Posts Tagged ‘depression’
Yglesias takes Tyler Cowen to task for invoking the specre of Hitler and the Nazis to make an argument against Keynesian stimulus:
When a country produces more HDTVs, more people have HDTVs and living standards go up. When a country produces more tanks and military explosives, none of the tanks or military explosives go into private hands (we hope!) so living standards are unchanged. But producing HDTVs doesn’t increase your ability to conquer France, whereas tanks and explosives are useful for conquering France. Hitler’s policy objective was to prepare for conquering France. And his policies worked quite well (though Ernest May reminds us not to neglect the importance of French intelligence failures), they just served Nazi objectives. But I don’t see why Hitler couldn’t have spent the money on something else. If we use fiscal policy to raise measured GDP primarily through building tanks, we’ll have higher GDP and more tanks. But if we use fiscal policy to raise measured GDP primarily through repairing existing roads and building new mass transit and high-speed rail lines, then we’ll have higher GDP, better roads, and more mass transit and HSR systems. It seems to me that living standards would therefore be higher.
Right. I doubt living standards increased for most Americans during the war years, but nonetheless GDP was rapidly expanding. The economic growth was sufficiently robust (explosive, really) to finally jolt the country out of depression. Once the war was over, living standards could resume their ascent, as money for guns was channeled into money for butter.
We don’t have the luxury at the present time to agonize over slumping living standards. The task is to save the economy, and avoid deflation. Once things have returned to normal — a non-deflationary economy characterized by growth — we can hopefully get back to increasing living standards. Personally I expect that, for a while at least, such increases will be modest, given the need to increase savings over the long term, pay back debt (ie higher taxes) and put the economy on a long-term, sustainable path. Still, “modest” need not mean “none.” Ideally, we can increase savings and (modestly) increase consumption over the long term by limiting growth in consumption to a number slightly lower than GDP growth.
Of course, we can (and should!) also try and extract some gains in this regard for the vast majority of the population by tackling the income inequality issue.
Amity Shlaes — writing with a chip on her shoulder apparently acquired because of criticisms made by a certain Nobel-winning economist who knows more about the dismal science than she’ll ever forget — makes a fool of herself with a piece she subtitles “Massive Government Spending is No Solution to Unemployment.”
Paul Krugman of the New York Times has been on the attack lately in regard to the New Deal. His new book “The Return of Depression Economics,” emphasizes the importance of New Deal-style spending. He has said the trouble with the New Deal was that it didn’t spend enough.
He’s also arguing that some writers and economists have been misrepresenting the 1930s to make the effect of FDR’s overall policy look worse than it was. I’m interested in part because Mr. Krugman has mentioned me by name. He recently said that I am the one “whose misleading statistics have been widely disseminated on the right.”
Mr. Krugman is a new Nobel Laureate, teaches at Princeton University and writes a column for a nationally prominent newspaper. So what he says is believed to be objective by many people, even when it isn’t. But the larger reason we should care about the 1930s employment record is that the cure Roosevelt offered, the New Deal, is on everyone else’s mind as well. In a recent “60 Minutes” interview, President-elect Barack Obama said, “keep in mind that 1932, 1933, the unemployment rate was 25%, inching up to 30%.”
The New Deal is Mr. Obama’s context for the giant infrastructure plan his new team is developing. If he proposes FDR-style recovery programs, then it is useful to establish whether those original programs actually brought recovery. The answer is, they didn’t. New Deal spending provided jobs but did not get the country back to where it was before.
The very subtitle of Ms. Shlaes’s piece gives away the inanity (or disingenuousness) of her piece, because “massive government spending” is exactly what finally enabled America to return to prosperity after the ravages of the 1930s. In fact, Franklin Roosevelt responded to the critics parroting the conventional wisdom of his day (sound familiar Ms. Shlaes?) by becoming a deficit hawk after his first term. Thus during FDR’s second term the federal deficit declined precipitously via tax hikes and budget curbs — in fiscal 1938 the government was very nearly in (PDF warning) surplus — and lo and behold the economic growth of his first term promptly evaporated and the depression entered a temporary period of intensification. It was not until after Pearl Harbor — when deficit spending by Washington skyrocketed (it reached over 30% of GDP in 1943) that the country finally made a permanent break with depression.
Now, I don’t think Mr. Obama or anybody else is suggesting borrowing on quite so massive a scale. I suspect deficit spending will likely peak somewhere north of 10% of GDP over the next year or two. But if we’re to heed the lessons of FDR’s day our course is clear: a massive stimulus plan along the lines of what Krugman and others are proposing is our best insurance against depression. An absurd emphasis on fiscal rectitude during times like these is surely a recipe for disaster. Fortunately, it appears the new team taking charge in Washington has read its history books.