Monday, November 10, 2008

Fiscal Policy and the 1938 Recession

Paul Krugman has a few economic history lessons for the President-elect and the rest of us:

Everybody’s talking new New Deal these days - and, predictably, the FDR-haters are out in force, with all the usual claims about FDR having actually made the Great Depression worse.

These rightwing FDR-haters also seem to think that the General Theory written by Lord Keynes is one of the most evil books of all time. Paul notes, however, that real GDP rose impressively relative to potential GDP from 1933 to 1941. But wasn’t there a recession in 1938? Paul continues:

you might say that the incomplete recovery shows that “pump-priming”, Keynesian fiscal policy doesn’t work. Except that the New Deal didn’t pursue Keynesian policies. Properly measured, that is, by using the cyclically adjusted deficit, fiscal policy was only modestly expansionary, at least compared with the depth of the slump.

Today Paul adds this:

there’s a whole intellectual industry, mainly operating out of right-wing think tanks, devoted to propagating the idea that F.D.R. actually made the Depression worse. So it’s important to know that most of what you hear along those lines is based on deliberate misrepresentation of the facts. The New Deal brought real relief to most Americans. That said, F.D.R. did not, in fact, manage to engineer a full economic recovery during his first two terms. This failure is often cited as evidence against Keynesian economics, which says that increased public spending can get a stalled economy moving. But the definitive study of fiscal policy in the ’30s, by the M.I.T. economist E. Cary Brown, reached a very different conclusion: fiscal stimulus was unsuccessful “not because it does not work, but because it was not tried.” ... F.D.R. wasn’t just reluctant to pursue an all-out fiscal expansion - he was eager to return to conservative budget principles. That eagerness almost destroyed his legacy. After winning a smashing election victory in 1936, the Roosevelt administration cut spending and raised taxes, precipitating an economic relapse that drove the unemployment rate back into double digits and led to a major defeat in the 1938 midterm elections. What saved the economy, and the New Deal, was the enormous public works project known as World War II, which finally provided a fiscal stimulus adequate to the economy’s needs.

In other words, that 1938 recession cited by rightwingers as evidence that fiscal stimulus is bad, bad is actually evidence that we should not turn to fiscal discipline just now. Let’s just hope the 2009 fiscal stimulus package does not come at the point of a gun – just as another idiotic invasion of a Middle East nation.


Anonymous said...

"there’s a whole intellectual industry, mainly operating out of right-wing think tanks, devoted to propagating the idea that F.D.R. actually made the Depression worse." PK

This fragment is a good example of the progressive thinker lending support to his/her contradictors.
"Intellectual industry?" There's a misnomer if ever there was one.
To propagate a misleading or inaccurate idea is to propagandize. There may be some intellectual effort involved in the cration of a propaganda campaign, but the product of the activity is not intellectual. It is still a lie or an attempt to mislead. Krugman and others would do well to call such think tanks as what they are, and not what the pretend to be. Even use of the term "think tank" is significantly misleading, as no thought goes into the production of demonstrably factual ideas within many of these organizations. I prefer the term stink tank in those cases.

TheTrucker said...

I am of the opinion that there is no good definition of "The Great Depression" other than the very high unemployment rate and the specter of people in bread lines because they could not earn a living. The GDP illustrates its total uselessness over and over again as any indicator of economic health.

What seems to be missing in most of the discussion of "The Great Depression" is the reality of "The Dust Bowl". The neoconomists cite the fact that farm prices continued to erode in spite of the fact that a huge amount of farmland was removed from the economy. And they say it as though this observation had some magic ability to remove the reality and restore the validity of their autistic equations.

Reality does not answer to calculus.

The people that were at the crux of the unemployment problem were the subsistence farmers and the subsistence communities of shop keepers and even bankers that depended on those local farms. If a man has productive land then a man has what he needs to get along OK, You have a cow and some pigs and chickens and you have the vegetables that you raise yourself and you don't really care so much about the price of wheat or cotton. But when the Dust Bowl destroys all of this you must go to the city to get a job. "The Great Depression" was arrested both by the return of rain and by the war. The war created the demand for lots of "stuff" that called for labor and more labor. But had the "Dust Bowl" not happened the depression also would not have happened. There may have been a depression. But it would not have been "The Great Depression". And when I think about the neoconomists 'bad mouthing' "The New Deal" I just want to scream.

The same thing happens in Mexico when NAFTA promotes the consolidation of all the subsistence farms. All those people have to come across the border to find a job. In other countries there is no border to cross; there is no escape. Capitalistic consolidation improves productivity. But governments seem unable to properly distribute the resulting goods/leisure.

Anonymous said...

Isn't the Marriner Eccles comment about the poker game appropriate to the current situation? The game is over when the little guys are wiped out. I read that the national debt increased 16 times between 1932 and 1945. (I read that at, a ph.d. thesis) Money went from the wealthy to the non-wealthy, the economy sprung back into shape. I may be wrong because the solution seems so simple. Am I?