born doctors at all.
European systems allot so many places in their medical schools, fill them with applicants who meet the qualifying standards, and the education is free or nearly so, as it is safe for them to assume that the vast majority of their graduates will serve their own publics. A few come here, saving us the cost of educating them.
If it were true that many well-qualified applicants are denied medical educations, one would expect that all who survive the winnowing process would exhibit a higher degree of excellence than is evident IMHO. Expanding the supply of poorly qualified or poorly trained medical doctors would not be my first thought as a solution to any problem.

[anne]

http://delong.typepad.com/sdj/2008/11/lessons-from-th.html

November 17, 2008

Lessons From the Great Depression Blogging
By Brad DeLong

Private investment recovers to 1929 levels by 1937, as New Deal policies take effect [Graph]

I have never been able to make any sense at all of the right-wing claim that the New Deal prolonged the Great Depression by creating a "crisis of confidence" that crippled private investment as American businessmen feared and hated "that Communist Roosevelt." The crisis of confidence was created by the stock market crash, the deflation, and the bank failures of 1929-1933. Private investment recovered in a very healthy fashion as Roosevelt's New Deal policies took effect.

The interruption of the Roosevelt Recovery in 1937-1938 is, I think, well understood: Roosevelt's decision to adopt more "orthodox" economic policies and try to move the budget toward balance and the Federal Reserve's decision to contract the money supply by raising bank reserve requirements provide ample explanation of that downturn. * And once those two factors had run its course the continuation of Roosevelt's policies was no obstacle to an investment recovery driven by war-related exports monetary expansion produced by capital flight from Europe.

You can argue--and I occasionally do--that had the Supreme Court not ruled the National Industrial Recovery Act unconstitutional it would have exerted a significant drag on medium-run economic recovery. But the Supreme Court did rule the NIRA unconstitutional, 9-0, Brandeis voting alongside MacReynolds.

* http://www.jstor.org/pss/1927330

August, 1938

The Downturn of 1937
By Sumner H. Slichter

[John V]

Anne,

On Smoot-Hawely, there's the other half of the equation in which other countries retaliated by raising tariffs as well. This caused exports (and related jobs) to weaken from their potential standing without the tariffs.

[anne]

"[Cowen] then claims our real recovery, like back then, will be mainly due to monetary policy and not the many fiscal/market-regulatory initiatives that will be tried (like back then)."

Such a claim, which is not actually made, is historically ridiculous.

[Tom Geraghty]

The idea that the New Deal is contractionary is a figment of classical economists' imagination. If the classical model were in any way an adequate description of how economies work the Great Depression never would have happened in the first place:

Gauti Eggertson, Great Expectations and the End of the Depression

. . . the US recovery from the Great Depression was driven by a shift in expectations. This shift was caused by President Franklin Delano Roosevelt’s (FDR) policy actions. On the monetary policy side, FDR abolished the gold standard and — even more importantly — announced the explicit objective of inflating the price level to pre-depression levels. On the fiscal policy side, FDR expanded real and deficit spending. This made his policy objective credible. These actions violated prevailing policy dogmas and involved a policy regime change . . .

Gauti Eggertson, Was the New Deal Contractionary?

Can government policies that increase the monopoly power of firms and the militancy of unions increase output? . . . these policies are expansionary when certain "emergency" conditions apply. These emergency conditions - zero interest rates and deflation - were satisfied during the Great Depression in the United States. Therefore, the New Deal, which facilitated monopolies and union militancy, was expansionary . . .

Further,

This conclusion is contrary to the one reached by a large previous literature, . . . that argues that the New Deal was contractionary. The main reason for this divergence is that the current model incorporates nominal frictions so that inflation expectations play a central role in the analysis. The New Deal has a strong effect on inflation expectations in the model, changing excessive deflation to modest inflation, thereby lowering real interest rates and stimulating spending.

Menzie Chinn, Back to the Great Depression Debates

a lot hinges upon one's feelings regarding the stickiness of prices. As a person who taught graduate students the Mankiw menu cost model from Mankiw and Romer's, New Keynesian Economics (MIT Press, 1991), I'm on the side of nominal rigidities, and hence the model that re-establishes the conventional wisdom regarding the New Deal policies. But, if you feel that prices are fully flexible (i.e., somehow you've missed the fact that the prices at your local restaurant are not moving around day by day), then you should side with Cole and Ohanian's perspective.

[anne]

http://www.nytimes.com/books/00/11/26/specials/schlesinger-hundred.html

April 10, 1983

The 'Hundred Days' of F.D.R.
By ARTHUR SCHLESINGER Jr.

Exactly half a century ago, the Republic plunged into the Hundred Days - that time of tumultuous change when a flood of legislation swept away venerable market practices and gave the American economic system a new contour.

In the frenzied weeks from March to June 1933, Franklin D. Roosevelt sent 15 messages to Congress and steered 15 major laws to enactment: among them, central planning for industry and for agriculture, new regulation for banking and for the securities exchanges, the Tennessee Valley Authority, the Civilian Conservation Corps and a national system of unemployment relief.

''At the end of February,'' Walter Lippmann wrote when the special session adjourned, ''we were a congeries of disorderly panic stricken mobs and factions. In the hundred days from March to June we became again an organized nation confident of our power to provide for our own security and to control our own destiny.''

The Hundred Days were only the start of a process that ended by transforming American society. Who can now imagine a day when America offered no Social Security, no unemployment compensation, no food stamps, no Federal guarantee of bank deposits, no Federal supervision of the stock market, no Federal protection for collective bargaining, no Federal standards for wages and hours, no Federal support for farm prices or rural electrification, no Federal refinancing for farm and home mortgages, no Federal commitment to high employment or to equal opportunity - in short, no Federal responsibility for Americans who found themselves, through no fault of their own, in economic or social distress?

These social changes have won general approval. Even the Reagan counterrevolution, for all its 19th-century laissez-faire and Social Darwinist passions, shrinks from abolishing the framework of social protection - the ''safety nets'' - created by the New Deal.

But what of the narrowly economic results? How effective was the New Deal in reducing unemployment, promoting economic growth and altering the distribution of income? And does the experience of half a century ago offer any guidance to the nation in its economic perplexities today?

The technique of the New Deal was improvisation and experiment. ''It is common sense to take a method and try it,'' F.D.R. said in the 1932 campaign: ''If it fails, admit it frankly and try another. But above all, try something.''

Except for that part about admitting failure frankly, this continued the rule for Roosevelt's 12 years in the White House. In the intellectual circumstances of the time, there was really no alternative to experiment. The Hundred Days found the country in a state of invincible ignorance. No one knew the causes of the Depression. No one knew the cure. Business leaders and academic economists alike were analytically baffled and impotent.

A fortnight before Roosevelt took office, the Senate Finance Committee summoned a procession of business leaders to testify on the crisis. ''I have nothing to offer, either of fact or theory,'' said John W. Davis, the head of the American bar. ''There is no panacea,'' said W.W. Atterbury, president of the Pennsylvania Railroad.

Economists had been so wrong in the recent past and were in such hot disagreement in the urgent present that no non-economist could take the profession seriously.

In its detail, New Deal experimentation was often chaotic and not seldom contradictory. But it was unified by F.D.R.'s definite conviction about the ends of economic policy - ends prescribed not only by the miseries of the Great Depression but by the President's alert, resourceful and generous-hearted personality.

Born in the Hudson River aristocracy, he inherited a sense of obligation to land and to community. He was indeed, as John T. Flynn labeled him in a once famous polemic, a country squire in the White House. The Republic was Hyde Park writ large, and he saw himself as trustee for a national estate that required vigilant protection and cultivation.

There was more than a touch of paternalism and noblesse oblige in all this, but there was also a vivid feeling of responsibility for the national community as a whole, especially its most defenseless members.

F.D.R. had had a reasonable exposure to the economic thought of his time. At Harvard he had taken more credits in economics than in any field except history and English. His teachers - William Z. Ripley, A. Piatt Andrew, O.M.W. Sprague - were in the reformist school that hoped to mitigate laissez-faire by regulation.

In the 1920's he had been active in the business self-regulation movement. As Governor of New York, he had pioneered in regional planning, conservation, electric power development and welfare legislation.

The President-elect emerged from this varied experience with a patrician disdain for business wisdom and a curiosity about economists. ''This nation asks for action, and action now,'' he said in his inaugural address.

He looked first to national planning, ''a fair and just concert of interests,'' with business, labor, agriculture and consumers working together under government leadership. Each unit ''must think of itself as a part of a greater whole; one piece in a large design.''

This integrative approach sprang from his sense of the nation as a great community. It found particular expression in the National Recovery Administration and the Agricultural Adjustment Administration. These mechanisms of negotiation and coordination soon arrested the fall in production and prices and brought about a measure of re-employment.

But they also encountered difficulties. N.R.A. especially tried to run too much; and, though it gave new status to organized labor, business used its dominating position in many industrial codes to fix prices and restrict production. In the end, the laws fell afoul of the Supreme Court.

The Second New Deal

After 1935 Roosevelt embarked on a new tack: leftward in rhetoric, rightward in policy. Instead of seeking business partnership in the reorganization of economic institutions, the Second New Deal embraced the theory of a competitive economy and strove for recovery through a three-pronged reform campaign.

One prong, which naturally outraged those businessmen who endorsed competition in principle but hated it in practice, was a campaign against the ''economic royalists'' and the concentration of private economic power. The thesis, Roosevelt said in 1938, ''is not that the system of free private enterprise for profit has failed in this generation, but that it has not yet been tried.''

A second prong aimed at the stimulus of the economy through deficit spending. Keynes in his 1936 book ''The General Theory of Employment, Interest, and Money'' gave compensatory fiscal policy its classic rationale.

But the New Deal came to public spending earlier and for its own reasons. It created deficits to combat human suffering, and it found its early justification in the arguments of the Utah banker Marriner Eccles, whom Roosevelt made chairman of the Federal Reserve Board.

He took his ideas from two now forgotten American economic writers, William Trufant Foster and Waddill Catchings, whose irreverent critique of Say's Law in the 1920's had demonstrated the perils of over saving, concluding with the brisk injunction: ''When business begins to look rotten, more public spending.''

F.D.R. had scrawled in his copy of the Foster-Catchings book ''The Road to Plenty'' (1928), ''Too good to be true - You can't get something for nothing.'' Very likely he continued to prefer structural to fiscal remedies. But ''above all, try something.''

The third prong in the Second New Deal was targeted attention to weak sectors in the economy - the South, the West, housing, railroads. Here the Reconstruction Finance Corporation, headed by a Texas banker, Jesse Jones, played a key role. The R.F.C., and later its wartime subsidiary, the Defense Plant Corporation, liberated the colonial South and West from the New York capital market and used government money to lay the foundation for the postwar boom in the Sun Belt....

All this Rooseveltian hyperactivity brought the country through the worst of the Depression. By 1940 the gross national product was higher than in 1929 and over 60 percent higher than in 1933.

As has been often noted, the New Deal did not solve the problem of unemployment. By 1940 the jobless rate had been cut by nearly two thirds, to 9.3 percent of the labor force from 25.2 percent in 1933. Still five million people lacked jobs.

So much re-employment in half a dozen years was a not inconsiderable accomplishment...

[John V]

Anne,

Such a claim, which is not actually made, is historically ridiculous.

How so?

[Philip]

I dislike how the whole argument here is framed in terms of "what would work" without any discussion of whether then ends justify the means. If confiscating all of the wealth of the top 10 percent, using that money to build roads and hospitals, and forgiving all the debt of the bottom 50% would "work" to get the economy growing again, would that be the right thing to do? Do not the individuals have some right to not be made into slaves just because it would work? Confiscating someone's money after the work is done is tantamount to making them an indentured servant. If you want to attack the rich then figure out where they broke the rules and hold the accountable, surely there are plenty of cases. But to go after all the rich for the "crime" of being rich is wrong. Forcing people to join unions in order to work is wrong. Socialists love to use force and downplay rights unless those rights are the type that let them use force (get rid of the pesky right of an individual to decide how to work, but give the force-enabling right to receive medical care from someone else).

[Someone spilled their drink all over their shirt]

JV (team):

If you don't know what Keynes meant by the phrase "There's many a slip twixt cup and lip" you shouldn't try to comment on monetary policy during the Great Depression. Seriously, get a clue.

Then there's that whole "Keynesians versus Monetarists" thing...

[OhNoNotAgain]

"In summary, he seems to saying bad/good monetary policy was the primary reason for real economic downturn/recovery...respectively."

Do you not think that there was room for regulatory "interference" in the financial markets leading up to the October crash in 1929, and that such regulatory regimes might not have prevented much of the imbalances caused during the run-up ? If you think that lax monetary policy was partly responsible for the speculative boom (as it has been in the past decade), then it is only logical that regulatory changes in margin requirements, insider trading, and other aspects of the stock market most certainly would have helped cool off the situation. Let's get real here, we have two distinct cases within 100 years of one another, where the following conditions have caused a huge problem:

1) Easy money due to the Fed holding interest rates too low for too long.

2) Too much speculative investment due to 1) and lack of proper regulation.

3) Large amounts of income/wealth inequality between working men and women and the extremely wealthy.

It seems to me that it is time to put Wall Street on a very tight leash, move away from the stock market as a retirement vehicle for average Americans, and start rewarding productive investment as opposed to speculative investment.

[Bruce Wilder]

I feel I need to clarify my earlier remarks.

Publius: "If the New Deal worked or didn't work according to one's pet ideology is really moot."

I think that kind of nihilism is exactly what according Tyler Cowen respectful attention produces.

Economic policy does matter, and it matters for material reasons, not just psychological ones.

The New Deal did not include the kind of massive Keynesian stimulus, which the consensus of the economics profession says would have been necessary to end the Great Depression quickly. That's a fair point about policy and history. If we are getting ourselves into another depression, it might turn out to be materially important to a lot of folks, that government policy is shaped by that Keynesian insight.

It has become a shibboleth on the Right that the New Deal actually inhibited recovery, not by failing to enact a Keynesian policy (which conservatives at the time, naturally, opposed doing), which would be true, but by enacting other policies, such as promoting unionization of the industrial workforce, particularly in steel, autos and mining. Tyler repeats this assertion as if it is a proven fact.

My complaint about Tyler is not centered on the fact that we probably have different preferences about government policy with regard to labor unions. Unions have their pluses and minuses, and conservatives are going to have legitimate, critical views. In general, politics is an on-going conflict over the distribution of wealth, income and power, with no single right "solution" known only to economists, or liberals or libertarians. Productive political argument helps us discover good policy and reform bad policy, as we muddle pragmatically forward. That's my general view; as a good liberal, my own political view includes doubts about whether I'm right or whether we know enough.

Here's what Tyler Cowen wrote:He also took steps to strengthen unions and to keep real wages high. This helped workers who had jobs, but made it much harder for the unemployed to get back to work. One result was unemployment rates that remained high throughout the New Deal period. What troubles me is not that as a conservative, Tyler thinks industrial workers should be paid less, and capitalist owners and corporate managers should be paid more. It is that he does tells us about his political preferences. Instead, he purports to tell us something, authoritatively, about economics: that because industrial wages rose by means of unionization, recovery from the Depression was delayed and unemployment materially increased. And, that something is a lie; that something is bad, false economics.

Like many effective lies, it has a certain superficial appeal. And, although he doesn't actually say so in the piece, I think he makes it sound like some economic historian has actually studied employment patterns and estimated an significant employment effect -- that his assertion is not something he's pulling out of his ass, but a fair appreciation of verified fact.

On a deep level, this assertion about the deleterious effect of strengthening the bargaining power of industrial labor is not just an assault on the right of ordinary workers to bargain effectively over wages and working conditions, it is also an assault on the Keynesian insight. It is a backdoor way of asserting that Keynes was wrong and Says was right.

Deflation and depression is not bad for everyone. For the really wealthy lenders, it can be a boon. The Gilded Age was a product of the Long Depression (1869-1896); lots of people worked hard, developing the country, went bankrupt, and a relative handful of people ended up owning everything. With high unemployment and frequent financial panics, it was easy enough to break labor unions, drive down wages. That's what Tyler is advocating here: the unrestrained oppression of the 95% by the 0.5%. That's his preference, and he's entitled to express it, of course. Rahm Emmanuel recently said he would not waste a crisis; neither would Tyler -- a depression is Tyler's opportunity, on Mr. Koch's behalf, to cut your wages and benefits -- for the good of the country and to speed economic recovery, of course!

My objection is not to his preference (although I do object, of course), but to making it sound like economic analysis doesn't include the Keynesian insight. I object to his assertion that economic recovery would aided by cutting wages or by preventing the formation of unions. It ain't so.

Unions are able to bargain effectively over wages in sectors where there are substantial rents, to bargain over. Mostly, it is a zero-sum game between workers on one side and capital and (maybe) management on the other, neither product prices nor levels of employment are majorly affected.

It is not that there are not sectors, where unionization might not, conceivably, drive up costs and product prices -- it is that unionization tends not to get very far in highly competitive sectors of that kind -- people don't like to join a union, strike for a higher wage, and then lose their jobs and, surprise, mostly they won't do it. It's a selection bias, you might say. Unions do well in sectors where there are rents to bargain over. And, in the Great Depression, that's where unions made progress: in steel, autos and mining, utilities, regulated transportation, etc. And, their increasing wages trickled outward into the communities where they lived and shopped.

On a macro-level, unionizing steel and autos and mines did not matter much to overall employment. It couldn't. Those advanced industrial sectors don't have much scope to vary the ratio of capital and labor. The capital embodies a technology, and the technology dictates the rest; as Pareto would say, there's only one seat on a tractor. It is not as if there's some alternative high-labor-intensive way to make mass-produce steel or assemble autos, just waiting around for wages to come down. Cutting wages was not going to sell any more cars -- who was going to buy them? -- nor would Ford suddenly re-invent the assembly line to use more labor. The labor-intensive open hearth furnace? I don't think so.

Which brings us back to the Keynesian insight. The deflation of 1928-1932 left lots of resources outside the circular flow. There's a classic argument that says, resources can bid their way back into the circular flow; prices and nominal income will fall in competitive markets to market-clearing levels, and all will be well. That argument is wrong. Doesn't happen. What happens is that much of the structural organization of the economy is destroyed, and lots of resources are left without the income they need to provide effective demand, left outside the circular flow with no practical way to get in. The Keynesian answer is government spending to increase the size of the circular flow until it again employs all available resources. That's what did not happen under the New Deal -- or rather not enough of it happened -- until WWII.

The assertion that unionization had deleterious effects on employment is really just a way of dressing up the claim that men like Charlie Koch have a divine right of plutocrats to use the economic circumstances of a depression to beat up on unions and the workers they represent, without government interference. It is an argument without foundation in economic theory or history, and deserves scorn.

[John V]

Someone...,

That really doesn't work. You're going to have to try harder than that....not to mention broaden your ire to many people much more knowledgeable than I.

[roger]

JohnV, the private sector has no stated purpose at all. Its configurations are simply results of conventions, expectations, etc. Corporations began to try to promote diversity explicitly in the 80s and 90s, so insofar as there is a "stated purpose", we have the purpose of social mobility as a social fact. Your argument, that the private sector accidentally promotes social mobility, or lessens inequalities, isn't really born out by the stats. The more the U.S. has tended towards the Reaganomics model, for instance, the less it has ranked among nations with social mobility upward. Here is an abridgment of the findings of the Sutton Trust study done by the London School of Economics, which you can find here:
http://www.lse.ac.uk/collections/pressAndInformationOffice/newsAndEvents/archives/2005/LSE_SuttonTrust_report.htm

"Jo Blanden, Paul Gregg and Steve Machin found that social mobility in Britain - the way in which someone's adult outcomes are related to their circumstances as a child - is lower than in Canada, Germany, Sweden, Norway, Denmark and Finland. And while the gap in opportunities between the rich and poor is similar in Britain and the US, in the US it is at least static, while in Britain it is getting wider.

A careful comparison reveals that the USA and Britain are at the bottom with the lowest social mobility. Norway has the greatest social mobility, followed by Denmark, Sweden and Finland. Germany is around the middle of the two extremes, and Canada was found to be much more mobile than the UK."

As for your notions about the capture of the government by the powerful (I notice that you don't say the rich), that is, as I wrote, one of the reasons that the prestige wealth of the wealthy needs to be lopped. From Phil Gramm pushing through bills to destroy any regulation of the mortgage sector to Joe Lieberman strangling the attempt by the SEC, in the late nineties, to investigate the corrupt accounting practices that later blew up in places like Enron, the political market has skewed to one sector of the powerful. Now, as it is a political market, and as we all agree that there are certain command and control measures one can't take with a market, I'd guess the best way to deal with this is by doing exactly what it looks like the Dems are going to be doing - encourage organized labor's power. This will, of course, be good for all, insofar as a buffered elite usually degenerates quickly.

This isn't to say that either the private sector is evil or the state is good - but it is the clash between them that does the public the most good. And at times the Government has to grossly overreach - which it should be doing in the next four years - simply in order to correct the system wide problems that develop in a private sector led by an elite that has accrued too much wealth and power, and has played the system until it systematically misallocates capital in the chase for high yield non-products. Twenties, meet the naughties.

[John V]

OhNoNotAgain,

"Do you not think that there was room for regulatory "interference" in the financial markets leading up to the October crash in 1929,"

Sure there was. But I wasn't saying otherwise if you read more closely. But then again, such topics need context. What exactly are we regulating? And why? Oftentimes, we will see poor regulation/deregulation as the precursor of havoc in some related..yet unregulated/regulated activity.

As for the numbered points, I'd say (1) caused (2)...among other problems...in significant enough clusters to bring about wide-spread problems. In fact, that (1) is like cat nip for many errors.

[John V]

Roger,

from the link you provide:

"Comparing surveys of children born in the 1950s and the 1970s, the researchers went on to examine the reason for Britain's low, and declining, mobility. They found that it is in part due to the strong and increasing relationship between family income and educational attainment.

For these children, additional opportunities to stay in education at age 16 and age 18 disproportionately benefited those from better off backgrounds."

You seem to using results from a study that are argued to be grounded in educational opportunity and attainment to attack economic policy and the private sector. Unrelated.

[John V]

"As for your notions about the capture of the government by the powerful (I notice that you don't say the rich), that is, as I wrote, one of the reasons that the prestige wealth of the wealthy needs to be lopped."

Well I see those notions of capture by the powerful (and very rich) to be a reason to restrict power by inhibiting the avenue of parasitic regulatory/rent-seeking wars.

Taking money from rich sounds nice in theory but it doesn't implicitly explain some benefit you seek.

[Beezer]

Hedge fund manager Hugh Hendry said, in an interview on CNBC this am (http://www.cnbc.com/id/27835645) that socialism actually builds a "moat" around the wealthy. In his view, socialists end up protecting established wealth and, in effect, insures them from economic disruptions.
Based upon the billions spent by government most recently, it appears the wealthy were at the front of the cue. Maybe Hendry's observation contains some truth.
On the other hand, if socialism can build "moats," then why not build a couple (health insurance, retirement funding) for the ordinary citizen, rather than insuring those who don't need it--the wealthy?
As for fiscal stimulus, America needs it in order to reform its energy system, and to move towards a sustainable economy.
Both efforts will take government involvement. No way around it because the private sector is unlikely to coalesce around such long term goals without an enabling government.
Somewhere earlier a comment questioned how infrastructure investments can make people healthier. Clean water works well for health, and clean water is an infrastructure issue. Reducing pollution's pretty good for health too. Bringing back mass transit reduces pollution. Cleaner truck and car engines also reduce pollution (this would involve government in restructuring our truck/automobile industry).
Also in a couple earlier comments, it was argued that buying stock doesn't do much for investment in productive capital.
Mostly true. However, stock can be put up as collateral for investment spending loans, and it can be used for purchasing other companies. The key word here is "can." Doesn't mean the loans will be used productively, or that purchasing other companies will result in more production. Most stock purchases and sales do not affect company investment at all.
One final observation. As a former retail stockbroker (Merrill Lynch)I knew what would happen after Glass Steagall got knocked down in '99. Giving investment bankers access to bank deposits is like putting the proverbial fox in charge of the chickens. That the chickens got plucked thoroughly was as certain as the sun rising from the east.

As a 40 year Republican who became a Democrat late in life, I look forward to a good helping of infrastructure spending, as well as a middle class tax cut, a more progressive income tax system, and many more card carrying union members.

[bob mcmanus]

If confiscating all of the wealth of the top 10 percent, using that money to build roads and hospitals, and forgiving all the debt of the bottom 50% would "work" to get the economy growing again, would that be the right thing to do?

Now we are getting somewhere.

[Bob S]

"Lafayette says...[w]hat if the Japanese consistently make better cars that erode our market share?...In the one instance the GM did try to answer that last question, they came up with a separate operation to make cars, called the Saturn. Why could GM not make that venture work to compete well with Japanese imports?...Any responses?"

At least part of the reason must be GM's lack of continuous attention to Saturn product development. Once the new brand was up and running, GM neglected it for at least a decade. The original Saturn S-type was developed by people diverted from other divisions (many from Pontiac, it would seem), using funds diverted from other divisions. The resulting car was and still is well regarded for good reasons. But when initial development ended, most of the people who had developed the car were sent of to other work and the product was allowed to drift.

Perhaps the more general problem is that GM's engineering resources are just too few or too poorly managed to support the number of brands and models the company tries to maintain. This would be consistent with the variable quality of GM product lines, which in turn may explain why customers who aren't determined to buy from GM may be inclined, instead, to visit Toyota or Honda, where they know they can pick out a good car with their eyes closed.

[anon]

Mr. Wilder - I think you offer a good analysis, especially in that you add a perspective (e.g. on the unionization relationship to rents; on manipulation by plutocrats) that is often missing in the large majority of mainstream analysis, which is so often superficial and repetitive.

Regarding "...lots of resources are left without the income they need to provide effective demand..." I'll add that some resources *ought* to be left without. For a current example, the easy money that led to the housing bubble greatly expanded production of things that were used mainly to drive up transaction costs (and the accompanying profits) and that would not be viewed as worth the money if that money wasn't artificially so easy to come by as a result of the toxic combination of lax regulation, malfeasance and a Fed that was happy to accommodate all of that and more.

So, we end up with a lot of large houses that are expensive to keep and that have luxury features most people could do without. For the government (including the Fed) to then come in and try to pick up the slack for these luxuries by propping up housing prices strikes me as a profound misallocation of resources that would only postpone a recovery.

It seems to me that the reflexively extolled Keynesian solution of government spending often leaves out any consideration of waste.

says...

An shining example of FDR's clear economic logic was the the government program to fight deflation by buying gold. FDR would meet daily with his team and peg the price for the day. At one meeting he suggested a rise of 21 cents for that day. When questioned as to the amount - he smiled and said it was 3 times 7 - a lucky number.

[anne]

Bruce Wilder:

Here's what Tyler Cowen wrote:

"He also took steps to strengthen unions and to keep real wages high. This helped workers who had jobs, but made it much harder for the unemployed to get back to work. One result was unemployment rates that remained high throughout the New Deal period."

What troubles me is not that as a conservative, Tyler thinks industrial workers should be paid less, and capitalist owners and corporate managers should be paid more. It is that he [does not tell] us about his political preferences. Instead, he purports to tell us something, authoritatively, about economics: that because industrial wages rose by means of unionization, recovery from the Depression was delayed and unemployment materially increased....

[anne]

http://economistsview.typepad.com/economistsview/2007/01/the_new_deal_an_1.html

January 11, 2007

The New Deal and the Great Depression
By Paul Krugman

I agree that the National Industrial Recovery Act might have raised the structural rate of unemployment * - but the economy got nowhere near the structural level of unemployment during the NIRA period, so what difference could that have made? **

What really puzzles me, though, is the assertion that wage and price rigidity created by the New Deal aborted the natural recovery process. Through what channel could price flexibility have helped? The US spent most of the 30s pretty much up against the zero bound, with interest rates well below 1 percent. A fall in the price level would have had the same effect as an increase in the monetary base - that is, no effect at all - except for the slight wealth effect of rising real balances. And even this slight effect could easily have been outweighed by debt deflation.

You just have to bear in mind that this was, um, the Great Depression - normal rules about monetary policy did not apply. And the same goes for any possible role of price flexibility.

* http://economistsview.typepad.com/economistsview/2007/01/the_new_deal_an.html

** The NIRA was ruled unconstitutional in May 1935. Unemployment was 20.1% not counting New Deal programs, and 14.4% with employment in the programs counted.

http://economistsview.typepad.com/economistsview/2007/01/the_new_deal_an.html

January 10, 2007

The New Deal and the Great Depression

Rates of Unemployment

1929 ( 3.2%) Hoover era begins, March
1930 ( 8.7)
1931 (15.9)
1932 (23.6)
1933 (24.9) (20.9%) Roosevelt era begins, March
1934 (21.7) (16.2)
1935 (20.1) (14.4)
1936 (16.9) (10.0)
1937 (14.3) ( 9.2) Recession begins, May
1938 (19.0) (12.5) Recession ends, June
1939 (17.2) (11.3)
1940 (14.6) ( 9.3)
1941 ( 9.9)

Numbers in later brackets correct for employment in New Deal programs.

Thomas Geraghty
Economic History
University of North Carolina