The New Deal and the Great Depression II
Aha. Interesting blowback at Mark Thoma's site against Daniel Gross and me:
Economist's View: The New Deal and the Great Depression: When Brad DeLong said:
A normal person would not argue that the New Deal prolonged the Great Depression.
It got quite a reaction.
Arnold Kling says:
...In case you have not been following it, Daniel Gross and Brad DeLong have been hurling insults at people who fail to genuflect to the proposition that the New Deal helped to cure the Great Depression. A reasonable view is that some New Deal policies helped, and some hurt....
Knowing what I know now, if I could go back to 1933 and tell President Roosevelt what to do, I would say "yes" to deposit insurance, "yes" to going off the gold standard, and "no" to pretty much every other New Deal policy, including Social Security. I would also encourage two things that were not tried--a monetary expansion and a fiscal expansion (which in those days, with taxes relatively low, would have meant more government spending).... Whether Roosevelt's actual policies were, on balance, helpful or harmful, is something that I think reasonable people can debate. Hurling insults at one side or the other is not appropriate...
But relative to Hoover, Roosevelt's administration did pursue both fiscal and monetary expansion. Fiscal policy shifted from Hoover's balance-the-budget-at-all-costs to Roosevelt's we-won't-worry-about-the-deficit-for-a-while--a big difference. It would have been much better if the New Deal had involved much bigger deficits, but the deficits it did involve were quite a help.
Similarly for monetary policy: Hoover's Fed was desperate to avoid gold losses, which meant raising interest rates whenever gold flowed out. Roosevelt's Fed wasn't. Again, a bigger monetary expansion would have been a greater help, but the change from Hoover to Roosevelt was a great help.
So you have four big macroeconomically-significant pluses working to alleviate the Great Depression: deposit insurance, abandoning the gold standard, fiscal expansion, and monetary expansion. What do you have on the negative side? The short-term damage done in 1993-4 by the NIRA, and the work-relief programs that probably created several percentage points' worth of structural unemployment.
Jim Hamilton also weighs in, citing Cole and Ohanian as critics of the NIRA:
What is supposed to help the economy recover [in a pure laissez-faire economy] is that a substantial pool of unemployed workers should result in a fall in wages and prices that would restore equilibrium in the labor market.... And yet, in the midst of quite significant unemployment, between 1933 and 1934, average hourly earnings increased by over 25% in sectors such as iron and steel, furniture, and cement, and over 50% at lumber mills. How could that be?... Cole and Ohanian noted... the NIRA and NLRA... limit[ing] the extent of competition between firms and competition between workers. Among the NIRA codes that Cole and Ohanian highlight include minimum prices below which firms were not allowed to sell their products, restrictions on productive capacity and the amount that could be produced, and limitations on the workweek. Cole and Ohanian concluded on the basis of model simulations that these kinds of New Deal policies might have accounted for 60% of the persistence in the output gap.... The notion that if we can just create more monopoly power for every single sector of the economy, encouraging every sector to produce less so they can raise their wages and prices, that we will then somehow make everybody richer, is so spectacularly wrong-headed that I would be just as dumbfounded to find that Brad De Long believes it as he seems to be by those of us who maintain that some aspects of New Deal policy surely did make the recovery from the Great Depression slower.
Let me agree with Jim that a durable, comprehensively-implemented NIRA would have been a disaster, but my understanding (from Ellis Hawley's The New Deal and the Problem of Monopoly) was that it was neither comprehensively implemented nor durable. It was always spotty, and was a dead letter by the middle of 1934, a year before it was overturned in Schechter Poultry.
I would love to be able to argue that there were steep increases in wage and price rigidity in the 1930s as a result of government policies that made the economy much more vulnerable to contractionary shocks--that would be a hell of a paper to write--but I have never been able to make the case work quantitatively. And IIRC Cole and Ohanian purposely focus on only the bad sides of the New Deal: their counterfactual is one with deposit insurance, with going off gold, and with abandoning the Hoover era's balance-the-budget fiscal and keep-gold-from-leaving-the-country monetary policies.
So no, reasonable people could not argue that the New Deal prolonged the Great Depression.
The furthest I will go is to agree that reasonable people can argue over whether reasonable people could argue that the New Deal prolonged the Great Depression.
UPDATE: A comment I left at Mark Thoma's Economist's View: http://economistsview.typepad.com/economistsview/2007/01/the_new_deal_an.html#comment-27521387
I would ask everyone to closely parse what's being said here. Neither Arnold Kling nor Jim Hamilton is saying, "Well I'm normal, and I think the New Deal made things worse." Jim is saying that "some aspects of New Deal policy surely did make the recovery from the Great Depression slower." And I agree with that 100%.
By not recognizing that most of the New Deal was a shift of fiscal policy from contractionary to neutral on a cyclically adjusted basis, Arnold is underestimating the positive effects of the New Deal--and even so he does not say that it made things worse. He doesn't take a view.
To get to somebody willing to argue that the entire New Deal taken as a whole made things worse, you have to go to somebody like Arnold's intelligent and energetic co-blogger Bryan Caplan, who writes:
>[Robert] Mugabe has made people afraid to invest in Zimbabwe. Why should [Brad] doubt that - on a smaller scale, of course - Roosevelt made people afraid to invest in the U.S.?
And I think that I am safe in classifying somebody who sees Robert Mugabe as Franklin Roosevelt writ large as not entirely normal.
