FDR/New Deal actually prolonged the Great Depression

[bascule]

This is a conservative meme which has been going around for quite some time, but seems to actually gained some traction as of late:

 

http://www.salon.com/opinion/feature/2009/01/02/sirota_fdr_depression/

 

Monica Crowley said we should instead limit such spending because President Franklin Roosevelt's "massive government intervention actually prolonged the Great Depression." Fox News anchor Gregg Jarrett eagerly concurred, saying "historians pretty much agree on that."

 

This is one of those "I ignore your reality and substitute my own"-type arguments. How exactly is it these people can spout blatant lies and then follow them up with "historians pretty much agree on that"? I'm reminded of the Fox Noise response to Peter Schiff.

 

The effect on the New Deal on the Great Depression is certainly debatable. What do you think. Did the New Deal actually prolong the Great Depression? After all, most historians agree!

[CharonY]

Well, apparently economists disagree. One aspect often uttered was that the New Deal enhanced unemployment by raging wages.

But according to Krugman:

 

And what Keynes had to say then is as valid as ever: under depression-type conditions, with short-term interest rates near zero, there’s no reason to think that lower wages for all workers — as opposed to lower wages for a particular group of workers — would lead to higher employment.

 

Suppose that wages across the US economy had been, say, 20 percent lower than they actually were. You might be tempted to say that this would make hiring workers more attractive. But to a first approximation, prices would also have been 20 percent lower — so the real wage would not have been reduced. So how would lower wages lead to higher demand for labor?

 

Well, the real money supply would have been larger — but the normal channel through which this might increase demand, lower interest rates, was blocked by the zero lower bound. Yes, there would have been a slight Pigou effect: real private sector wealth would have been higher, because cash under the mattress (or wherever) was worth more. But on the other hand, real debt burdens would also have been higher, probably exerting a contractionary effect. Overall, there’s no good reason to think that lower wages would have helped raise employment.

 

And to my simple and rudimentary understanding this makes a lot of sense.

[npts2020]

Even if every historian in the world agrees, how does that apply to the field of economics?

[Tartaglia]

My feeling is that the debt accumulation that had built up prior to 1929 had been liquidated by the time FDR came to power and so Keynesian pump priming probably did no short term harm. However the New Deal vastly increased the power of the state and from a libertarian point of view that was not a good thing in the long run.

The way things differ now is that Keynesian pump priming is being used before the debt has been liquidated and therefore the necessary debt liquidation will be longer, more painful and possibly ultimately hyperinflationary. This is a state of affairs which is potentially far more serious than a deflationary depression

Edited January 2, 2009 by Tartaglia

[bascule]

Well, apparently economists disagree.

 

Not that many of them. Only 5% of professional historians and 27% of professional economists believe it served to lengthen and deepen the Great Depression.

 

One aspect often uttered was that the New Deal enhanced unemployment by raging wages.

 

What about lowering the unemployment rate, which it did successfully except for during the recession of 1937, largely blamed on relaxing New Deal provisions in the light of conservatives barking for a balanced budget?

[Tartaglia]

The 1937 recession was due more to the unnecessary increases in banking reserve requirements, than tightened fiscal policy

[iNow]

How is an increase in banking reserve requirements not part of a tightened fiscal policy?

[Tartaglia]

Because its monetary policy not fiscal policy.

 

http://en.wikipedia.org/wiki/Monetary_Policy

 

http://en.wikipedia.org/wiki/Fiscal_policy

[iNow]

That really depends on the nature of the changes to banking reserve requirements (like, for example, did it impact lending/borrowing rates or instead printing frequency, etc.), but I take your point. Could you be more specific about which changes were made in the reserve requirements in 1937? History is a pretty weak subject for me, but I'm always interested to learn new things.

[Tartaglia]

I think you still misunderstand the difference between monetary policy and fiscal policy. Changing reserve requirements is definitely monetary policy, ie it affects money supply and market interest rates. It isn't anything to do with government expenditure or taxation (fiscal policy). One does have indirect effects on the other though.

 

Changes in reserve reuirements were

16/8/36 13% to 19.5%

1/3/37 19.5% to 22.75%

1/5/37 22.75% to 26 %

(Quoted for central reserve banks)

 

Thus a doubling of reserve requirements was made over a period of 9 months. No wonder the money supply contracted again. This was probably the worst of a number of blunders made by the Federal Reserve during this period.

Edited January 3, 2009 by Tartaglia
spelling

[bascule]

Thus a doubling of reserve requirements was made over a period of 9 months. No wonder the money supply contracted again.

 

How do you feel the effect compares to that of the cessation of many New Deal programs which created jobs that were lost in terms of the unemployment rate, which was after all the original point of discussion.

 

It's easy to say "no wonder the money supply contracted" contracted due to a given factor. Do you have any citations? Preferably those that compare the effects to the cessation of New Deal programs?

 

Just Googling around, all I'm finding is that the matter is debated but the only cause listed is an attempt to return to a balanced budget (which is what the article in the OP argues as well, BTW). I'm not seeing anyone blaming a doubling of reserve requirements as the primary cause (or even a secondary cause) anywhere.

Edited January 3, 2009 by bascule

[Pangloss]

Just to look at this from another angle, I'm not sure it would be a bad thing if it did draw out the Great Depression somewhat. Hypothetically, it might mean you come out of it a year later but with a stronger labor force -- more educated and stable and ready to go, as opposed to smaller, less educated, more mobile, and more desperate.

 

Just an idle thought.

[Aardvark]

Just to look at this from another angle, I'm not sure it would be a bad thing if it did draw out the Great Depression somewhat. Hypothetically, it might mean you come out of it a year later but with a stronger labor force -- more educated and stable and ready to go, as opposed to smaller, less educated, more mobile, and more desperate.

 

Just an idle thought.

 

It's a good thing that is just an idle thought because it makes no sense whatsoever. Having a longer slump won't make a workforce 'stronger', 'more educated' or 'stable'. It just means people are poorer for longer.

 

Since the depression lasted longer and was deeper in the USA than any other developed nation, and nations such as Britain, which had no New Deal type policies at all recovered much faster and had a much shallower depression it is hard to see an empirical evidence that FDRs policies alleviated the depression in the USA, rather the appearance is given of a significant hit to the economy from the New Deal.

 

Huge regulatory uncertainity leading to massive cutting back of business investment led to the Capital famine that caused the 1937 slump right back into depression in the USA. The rest of the world just carried on recovering.

[Pangloss]

Having a longer slump won't make a workforce 'stronger', 'more educated' or 'stable'. It just means people are poorer for longer.

 

Hypothetically speaking, I don't know that I buy such a sweeping generalization. For example, the surge in school enrollments during economic downturns is certainly familiar, and financial aid contributes to that, but it could still be accused of "extending" a downturn. I can only assume there are other, similar factors.

 

Is it better to come out of a recession in July with 50 million people having done nothing for the past six months, or to come out of it in November with rebuilt roads, new college graduates, and low-cost housing ready to be snapped up? I don't think the question is easily answered.

[iNow]

Pangloss has already more than adequately countered Aardvark's talking point regurgitation, but just to add to what he said... Out of all those nations, which one came out as the most powerful and best positioned for the 20th century? Just because Britain or Hungary came out a bit sooner doesn't mean they came out better off.

 

It's about time we start systems/long-term thinking on this, and stop focussing on the immediate/short-term distractions. It's the focus solely on today's bottom line at the expense of tomorrow's that is largely to blame for causing this mess we're experiencing right now.

[jackson33]

How do you feel the effect compares to that of the cessation of many New Deal programs which created jobs that were lost in terms of the unemployment rate, which was after all the original point of discussion.

 

It's easy to say "no wonder the money supply contracted" contracted due to a given factor. Do you have any citations? Preferably those that compare the effects to the cessation of New Deal programs?

 

Just Googling around, all I'm finding is that the matter is debated but the only cause listed is an attempt to return to a balanced budget (which is what the article in the OP argues as well, BTW). I'm not seeing anyone blaming a doubling of reserve requirements as the primary cause (or even a secondary cause) anywhere.

 

 

If you consider most projects involved with job creations were created from increasing debt or taxing from an available work force/investor class, you would get a zero net gain in GDP. No gains to the investor and the workforce paid from money drawn from the economy.

 

You might check out 'Wikipedia' and 'The Great Depression' or research 'Milton Friedman' on the Great Depression'. He and others contribute the major cause to the fall of the markets and the resulting loss in confidence of both the consumer and investor. Then has today the consumer made/make up the largest portion of GNP/GDP, which economists tend to follow for Economical Health. Then the seem to blame the 'Gold Standard Base' for monetary valuation, followed by tightening of the money supply. Making money unavailable to both the investor or consumer, which in those days was already restricted in many ways, compared to today. Might add as early as 2002, Ben Bernackie, had agreed with Friedman on 'access to funds'. In any event most that follow Friedman's principles, do not feel the work programs did anything to end the 'Great Depression' but in fact going into a War economy did...

 

In part I disagree with their findings, and feel the investor class (their were still a good many) had gone overseas with their investment. Many countries in the early 30's had not come back from WW I and had little debt, which should have been seen as sound conditions for growth. It was and many of those investors did very well. I also tend to probably over credit the 'Dust Bowl Days' in most the Central US, for many of the problems in those days.

I don't buy the 'Gold Standard' problem and feel the current loose money policy is building a false bottom to the problems. Banks, financial institutions and the investors are concerned with real problems and real bottoms. They are not going to loan anything, build anything or invest in anything or for that matter buy anything (confidence) until there are seen bottoms and this is not being seen and obstructed with Federal intervention. My opinion...

 

Example; The 'Empire State Building' ground was broken well after the 29 market crash and completed in 1932. (For comparison to the 'Twin Towers' rebuilding this was built in about 400 days). Not until 1950 did those investors turn a profit. This well after the war and when the general consumer had taken charge of the economy, today near 70% of the GDP and small investors had re-entered the economy in the US.

[ecoli]

Here's Rothbard's analysis on the subject: http://mises.org/rothbard/agd.pdf He contents that FDR prolonged the great depression significantly.

 

One thing that I think is an important to note is the mischaracterization of Hoover as a free marketeer and using that as proof of FDR's insight. Hoover signed the Smoot-Hawley act which made life very expensive during the Great depression (by making impossible to import cheap goods). Fortunately I don't think any politicians today would attempt something like that.

 

Here's a GREAT broadcast I recomend everyone watch regarding this important discsussion: http://www.tvo.org/TVO/WebObjects/TVO.woa?video?TAWSP_Dbt_20081210_779387_0

 

It's from canadian broadcasting company and so gives an interesting canadian prospective few americans probably know about. Their fiscal policy was much tighter during the great depression and probably were better off because of it.

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Well, apparently economists disagree. One aspect often uttered was that the New Deal enhanced unemployment by raging wages.

But according to Krugman:

Krugman forgets about people not living off a salary though (like the retired). For people living off their savings, if the rate of inflation is rising faster than their rate of interest on their savings, their purchasing power gets eroded.

(I'm trying to find a lengthier rebuttal to this in a blog I know I read somewhere).

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edit: Krugman also ignores the effect of illegal immigration (not sure if this was a problem at the time, but it is now) Raising wages increases the demand for illegal immigrant workers who don't conform to wage standards, driving up official unemployment statistics.

[iNow]

The video link you shared last night, though, raised an interesting point in regards to the employment statistics. How do the numbers account for the fact that most of those job increases were from government jobs (not necessarily illegal immigrant labor)? Basically, the government jobs used to account for 3% total workforce, then (after the New Deal) government jobs accounted for 10% of the workforce. Now, in the present, before any stimulus package from Obama, government jobs account for over 20% of the entire workforce (this all assuming the numbers presented in your vid link to be accurate), so that's sure to rise yet again.

 

Either way, we need to be careful making such one-to-one comparisons since the landscape is so very different. We really need to watch carefully the private sector, as that's where the hits seem to be taking place, and the most damage being done.

[npts2020]

The problem IMO is the way economists view "economic activity". Why is producing a trillion dollars worth of bombs or barbie dolls the same as producing a trillion dollars worth of houses or machine tools? It seems to me that the former will not provide for any vital needs or increase the ability to produce more goods, whereas the latter will. It also seems to me this is why we are in as much trouble as we are at present. How long can any economy last without ever increasing its ability to provide for its citizens or produce tangible goods?

[DJBruce]

The problem IMO is the way economists view "economic activity". Why is producing a trillion dollars worth of bombs or barbie dolls the same as producing a trillion dollars worth of houses or machine tools? It seems to me that the former will not provide for any vital needs or increase the ability to produce more goods, whereas the latter will. It also seems to me this is why we are in as much trouble as we are at present. How long can any economy last without ever increasing its ability to provide for its citizens or produce tangible goods?

 

I feel that the production of a trillion dollars worth of barbies would require a large amount of production equipment to be produced in order to make the barbies. If you make a trillion dollars of machine tools you need to have some sort of product to produce with these machine tools or the investment in the machine tools would be pointless. In my opinion the demand for goods and the production of these goods is intertwined with the investment of production equipment. You would not have an investment in one without a demand for the other.

 

As for FDR's policies in my opinion his policies helped shorten the Great Depression but only slightly. Also it was not his economic policies that influenced the depression but was more the confidence he restored in people. Before FDR there was a general feeling of mistrust for the banks and government but with the steps FDR took to stabilize the banks such as, declaring a bank holiday and establishing the FDIC along with his ability to make people feel like he cared for them and would make sure they prospered, he was able to renew America's trust in the banking system and government. This trust in my opinion is the most important consequence of FDR's New Deal.

[bascule]

The problem IMO is the way economists view "economic activity". Why is producing a trillion dollars worth of bombs or barbie dolls the same as producing a trillion dollars worth of houses or machine tools?

 

I think that's especially true of civil works projects. How much value has the Eisenhower highway system created over its lifetime? Is any economist poised to answer such a question?

 

Economists have such a microcosmic focus, whereas historians are able to study economists but as part of a larger, gestalt picture. I think they're better able to make value judgments about the system as a whole.

[ecoli]

I think that's especially true of civil works projects. How much value has the Eisenhower highway system created over its lifetime? Is any economist poised to answer such a question?

We can't say because it's not traded on a market.

 

I think the point is, though, even Keynes rejected expansionist fiscal policy as a way to get out of recession (and criticized FDR on this point directly). If you watch that video from the CBC, the economists seemed to agree.

 

I know we all want government to create infrastructure and jobs, but the government can't finance these projects without paying for them. The politicians are not going to be raising taxes and we can't afford even more debt or money printing right now. The last two are going to happen, but it didn't work during the 30s and it won't work now.

[iNow]

The last two are going to happen, but it didn't work during the 30s and it won't work now.

I don't think the economists in your video agreed on this particular point. While most of them agreed that it was both good and bad, and that things could have been better, there was no such agreement that "it didn't work."

[ecoli]

I don't think the economists in your video agreed on this particular point. While most of them agreed that it was both good and bad, and that things could have been better, there was no such agreement that "it didn't work."

sorry, what I meant to say was that "it didn't work as intended."

[Tartaglia]

Bascule, With regard to the effect of doubling the minimum banking reserve requirements, you should consider the following: the maximum money multiplier is the reciprocal of the minimum reserve requirements. Thus for a given monetary base M0, doubling the reserve requirement could in theory half the broad money measure (M2 or M4 depending on country or era). In 1936/7 there was however a lot of slack in the system and so it didn't have such a dramatic effect, it was however a substantial monetary tightening. Any reduction at all in the broad money supply will usually precipitate a recession

As regards references, I pulled the following books of my shelf which all alluded to this extraordinary tightening

J K Galbraith "Money Whence it came, where it went" p226-7

"The Great depression" M A Bernstein, p12 gives a number of scholarly references in footnote 12

C P Kindleberger "The World in Depression" p272

I could easily find more. J K Galbraith refers to this breathtaking incompetence many times in his other books