Econolog: New Takes on the New Deal

Here's the question:

Economists have long debated how effective the New Deal was. Now as the country again considers its fiscal priorities, WSJ.com asked economists Arnold Kling ... and Brad DeLong ... to type out their different takes on FDR's deal.

And here's Brad DeLong and Arnold Kling to debate the answer. This is from the first of four rounds, and the link is open:

New Takes on the New Deal, Econoblog, WSJ: Brad DeLong writes: Imagine the press discovered and published the extent of FDR's polio injuries and details of his irregular family life. Herbert Hoover is reelected in November 1932 and vows to "stay the course" with his first-term economic policies. In that alternate universe, a group of Harvard economists advises Mr. Hoover on the banking crisis in the winter of 1933. They argue that banks are failing because their fundamentals are unsound, and that it would be improper to rescue bankers who have run their businesses into the ground or depositors who have not been prudent enough to watch where they deposit their money. They say a full-fledged panic would not be a bad thing, as it would purge the rottenness from the system. High costs of living -- and high living itself -- will be tamed. People will work harder and live cleaner. Values will be adjusted and enterprising people will pick up the wrecks from less the competent.

It wouldn't have worked. People would not just work harder and live cleaner. Instead -- using Ben Bernanke's 1983 analysis of the Depression as a guide -- we could surmise that the depression would have gotten worse. ...

Under our imagined scenario, more and more banks would fail and more and more of the deposits of Americans would vanish. The downward spiral ... would have continued through 1933, 1934, and 1935. We can guess that increasing economic uncertainty would drive faster gold outflows from the U.S. through 1933 and 1934. The Federal Reserve -- under Treasury Secretary Andrew Mellon's control -- would have responded by following gold standard orthodoxy, which interprets the outflow of gold is a sign interest rates are too low and need to be raised. Rising interest rates would have further cut money supplies. The falling money supply was a key way the depression spread, according to Milton Friedman and Anna Schwartz's "Monetary History of the United States." Under our imagined scenario, the Depression would have been worse than it was in our actual history.

Arnold Kling writes: What would have happened in the U.S. without the New Deal? My father answers with one word: Fascism.

Given the climate of the time, which included intense despair alongside revolutionary fervor, a government that was seen as doing nothing could not have survived. ... Randall Parker's Reflections on the Great Depression, is based on interviews with eminent economists who lived through it. As I have pointed out, the consensus is that the New Deal failed to restore the economy back to full health.

Unemployment and what we would now call the "output gap" were still unusually high in 1940, after which our statistical perspective becomes distorted by the fog of war. In Parker's book, economists tended to give mixed -- and sometimes surprising -- reviews to New Deal policies. Milton Friedman, ... who was famous for his opposition to Keynesian expansion of government, and many New Deal programs -- approved of "the series of monetary measures that Roosevelt took, including the bank holiday, the going off gold, the program to purchase gold, the silver purchase program." Even James Tobin, a leading Keynesian, was critical of the National Recovery Administration and other New Deal programs that promoted cartels and restrictions on supply.

Another useful perspective comes from the current Fed Chairman. Ben Bernanke's Essays on the Great Depression, which makes the point that financial intermediaries matter, and that the wave of bank failures might have been a major factor in the Depression. ... All of that is very interesting to professional economists. But what I think is relevant to ideological debates today is this: Are Social Security, farm price supports, Federal Housing programs, legalization of trade unions, securities market regulation, and other major legacies of the New Deal necessary for macroeconomic stability? What did they contribute to recovery in the 1930s? What do they contribute today? ... [continue reading rounds 2, 3, and 4]