Arnold Kling  

The New Deal and the Great Depression

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James Hamilton writes,

The notion that if we can just create more monopoly power for every single sector of the economy, encouraging every sector to produce less so they can raise their wages and prices, that we will then somehow make everybody richer, is so spectacularly wrong-headed that I would be just as dumbfounded to find that Brad De Long believes it as he seems to be by those of us who maintain that some aspects of New Deal policy surely did make the recovery from the Great Depression slower.

In case you have not been following it, Daniel Gross and Brad DeLong have been hurling insults at people who fail to genuflect to the proposition that the New Deal helped to cure the Great Depression.

A reasonable view is that some New Deal policies helped, and some hurt. In fact, the book Reflections on the Great Depression, which interviews many famous economists, finds James Tobin criticizing some New Deal policies (the cartelization policies that Hamilton decries) and Milton Friedman praising some of them (going off the gold standard, which Hamilton praises).

Knowing what I know now, if I could go back to 1933 and tell President Roosevelt what to do, I would say "yes" to deposit insurance, "yes" to going off the gold standard, and "no" to pretty much every other New Deal policy, including Social Security. I would also encourage two things that were not tried--a monetary expansion and a fiscal expansion (which in those days, with taxes relatively low, would have meant more government spending). Although I do not believe in Keynesian "fine tuning," I think that in the 1930's I would have tried Keynesian policies as a way of getting to the right channel.

Whether Roosevelt's actual policies were, on balance, helpful or harmful, is something that I think reasonable people can debate. Hurling insults at one side or the other is not appropriate.

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CATEGORIES: Economic History

COMMENTS (14 to date)
Buzzcut writes:

>>Hurling insults at one side or the other is not appropriate.

So you recommend a spanking for DeLong?

Is it me, or is that guy a little too... aggressive. I contrast his blog with Arnold's, he's just so... quick to throw insults? Unprofessional? Hackish?

I just don't get him. Maybe it was working in the Clinton administration. He picked up the bad habit of needing to personally destroy any "enemies", which includes anyone whom he doesn't agree with, even over the most minor of details.

The biggest beef I had with the Clinton administration is that they never made arguments in good faith. Everything boiled down to "Type M" arguments, as Arnold would say. It's just not a good way to run a government. Or write an economics blog.

pgl writes:

As a general rule, when James Tobin and Milton Friedman were in agreement on something - I tended to step back and listen.

martin writes:

I had DeLong as a prof in college and he was a strange dude: Pretty arrogant and self-absorbed. Contrast that to Akerlof who was one of the most humble and insightful human beings I've met.

I can't complain too much, though. The class was a joke and I got an A- and showed up to maybe 1 of every 4 lectures. I guess I'm just saying he was short and impatient with his students, so it doesn't surprise me that his blog persona is the same.

K writes:

The big problem with assessing Roosevelt's economic policies is that they were political.

Today it is hard to imagine how powerful fascist and socialist movements seemed then. And both 'isms' touted state intervention in the economy as solutions to unemployment and a guarantee of avoiding total poverty. These ideas appealed to the unemployed and those facing utter poverty. Guess why?

Roosevelt sapped much of the economic appeal from fascism and socialism by much more limited policies. Some were poor economic ideas but that was not his interest. He wanted to promote the belief that the US government was actively trying to improve the condition of individuals.

Moos writes:

What are your thoughts on Rural Electrification (1936)?

Buzzcut writes:

If the depression was a monetary phenomenon (Friedman), then why on earth would fiscal policy have any bearing? Isn't propery monetary policy the only thing that needed to change?

Buzzcut writes:

>>I had DeLong as a prof in college and he was a strange dude: Pretty arrogant and self-absorbed.

Interesting. Well, he is a liberal baby boomer. He's playing to type.

Brad DeLong writes:

Note the difference between:

--Ben Stein's belief that the Great Depression was the result of "price fixing and restraint of trade encouraged by the New Deal"

--the weaker claim that the New Deal "prolonged the Great Depression"

--Jim Hamilton's "some aspects of New Deal policy surely did make the recovery from the Great Depression slower"

I agree with Hamilton. But "some aspects" are not the whole package.

There's a moving target here...


Fundamentalist writes:

"..."yes" to going off the gold standard..."

I don't understand why that was a good idea. One of the causes of the Depression was the gold-exchange standard, in which countries used foreign currencies, such as dollars, as reserves in addition to gold. This caused money supplies to explode in the '20's, then collapse in the '30's. Another problem was fixing the price of gold at $35 while the money supply exploded. The honest thing to do would have been to increase the price of gold in dollars to reflect the expanded supply of dollars. By keeping the price of gold artificially low, Roosevelt killed the gold mining industry in the US. A higher price, one reflecting the larger dollar supply, would have spurred mining and increased the supply of gold.

Ray G writes:

I have refrained from such, but typically when I find myself wanting to insult someone, it's when I'm reading something from Delong.

Solved that by not going there much, though it's still fun at times.

bill writes:

I would disagree with your assessment to a large extent. I think we are looking back knowing what we think we know now. But monetary and fiscal policy was not understood or trusted back then.

You say you like deposit insurance but not social security. What was the original deposit insurance amount, probably far less than the equivalent of 100,000 today. How do you propose somebody fund their retirement without social security back then? Deposit insurance is too low, the stock market is completely tanked, and we just went off the gold standard, so you don't know that your money is worth the paper and ink it is printed on. (Think european style hyper inflation). There are no consumer mutual funds and you so not trust the valuation of any stock. How on earth is anyone going to save for, let alone live off their personal retirement savings and feel halfway secure about it back then?

I would suggest that without these new deal policies, some of which were obviously huge steaming turds, yes, but without them as a whole, there very likely would have been a bloody red revolution. Remember the bonus army? How long do you think people would slowly starve, (slowly because it takes a long time to starve when you can get some food most of the time) while others are burning food and hijacking milk trucks in order to attempt to make the price go up? 25 percent unemployment is bad, really, really bad. How many investors would have confidence to invest in something that could be taken over by the masses the next day or a year from now.

Better to send the unemployed young men off to build parks somewhere with three squares a day. And as it turns out, also to fight a war. (Luckily that was a war we had to fight.) You do that, people are kept occupied, they are proud to send a small amount home to their families, you keep the minority populations from being even more persecuted and scape goated, and you create some aid and entitlement agencies to top it off so that you can ride it out till things pick up. KEYNES RULES!

Jim Glass writes:

Brad DeLong wrote:

Note the difference between:

--Ben Stein's belief that the Great Depression was the result of "price fixing and restraint of trade encouraged by the New Deal"

--the weaker claim that the New Deal "prolonged the Great Depression"

Any number of economic historians (see Peter Temin, MIT) and informed observers note that the very thing that made the "Great Depression" the Great Depression was not the initial economic fall, which was comparable to prior ones, but the fact that the recovery dragged on for a decade.

I.e., the reason it's not remembered by us as the Recession of '30, like the Recession of '21, is that it was so prolonged -- if it hadn't been so prolonged it wouldn't have been a Great Depression.

Why did the recovery take so long -- specifically longer in the US than anywhere else?

Any number of economic historians (see Peter Temin, MIT) say it was because of the New Deal policies that lifted prices and wages above market clearing levels (encouraging cartels, monopolies, price floors, output restrictions, etc.,) that were never applied following any previous recession as a "remedy" for it.

To the extent this is true Ben Stein is exactly right, New Deal policies in fact did cause the Depression as we know it, and Krugman and DeLong are simply wrong in denying it.

And to the extent that Prof. DeLong admits in his comment above that New Deal policies "prolonged" the Depression he admits they caused it -- as its prolonged nature was its unique attribute that earned it its name.

And, since this discussion (here and elsewhere) got going over DeLong's claim that 'normal people' don't argue the New deal prolonged it, and he's completely reversed course on that, I'd say he's conceded, in his inimitable way, defeat.

Bill writes:

Interesting points. I guess my thinking was that there were huge recessions other places, mostly europe, and everywhere else remained pretty poor (Except Japan). But wasn't one huge factor in Europe lifting out of its recessions the fact that government spending sky-rocketed in the form of military build-up?

So, to the extent that government spending is or was believed at the time to remedy a recession, than what is the difference (government spending-wise) between entitlement programs, make work programs, and regulations, as oppossed to huge government arms contracts according to government specifications. Also, unions and labor reforms took hold in Europe before they did in America.

The Autobahn, Panzer divisions, and Luftwaffe were not built in a year, and neither was the Magnot line, or the British Spitfires. In other words, I suggest many of these government projects fueled the european recovery. Meanwhile, Japan was still an Empire, accumulating huge amounts of mineral and raw material wealth for herself.

I guess my point here would be to suggest that all the other major players at that time, the countries who would emerge from that era to be really powerful, including economically powerful, in that they could field massive and technologically advanced armies to fight each other with, none of them, in my estimation, really came close to rebounding through their receissions by employeing fiscal and monetary policy and keeping their hands off markets.

That's not to say it doesn't work now, but at that time in History, I don't know if it would have worked. Maybe people weren't ready for it, almost in the same way we're not ready for passivism today. People wouldn't believe in it, wouldn't understand it, and wouldn't have given it a chance. Or, on the other hand, maybe it would have worked and the war would have been avoided because the last decade wasn't spent on preparing for war.

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