Monday, November 17, 2008

Net Investment Under FDR: Krugman v. Will and a Chart

Brad DeLong, Ian Welsh, and Steve Benen treat us to an exchange between George Will and Paul Krugman that Steve captures this way:

On ABC's "This Week" earlier, George Will explained his belief that FDR financial/regulatory policies discouraged investment and created an environment in which the "depression became the Great Depression." Fortunately, Will was sitting next to Paul Krugman. To hear Will tell it, the Roosevelt administration stood in the way of investors. In a fairly devastating 45 seconds, Krugman not only set the record straight, but explained that it was FDR's desire to balance the budget and cut federal spending that contributed to a decline in 1937.

Will not only tried to claim that FDR somehow spooked investment demand but he also suggested that net investment was negative during the 1930’s. Krugman’s counter was that investment demand tends to be pro-cyclical so it fell during the 1929 to 1932 period but rose from 1932 to 1937 as real GDP rose. Fortunately we can turn to this source for the NIPA tables. Table 1.1.6, line 6 provides us with gross investment, while table 1.7.6, line 5 provides us with private depreciation. The difference is net investment, which we have graphed from 1929 to 1941. The pro-cyclical nature of net investment that Krugman noted is rather clearly shown. We also see that net investment was positive in 1936, 1937, and 1939.

If some pundit like Will is going to mention an economic time series such as net investment, shouldn’t he be required to get the facts straight? Maybe such pundits should also be required to bring along correctly drawn charts of the series that they mention.

[Footnote: all series in real terms ala 2000$ (billions), INV-g = gross investment, INV-n = net investment, Depr. = private depreciation]


Shag from Brookline said...

Where there's a Will, there's an "Oy Vey!"

Anonymous said...

I am not a great fact checker, but I believe that Will has been getting away with presenting his ideological propaganda as truth for years, through his erudite manner. With Krugman at the table he over-estimated himself.

Anonymous said...

And this chart is inconsistent with Will's position how? Because in the absence of FDR's awesome policies, it would have taken more than 5 years from the trough for net investment to turn slightly positive? Is that your position?

J Thomas said...

Anonymous, it's of course always something of a controversy what things would be like if they were different but the graph is striking.

Investment was still going down when FDR made his changes. Investment went up until FDR changed back, then it started down again. FDR changed back to what had appeared to work before and investment went up once more.

You can argue that it was coincidence. If you come up with an alternative explanation we can look at them and try to get more evidence. But so far all you've done is try to spread FUD.

Anonymous said...

I hardly think asking a legitimate question without taking a position is spreading fear, uncertainty, and doubt. Beyond the obvious fact that correlation is not causation, I think it is disingenuous to say that investment increased when what you mean is that it decreased at a slower rate.

Nevertheless, I am indeed skeptical of Krugman's adoration for FDR in light of other research. This is a very smoothed graph, there is no actual correlation to events or policy dates, and there is no theory behind it. If I was trying to form an opinion of FDR on the basis of this graph, the most I would feel comfortable even suggesting is that FDR may have been less scary than Hoover, who was pretty f-ing scary. What is the basis for comparison with more free-market positions?

Anonymous said...

What in God's name are you talking about, anonymous? Will made a factual statement that was wrong. This has nothing to do with theory. I don't know what sort of ideology you have buzzing around your head, but it's just not relevant.

RussRoberts said...

I think Will was right on what matters. Net investment between 1930 and 1939
ywas negative. By a pretty substantial amount.

Anonymous said...

but he also suggested that net investment was negative during the 1930’s.

And your graph shows Will's right (at least about the statement above). Unless I'm missing something. If you add all the data points for the net investment curve from the 30s you get a negative number.

Anonymous said...

Other Anonymous,

There were two issues raised by Will/the post. First, Will's statement that net investment was negative in the '30s. Clearly true, unless you unreasonably interpret it to mean negative in every single year of the '30s.

Second, the idea that FDR "spooked" investment demand. J Thomas argues against this, interpreting the graph and saying that "Investment went up until FDR changed back." My response is that basically data during FDR's terms by itself cannot tell you whether FDR spooked the market or not because there would have to be some way to compare it against someone other than FDR. Furthermore, the graph certainly does not show the economy doing well under FDR. Although J Thomas describes it as "investment going up", investment continues to be negative, so the capital stock is still going down, just at a slower rate.

Anonymous said...

This is technical, but probably important. The real NIPA estimates that you link to above are formed using chain-aggregation. For this reason, calculating net private investment by deducting private capital consumption from gross private private investment will probably give misleading results. (See the technical details under "Caution on the use of chained-dollar NIPA estimates," which can be found in the same pages that you link to above.)

Anonymous said...

Yep, I've got to agree with the others that negative investment is negative investment, even if it's less negative than before.

Good work proving George Will correct!

ProGrowthLiberal said...

I see that the George Will apologists are having a lot of fun. But his thesis is basically debunked even if the apologists can have their silly fun.

RussRoberts said...


Happy to understand how the thesis is debunked when the capital stock in 1940 was lower than it was in 1930 by over $225 billion as I posted at Cafe Hayek and linked above.

From 1933 through 1939, net investment fell by over $100 billion ($2000 dollars.) Happy to hear different numbers if you have them. These numbers, taken from the post I linked to above at Cafe Hayek, are from your source. Maybe I have made a mistake which I also would be happy to acknowledge.

Anonymous said...


If you at first felt that the graph you posted was evidence for the success of FDR's policies, shouldn't the reduction in evidence after closer analysis reduce your belief?

A lot of people have criticized George W Bush for refusing to let new developments (or facts of any type) change his views - you don't want to be like that, do you?

muirgeo said...

From my post at Cafe Hayek blog;

"But Will is right on what matters. The sum of all investment in the 1930s is NEGATIVE."
"Will is right--the investment climate in the 1930s was lousy."

Russell Roberts

"Shockingly, the capital stock was lower in 1940 than it was in 1930. I think this illustrates better than any other statistic the failure of investment to recover during the Great Depression and New Deal."

And this fact makes it very, very difficult to argue with a straight face that New Deal policies saved Americans from the Great Depression."

Posted by: Don Boudreaux

Listen to the video again. At 2:03 Krugman agrees that Will is right. Net investment was negative. Then between 2:03 and 2:10 he explains why.

At 2:17 to 2:25 he explains why the economy was bad. And that would be a lack of consumer demand.

The salient point here is the sudden desire by free market apologist to suddenly use investment demand over GDP and jobs numbers as the relevant economic indicator.

J Thomas said...

Because in the absence of FDR's awesome policies, it would have taken more than 5 years from the trough for net investment to turn slightly positive?

What would things would be like if things were different? Only The Shadow knows. If you like we can discuss what things would be like if we'd had a truly libertarian government from 1860 on. But we utterly lack evidence.

My response is that basically data during FDR's terms by itself cannot tell you whether FDR spooked the market or not because there would have to be some way to compare it against someone other than FDR.

Well, look at the graph. Under Hoover, investment kept going down until by 1932 gross investment was not far from zero. Less than 10% what it had been in 1929. FDR took office and investment went up every year except 1937 when FDR tried something akin to Hoover's approach, and that year it went down at about Hoover's rate. I'd take that as clear evidence that FDR did not spook the market compared to Hoover. If anybody spooked the market it was Hoover. You could argue that it was coincidence, but arguing that it didn't happen is silly.

Happy to understand how the thesis is debunked when the capital stock in 1940 was lower than it was in 1930 by over $225 billion as I posted at Cafe Hayek and linked above.

Russ, I'm having a lot of trouble understanding what your point is here. I just don't get it.

Try out this fantasy and see how it compares for you:

Imagine that in some alternate world, in late 1987 we had a small nuclear war and New York, Chicago, LA, Dallas, and Silicon Valley all got nuked. In 1988 President Schwarzenegger started an intensive recovery program. And in 2062 some blogger-equivalents decide that the program was a failure because in 8 years we did not recover to the point we were at in 1987.

I'm just baffled. After a giant national disaster, how can the criterion possibly be to get back to the point we were before? It doesn't make sense.

As a side issue, I haven't looked in detail at how the numbers were derived, but I've got to be suspicious about the flat line for depreciation. If net investment was so negative for so long, how can it be that depreciation stayed constant? After awhile wouldn't there be less stuff left to depreciate?

RussRoberts said...

J Thomas,

My point is smaller than the one you think I'm making. I'm not saying that the New Deal was a failure or that the economy should have recovered to where it was in 1939 as a test of the New Deal.

I'm simply trying to check the facts on net investment and the claim about Will. Will was right. Net private investment was negative in the 1930s.

Of course it was negative before 1933 and the New Deal. The economy was horrible and you can blame Hoover, monetary policy, Smoot-Hawley and whatever else you want. But I find it interesting and suggestive that after 1933 and the New Deal, investment not only didn't get back to its pre-Depression levels, it was negative. That means during the New Deal, when Roosevelt was cheerleading and encouraging people to think that happy days were here again, he actually wasn't able to create an enviroment conducive to risk-taking and investment. That's all. This assumes the data we have are accurate.

The economy was growing over much of that period. And yes it took a while to get back to pre-Depression levels. But that could be because the hole was so deep. Or that Roosevelt made it worse. Hard to know, maybe impossible to know ex post.

Anonymous said...

This is as silly as arguing that rockets should point downwards to get into outer space. When the rocket points downwards, it accelerates downwards. Whenever FDR pointed the rocket upwards, it headed upwards. When he switched, the rocket changed course.

Arguing that continuing the downward course of investment would have been preferable may be popular today. Perhaps it's because too many buggy video games let you wrap around at the bottom. Economies don't wrap around at the bottom. They have to move up to go up.

Anonymous said...

While I think that the relevant concept here is gross investment, if we insist on looking at net investment let's at least get the facts straight. As mentioned in an earlier post, the chart of net investment above is calculated incorrectly because it adds and subtracts two chain-aggregated data series. So to examine whether capital went up or down in the 1930s, it's better to look at the following estimates of the net stock of private fixed assets from the BEA:

These data show that the real (net) stock of fixed capital actually moved up slightly during that decade (not down as the graph above would suggest) and that capital moved up steadily over the latter half of that decade.

Anonymous said...

I find it interesting and suggestive that after 1933 and the New Deal, investment not only didn't get back to its pre-Depression levels, it was negative.

I don't follow you on this.

Here's a possible interpretation. Suppose that in 1929 there were a whole lot of sunk costs, "investments" that were not profitable and would never be profitable. And suppose that somebody for some unknown reason wants to think of those as something to depreciate over 10 years.

And there was more of that than there was actual profitable investment in, say, 1935. Then that suggests ... that suggests .... At this point I draw a blank. It suggests that there was a whole lot of useless "investment" present in 1929? Kind of like the many billions "invested" in internet businesses before the crash? Should we count everything spent on failures as investment that should be depreciated over the eight Bush years?

What about housing? I don't think we have a standard for how fast housing should depreciate, except for mobile homes. Surely there's some way to spread the recent housing losses over the entire Obama years to make it look like net investment is small.

Is that the sort of thing you suggest?

J Thomas said...

No answer?

Jazzbumpa said...

The only way to actually get negative investment is to turn the hard asset into cash. The graphed calculation does not do that.

Has it occurred to anyone that net investment, using depreciation as the subtrahend, is a concept that doesn't actually mean anything real?

Investment is cash paid out in exchange for an asset - a real transaction. Depreciation is an accounting abstraction that allows for the amortization of investments made some time in the past over the presumed useful lives of the purchased assets.

The whole concept is ridiculous. Does the fact that they are both dollar denominated justify this kind of confusion? You might as well subtract a duck from an egg.

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