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Saturday, November 22, 2008

"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.

    Posted by on Saturday, November 22, 2008 at 02:07 AM in Economics, Fiscal Policy | Permalink  TrackBack (1)  Comments (72)


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    » Financial vs Real investment from Ashish's Niti

    James Kroeger makes this ridiculous claim in the post "The New Deal Didn’t Always Work, Either":Here you are guilty of conflating the two definitions of 'investment.' Rich people, generally, do not spend money on economic investments, but only on finan... [Read More]

    Tracked on Saturday, November 22, 2008 at 09:17 AM


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