Bryan Caplan  

Normal Criticism of the New Deal

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Brad DeLong's of course right that I'm not normal. At the same time, he's backed off enough that I wonder if he'd put himself in the same boat as two normal guys with negative things to say about the New Deal (and policies in France that they see as similar): Bernanke and Eichengreen. From my paper "The Idea Trap" (European Journal of Political Economy 19(2), June 2003, pp.183-203):

Bernanke observes that throughout the world, the depression "increased pressure on governments to intervene in the economy in ways that inhibit adjustment." (1995, p.24) An array of counter-productive policies won new popularity: labor market regulations to keep nominal wages from falling, pro-union legislation to push real wages up, and industrial and agricultural policy to raise the price level by restricting production. Sensing political opportunities, politicians rapidly responded to the public's new ideas about effective economic policy. This began on a moderate scale during the Hoover administration, then rapidly expanded under Roosevelt. "The National Recovery Act, the cornerstone of Roosevelt's First New Deal, also contributed, perversely, to the slow recovery of American output and employment," explains Eichengreen. "By January 1934, 80 percent of American industry was covered. All of these codes established minimum wages of 40 cents an hour, and many revised upward the entire structure of industry wages." (1992, p.344) Thus, it appears that sharply negative growth reduced the quality of ideas, policies worsened because politicians competitively responded to voter demand, and bad policies in turn retarded the recovery.

Similar developments may be found in France. As Eichengreen notes, many expected voter-driven policy change would be for the worse. "According to the opposition, investors feared that removal of the gold standard constraints, rather than permitting the adoption of sensible reflationary measures, opened the door for the Popular Front Government to pursue all manner of irresponsible fiscal and financial policies." (1992, p.383) Even though France finally adopted reflationary policies to reverse the earlier monetary contraction, other new measures roughly offset their benefits. Bernanke provides an incomplete enumeration:

Examples of interventionist measures by the French government included tough agricultural import restrictions and minimum grain prices, intended to support the nominal incomes of farmers (a political powerful group of debtors); government-supported cartelization of industry, as well as import protection, with the goal of increasing prices and profits; and measures to reduce labor supply, including repatriation of foreign workers and the shortening of workweeks. These measures (comparable to New Deal-era actions in the United States) tended to block the downward adjustment of wages and prices. (1995, pp.24-25)

My first goal in any argument is to accurately draw the border between agreement and disagreement. Will Brad at least agree with the position I ascribe to Bernanke and Eichengreen?


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COMMENTS (5 to date)
caveat bettor writes:

I think that Mr. DeLong would prefer peeling his own skin off than to publicly agree with Bernanke and Eichengreen. He's pretty much like his mentor, Mr. Krugman, I suspect.

Nathan Smith writes:

Good luck getting Brad DeLong to respond to this post, and to the issue of Roosevelt scaring investors. There's a powerful (though in some respects subversive) case for rights based in game theory: even if "belief in [rights] is one with belief in witches and unicorns" (as philosopher Alasdair MacIntyre has argued), then the misguided belief in rights is useful to render behavior predictable and thus prevent certain kinds of games.

You can show this with a crude game with two players: Big Business and Roosevelt. Each player has two options. Big Business can play H(oard) or I(nvest). Roosevelt can play R(espect Property Rights) or E(xpropriate). The returns matrix is as follows:

Roosevelt Big Business
I(nvest) H(oard)
R(espect) (Jobs,K+r) (Unemployment,K)
E(xpropriate) (Jobs+handouts,0) (U+handouts,e)

Where:

K=Big Business's capital endowment
r=the normal returns to investment
e=evasion, i.e., whatever Big Business can save from confiscation by keeping it liquid, if Roosevelt tries to expropriate them

And Roosevelt's objective function is to prefer Jobs to Unemployment, "handouts" to no handouts, and Jobs w/out handouts to Unemployment w/handouts.

The above game is not quite a prisoner's dilemma because Big Business will want to play I, thus procuring the optimal solution, if (and only if) Roosevelt plays R. But Roosevelt is better off playing E regardless of what Big Business does. So Big Business is likely to expect him to play E, and respond by playing H, leading to a bad equilibrium.

What is needed is some commitment device so that Roosevelt can precommit to playing R rather than E. It makes no difference what it is. It could be religious: one is reminded of Voltaire's remark that one mustn't speak of atheism in front of the servants, lest they steal the spoons. A superstitious belief in "Jeffersonian" property rights could serve as a useful commitment device regardless of its metaphysical merits.

If this is part of the explanation for the tenacity of the Great Depression, then Bryan is on the right track in emphasizing the history of ideas as a causal factor (though I think "progressive" and collectivist thinking had cultural sources rather than being a response to an economic downturn). Pre-Roosevelt, a principled belief in property rights and limited government prevailed, which, whether right or wrong, helped achieve a beneficent equilibrium by serving as a commitment device, which Roosevelt lost by being willing to try new approaches... Of course this is extremely and crudely stylized and is not meant to be a serious portrayal of the economy in the 1930s. But I hope it will help force the table-pounders of "normalcy" to acknowledge that "confidence" needs to be taken seriously.

spencer writes:

I do not believe that Bernanke would agree with you that the Bank Holiday and/or Roosevelt raising the price of gold were examples of governemnt interventionest policies that inhibited adjustment. My reading of Bernanake is that he thinks these were very good policies without which the recovery may never have happened.

spencer writes:

Bernanke observes that throughout the world, the depression "increased pressure on governments to intervene in the economy in ways that inhibit adjustment."

A great example of a very careful use of selective quotes to put words in someones mouth. Bernanke said the first sentence, but the rest of the quote is from Eichengreen. So you have very carefully crafted a paragraph to make it appear as if Bernanke said things that Eichengreen actually said.

You are putting words in Bernanke's mouth.

Bill Stepp writes:

To Nathan Smith:

Why is a belief in rights evidence of superstition? Or to put it another way, if you have a property dispute with your neighbor, or are taken into custody by the police (perhaps on a trumped up charge), would you not hire an attorney to defend your rights?
Rights are real, existing things. Examples include the right to own and alienate property, and to do whatever else that comes with the bundle of rights that are part of the property.
(Property is a bundle of rights that attach to tangible objects, not merely the objects themselves.)
Also, pre-Roosevelt, there were plenty of assaults on property rights, especially during the terms of TR, Wilson, and Hoover. And let's not even discuss Lincoln's full frontal assaults on property rights.

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