David R. Henderson  

Cowen on Great Depression

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I work as little as possible on my birthday (November 21), which is why I didn't post yesterday. Tyler Cowen's column in yesterday's New York Times is excellent and I want to note some highlights, with my additional thoughts, and two criticisms.

Tyler points out what we know about the causes of the Great Depression and what ended it. He highlights the monetary contraction, which Milton Friedman and Anna Scwhartz did such a great job of explicating in their classic, "A Monetary History of the United States." Incidentally, remember how Mark Twain defined a classic: a book that everyone wants to have read and nobody wants to read. I recommend reading or rereading the approximately 100-page chapter in their book on the Great Depression. Tyler highlights more-recent work by Christina Romer that showed that expansionary monetary policy was one of the keys to getting out of the early years of the Depression. And, of course, as Friedman and Schwartz noted, the doubling of reserve requirements in 1937 decreased the money supply yet again, bringing the economy to a double dip.

Tyler points out that Roosevelt made things worse by cartelizing industries, giving unions the power to monopolize parts of the labor force, and subsidizing agriculture. Indeed the Supreme Court saved his bacon (pun intended) and helped him win the 1936 presidential election by finding the NRA unconstitutional. That led output in many industries to expand and prices to drop as industries "de-cartelized." For a more complete coverage of all these issues and more, done succinctly, see Gene Smiley's "Great Depression." The relevance today? Tyler doesn't mention this, but even sometimes-free-market Martin Feldstein has advocated that the government prop up housing prices. Also, the grossly misnamed Employee of Freedom of Choice Act, which will certainly make its way through Congress next year, would make it easier for firms to unionize in the face of opposition by workers and thus drive wages up and employment down in newly unionized workplaces.

Now the criticisms. First, Tyler doesn't mention the Smoot-Hawley increase in tariffs, a major contributor to the decline of trade between America and other countries. Second, Tyler writes, "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." In other words, Tyler is defending a welfare state.


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CATEGORIES: Economic History



COMMENTS (17 to date)
Bill Mill writes:

What is "the decline of trade in American." supposed to mean?

[It was a typo that is now fixed. It was supposed to read "contributor to the decline of trade between America and other countries."--Econlib Ed.]

Ruy Diaz writes:

The phrase Mr. Henderson quotes is especially jarring:

"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."

Does it mean there was no social safety net before The Bismarck Deal? (There is little new about the new deal.) Come to think about it, are people fish that they need to be caught by nets? It makes no sense.

What programs like Social Security did, among other things, was to crowd out other "social safety nets". People didn't live in the jungle before Good old F.D.R came to civilize them.

Steve Roth writes:

Oddly, both you and Tyler fail to mention the most obvious and significant fiscal and monetary fact of the war years: extraordinary government (deficit) spending.

More than a few economists have pointed to that spending as the key item that finally broke the Depression's back. (Yes, there were shortages during the war, having little or nothing to do with fiscal or monetary policy.)

We spent thirty-five years paying down that debt, "putting it in the bank" so we'd have ammo when facing another crisis.

Starting in 1980 we started taking it out of the bank again (to buy votes for Republicans by bribing gullible voters with irresponsible tax cuts), leaving us with far less shot in our locker as we face a new crisis.

I'm completely bewildered as to how that can be described as "conservative."

Steve Roth writes:

It's also worth pointing out that uber-hero Milton Friedman also advocated a welfare state. Think: negative income tax.

There is not a single prosperous, developed, modern country that is not, to some extent, a welfare state.

Perhaps such a utopia exists. But nobody's ever seen one.

Ironman writes:

Bill Mill asked:

What is "the decline of trade in American." supposed to mean?

It's likely a simple typo - read it as "the decline of trade in America" instead.

If it helps, here's a related discussion of Tyler's and David's major points, although I don't know if Tyler defends a "welfare state" so much as he argues in favor of policies consistent with a "limited welfare state."

Daniel Klein writes:

Nice post.

I'd also say that Tyler misses the whole Higgsian rules-uncertainty angle.

BTW, I think Higgs' angle is better termed "rules uncertainty" than "regime uncertainty."

Patrik Ã…kerman writes:

Considering that Tyler is writing about the policies implemented by FDR I do not find it odd that he neglects to mention a tariff imposed three years before he became president.

Lord writes:

Tariffs are overrated because they were never low here. America was just continuing its mercantilist policies assuming the developed nations would follow their free trade policies. The fact that they didn't and retaliated was more significant.

Jacob Oost writes:

The NIT in and of itself was not a welfare state, it was meant to be a total REPLACEMENT for the welfare state. It was designed to help the truly destitute, the mentally retarded, the severely disabled. Basically anybody who would wind up at the bottom of the income scale.

If anything, he regarded it as a barrier to a full-fledged welfare state.

FWIW, Hayek also said that free market competition and social services from the gubmint aren't necessarily oil and water.

And they aren't (always), though social services spending can certainly be a drag on economic growth.

Anyway, the Thanks For Buying My Election, Unions Act, oops I mean the Employee Free Choice Act shouldn't hurt things too much in right-to-work states (beyond the loss of efficiency in dealing with the firings and such). It's the states like Michigan and Ohio, already hurting, that are going to get it up the exhaust pipe.

Next time I hear somebody say Democrats will help the economy and create jobs, I'll ask "Oh, does that mean Ohio will become a right-to-work state?"

David writes:

How about, The Supreme Court saved FDR's kishkes (no pun intended)?

johnleemk writes:

Good points, Jacob, although the disagreement re welfare state seems to be a disagreement in terminology. Ultimately it's hard to dispute that most economists outside the hardcore Austrian school think some sort of government assistance for the needy is desirable. The ideal form of assistance may not look anything like modern day welfare states, but in principle some sort of government spending on social services is desirable.

Bill Stepp writes:

[Comment removed pending confirmation of email address and for rudeness. Email the webmaster@econlib.org to request restoring your comment privileges. A valid email address is required to post comments on EconLog.--Econlib Ed.]

Dezakin writes:

Is this sort of political baiting while attacking another blogger/writer really what passes for an economics post now?

The great depression is largely agreed to have been fomented by a drop in aggregate demand and ended with an artifical jump in aggregate demand. The market didn't prevent the drop, and no planning committie forsaw it. When wartime spending broke the deflationary cycle it wasn't because of the welfare state or good planning but the happy coincidence that massive spending on the instruments of destruction increased aggregate demand.

We can try to take home lessons on government policy but this begging the question that happens is just injection of ideology.

Jacob Oost writes:

Dezakin, don't overlook the contraction of the money supply courtesy of the Fed, which prevented the market from correcting itself and turned what would have been a recession into the Great Depression.

Dezakin writes:

I don't. And the very poor fiscal responce of austerity programs by the US government doggedly trying to balance the budget, courtesy of the Roosevelt administration, when they should have been borrowing to spend on anything.

My point is it was bad policy coupled with market failure that got us into the mess, and accidental policy (war) that got us out, but it wasn't socialist or capitalist policy that caused or cured the great depression.

Sheldon Richman writes:

Steve Roth writes, "There is not a single prosperous, developed, modern country that is not, to some extent, a welfare state."

What does this prove aside from the fact that politicians have found an ingenious way to augment their power by making people dependent on the state? That was Bismarck's motive. Surely you are not suggesting the welfare state causes prosperity. That's like arguing that wet streets make it rain.

twv writes:

Giving aid to the poor and helpless is certainly good for them, and is generally held to be good to society at large, humanizing all social interaction.

But forcing all to give through taxation and welfare-state activities, is another matter. It encourages over-giving, and it builds up an amazingly large bureaucratic class (the latter, if not the former, was the target of Friedman's negative income tax).

The question to ask ourselves is: had the Crash of 1929 not morphed into the Great Depression, would America have federalized its poor relief programs, and crowded out private charity to the degree it did?

It is not immediately evident to me that former libertarian economist Tyler Cowen is right, and that even in the '20s a welfare state would have been a good idea. We have had vast over-production of aid to the poor since then. This has helped cause enormous social evils, evils that economists should be able to understand, evils like a huge rise in broken families and unwed mothers giving birth and maintaining children at public expense.

The Great Depression was a social disaster for America, and it helped transform an individualist nation, wherein responsibility was as large a factor as individual freedom, to an irresponsible nation where nearly everyone tries to use the state to live at the expense of everyone else.

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