Tuesday, February 03, 2009

More On the Great Depression

I discussed recently how I thought the government helped make the Great Depression even greater. Helpfully an editorial in the Wall Street Journal today by economists Harold Cole and Lee Ohanian assists me in making my case.

The goal of the New Deal was to get Americans back to work. But the New Deal didn't restore employment. In fact, there was even less work on average during the New Deal than before FDR took office. Total hours worked per adult, including government employees, were 18% below their 1929 level between 1930-32, but were 23% lower on average during the New Deal (1933-39). Private hours worked were even lower after FDR took office, averaging 27% below their 1929 level, compared to 18% lower between in 1930-32.

Even comparing hours worked at the end of 1930s to those at the beginning of FDR's presidency doesn't paint a picture of recovery. Total hours worked per adult in 1939 remained about 21% below their 1929 level, compared to a decline of 27% in 1933. And it wasn't just work that remained scarce during the New Deal. Per capita consumption did not recover at all, remaining 25% below its trend level throughout the New Deal, and per-capita nonresidential investment averaged about 60% below trend. The Great Depression clearly continued long after FDR took office.



Unfortunately not everyone reads history. And one of those people we just elected president.

The European Union warned the US yesterday against plunging the world into depression by adopting a planned “Buy American” policy, intensifying fears of a trade war.

The EU threatened to retaliate if the US Congress went ahead with sweeping measures in its $800 billion (£554 billion) stimulus plan to restrict spending to American goods and services.

Gordon Brown was caught in the crossfire as John Bruton, the EU Ambassador to Washington, said that “history has shown us” where the closing of markets leads — a clear reference to the Depression of the 1930s, triggered by US protectionist laws.

18 comments:

Lonnie Bruner said...

James,

I completely disagree with the "buy American" idea. I export US products so I am worried about that push.

Also, I don't think you actually read the article you linked to. Your article quotes President Obama saying:

"""“I agree that we can’t send a protectionist message,” he (Obama) said in an interview with Fox TV. “I want to see what kind of language we can work on this issue. I think it would be a mistake, though, at a time when worldwide trade is declining, for us to start sending a message that somehow we’re just looking after ourselves and not concerned with world trade.” """

As for your WSJ quote, it's weak Republican clap trap. Of course all those percentages are lower than the 1920s. IT WAS A BIG-ASS DEPRESSION WHILE FDR WAS IN OFFICE. This seems like just more attempts to re-write history, saying that the New Deal did nothing. I wouldn't expect anything less from the editorial page of the WSJ though.

James B. said...

Do you have an actual argument, or just an ad hominem attack against the Wall Street Journal? If you have a suggestion for a better US newspaper in regards to finance and economics, I would like to hear it.

And of course Obama says he doesn't want a trade war, nobody is dumb enough to actually come out and say it (well, maybe Joe Biden) but he is constantly calling for policies which will all but guarantee it. Remember the whole renegotiate NAFTA debacle?

And if you actually read the article, it does not say "the New Deal did nothing" it says that the New Deal made things worse. Unfortunately, that is doing something. Once again, feel free to actually address the argument in the article.

Lonnie Bruner said...

"If you have a suggestion for a better US newspaper in regards to finance and economics, I would like to hear it." -- The Economist. Not technically from the US, but excellent coverage and analysis of US and elsewhere. WSJ is good, but their editorial page is quite different from the rest of the paper, which is just world class.

Also, my point was not "ad hominem" (you sound like a Troofer!). In your quote, the WSJ was comparing Depression-era hours worked to the 1920s, which were obviously much higher because in the 20s, we weren't in a Depression! Duh. Of course they're going to be lower. I was commenting on that. Honestly, as for the whole article, I don't have time to break it all down. May sound lazy, but this IS just a blog and I've got work to do. Really!

In the end, the G.D. was so bad because it appeared to be capitalism's collapse -- the only recovery was for the government to spend when no one else would, and it worked, especially the ultimate government jobs program: World War II. Of course, folks like you and the WSJ are trying to re-write that fundamental fact to support cherished beliefs. Some points you make may be true, but overall, the government did not make the Depression worse.

We'll see what Obama does. If he raises barriers, I'll be pissed, but I think he's smarter than that.

Cheers,
LB

James B. said...

No, attacking the argument on the basis of which paper it was in. rather than the logic of the argument, is practically the definition of ad hominem. You are attacking the source rather than the argument. And this isn't even by the editorial board, it was written by these guys:

Mr. Cole is professor of economics at the University of Pennsylvania. Mr. Ohanian is professor of economics and director of the Ettinger Family Program in Macroeconomic Research at UCLA.


Do you have something against Penn and UCLA?

And saying that the Great Depression was really bad is a tautology. Why was it so much worse than every other economic downturn? The answer is because of the government response.

The Economist is a weekly magazine, not a newspaper. It is a pretty decent magazine, I read it occasionally, although you won't get a straight story on this subject. Keynes is considered a God on that side of the pond. Kind of the same relationship as Obama and the US press.

Lonnie Bruner said...

Well, if it wasn't the editorial page, then I was wrong. And all I said was that the op-eds in WSJ are always very right wing. What's wrong with that? It's true. Relax.

Yes, GD was bad. The 20s were not. The quote is comparing 30s to 20s -- which is apples to oranges.

I think there are some things the gov't did which made it worse -- contracting the money supply, tariffs, etc. Those are things we learned from. However, there is no question that gov't spending helped the GD -- reduced unemployment.

The wiki article on Hoover is interesting. "Hoover feared that too much intervention or coercion by the government would destroy individuality and self-reliance, which he considered to be important American values. Those ideals, as well as the economy were put to the test with the onset of The Great Depression."

Hoover's polcies are basically what you're proposing. They brought unemployment up to 25% when FDR came to office and in 4 years of his New Deal, unemployment was down to 14% by 1937. End of story.

Libertarianism is dead, man, and it's getting deader by the day.

Lonnie Bruner said...

Also, The Economist refers to itself as a "newspaper".

James B. said...

Comparing the economy at one point in time to another is not apples and oranges, it is the basics of econometrics. By the same logic I could then argue it is unfair to compare the economy under Bush with the economy under Clinton.

However, there is no question that gov't spending helped the GD

Actually there is a serious question. This is an article of faith by Keynesians, not a settled historical fact.

And I am not proposing Hoover's policies, as I have already stated twice, FDR did nothing more than extend Hoover's policies. While Hoover was reluctant to intervene, he did so nonetheless. FDR just removed this reluctance.

James B. said...

And I love Wikipedia, it is great for looking up quick facts, but the editorial opinion of some anonymous Wiki editor is worse than useless.

Lonnie Bruner said...

"FDR did nothing more than extend Hoover's policies." -- now if that's not a minority opinion, I don't know what is. What percentage of historians/economists actually would agree with this statement? 1%? 2?

The point is not to compare, say, 1933-1937 to 1923-1927, but to compare 1933 to 1937. That gets you a better idea of where things went -- improvement from the worst point.

Wikipedia is a lot more reliable than you give it credit for, and far from "worse than useless".

Also, as an extended point, what would you attribute to the fact that we've never had another depression since WWII? You're telling me that the policies put in place by FDR play ZERO role in this? If FDR's policies made the G.D. worse, then shouldn't we have had multiple depressions since WWII?

The fact is that prior to 1929 there were multiple depressions -- not recessions. Also, all recessions from WWII until the early 80s were caused by the Fed, trying to reign in inflation. Reason there aren't multiple depressions: government safeguards, spending (esp. military) and regulation to prevent it.

Also, since WWII we've always had "the pump" of military spending to keep things moving, but that's another discussion.

Keynesians are pragmatic, centrist, non-ideological. On the left are the commies calling for full government control, on the right are the libertarians saying it's all government's fault. In the middle are the Keynesians rolling up their sleeves to make people's lives better while the rest of you scream and shout.

It's also a win-win for Obama and the Democrats now. We're not likely to be in a recession in 2012, and they're going to claim it's b/c of their stimulus package and say that if it had been up to Republicans, we'd still be in one. Whether that's true or not doesn't matter, but either way righties lose. (Again).

Cheers,
LB

James B. said...

Well I won't disagree with you that timing, in the matter of presidential elections, is everything, but if Obama's first 2 weeks are any indication, we are in for a long 4 years.

James B. said...

BTW, and this is ironically from your very own Wikipedia link (emphasis mine):

Franklin D. Roosevelt blasted the Republican incumbent for spending and taxing too much, increasing national debt, raising tariffs and blocking trade, as well as placing millions on the dole of the government. Roosevelt attacked Hoover for "reckless and extravagant" spending, of thinking "that we ought to center control of everything in Washington as rapidly as possible," and of leading "the greatest spending administration in peacetime in all of history." Roosevelt's running mate, John Nance Garner, accused the Republican of "leading the country down the path of socialism".[40]

These policies pale beside the more drastic steps taken later as part of the New Deal. Hoover's opponents charge that his policies came too little, and too late, and did not work. Even as he asked Congress for legislation, he reiterated his view that while people must not suffer from hunger and cold, caring for them must be primarily a local and voluntary responsibility.

Even so, New Dealer Rexford Tugwell[41] later remarked that although no one would say so at the time, "practically the whole New Deal was extrapolated from programs that Hoover started."

OK, so except for senior members of FDR's braintrust, nobody believes that FDR's policies were merely extensions of what Hoover was doing. ;-)

Lonnie Bruner said...

James,

I thought wikipedia was "worse than useless"!

"Extrapolated" from Hoover's policy does not mean a continuation of the same. FDR went far further than Hoover did which was (obviously) not enough.

No idea why we haven't had another depression since WWII?

James B. said...

You aren't paying attention to what I am saying.

And I love Wikipedia, it is great for looking up quick facts, but the editorial opinion of some anonymous Wiki editor is worse than useless.



This isn't the opinion of one the people editing the article, this is a quote from an FDR advisor. That makes it an issue of fact from Wikiepedia's standpoint.

"Extrapolated" from Hoover's policy does not mean a continuation of the same.

Actually it pretty much does. From your friend Wikipedia.

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

In mathematics, extrapolation is the process of constructing new data points outside a discrete set of known data points.


To extrapolate means to continue a trend, it doesn't mean it will continue at the same level. Hoover was increasing these programs, FDR continued to increase these programs. That is extrapolation.

cormany said...

I'm not going to try and pretend to be as educated on the history of economics and the Depression as many people. By I would like to ask, why did the people who lived at the time believe so fervently the New Deal helped? My parents are old Republicans born of Old Republicans and even they speak highly of FDR and what he did -- they were teenagers in rural mid west communities at the time. And doesn't this seem to indicate the New Deal helped create work -- jobs? or whatever you choose to call them if you want to delve into Steele type semantics. Having been unemployed and in dire straits in the past I do not put parameters around where my paycheck comes from anymore.http://edgeofthewest.wordpress.com/2008/10/10/very-short-reading-list-unemployment-in-the-1930s/

Just curious as to what answers are to this.

James B. said...

Well I don't think there is much argument that FDR was a great communicator who who comforted and inspired an entire generation of Americans. The question is whether his policies actually made a significant improvement in the economy. While the New Deal has achieved somewhat of a mythology in American history, I believe that there is a good argument that its actually role is significantly overrated. And that these sorts of government interventions in the economy, which is very topical given the current situation, make for bad economics.

Lonnie Bruner said...

James,

So you're saying that the millions of people just like Cormany's (Republican) grandparents were just affected by a politician's pretty words? That's a fairly cynical view of people's intelligence. Come on.

James B. said...

We just elected the most inexperience president in over 100 years, almost entirely based on his ability to use a teleprompter. This isn't cynicism, this is realism.

If you do not believe this is a factor, then please explain the widespread popularity of Ronald Reagan.

Lonnie Bruner said...

... and we elected a president for 2 terms who could barely string a sentence together, based almost entirely on people's feeling that they could "have a beer with him." And so it goes ...

Reagan is a better comparison for this. He's been out of office for many years (like FDR, & unlike Obama) but in the 80s, people felt like they were getting richer. Even though the 30s were a terrible time, people like Cormany's grandparents felt like their lives were improving through the New Deal (unemployment in '33 = 25% ... '37 = 14%). People know when their economic situation is getting better; that's why politicians often don't get re-elected in a recession (See G.H.W. Bush) despite their fancy words.

Also, the "inexperience" charge was the best charge Republicans had against Obama in '08. But you won't be able to use that one in 2012, now will you ...

;-)