Is It Morning in America Yet?
The Federal Reserve Does Nothing

Paul Einzig Was Wrong!

Tyler Cowen sends us to:

Paul Einzig, from 1932: It is often argued that Governments are in a position to inflate by carrying out ambitious schemes of public works. Undoubtedly during the earlier stages of the crisis such measures might have produced the desired effect.  At present, however, they could hardly be adopted on any large scale.  Practically every Government has a huge budgetary deficit, which makes it difficult, if not impossible, to raise loans for meeting the extraordinary expenditure of such public works.  Any attempt to borrow for such purposes would inevitably lead to a further accentuation of distrust, which must be avoided at all costs.

Tyler writes:

No matter what your point of view on fiscal policy, you can find that quotation to be scary.  That is from this book, p.103, and I thank Michael Reddell for the pointer.

Paul Einzig was wrong. Almunia et al." [F]iscal policy made little difference during the 1930s because it was not deployed on the requisite scale, not because it was ineffective.... [T]he first set of VAR exercises suggested that [multipliers] were 2.5 on impact and 1.2 after one year. Where significant fiscal stimulus was provided, output and employment responded accordingly.

Individual country experience with large fiscal stimulus was rare in this period, but where it occurred the evidence points in the same direction. One of the biggest fiscal stimuli in this sample occurred in Mussolini’s Italy during 1936-7, as a result of the war in Ethiopia. Italy ran a deficit in excess of 10 per cent of GDP in 1936 and 1937. Italian GDP grew by 6.8 per cent in 1937, by a marginal amount in 1938, and by 7.3% in 1939. According to Toniolo (1976), the Italian economy moved to full employment during this period. In France, the budget deficit increased substantially beginning in 1935, and GDP grew by 5.8 per cent in 1936. The deficit exploded in 1939, during which year the economy grew by no less than 7.2 per cent.

These examples remind us, of course, that the real Keynesian stimulus, when it came, would be associated with military expenditure during World War II, producing very rapid growth in countries like the United States. In our view, peacetime stimulus packages, which could have halted the rise in unemployment that ultimately led to the election of Adolf Hitler...


Ian Leslie:

Play it phoney, George: Today, George Osborne set out the most austere budget the country has seen in 30 years. Here’s hoping it was a sham--that the government is misleading the country and the world about the scale of the cuts it is about to implement.... The danger of a violent fiscal tightening has been well-flagged by the Labour party and by economists like David Blanchflower: by cutting too far, too fast, the government risks tipping the country into a second recession, one that will see long-term unemployment rise, causing lasting damage to our social fabric. Maybe, say supporters of austerity, but... [the] key thing is to send a signal to the world about Britain’s determination not to let its debt get out of control.... The optimal strategy for our government... is to manipulate perceptions.... Governments ought to pursue fake austerity programmes; to talk big about slashing costs and shrinking the state while, in reality, only making the most superficial of cuts. This would restore confidence amongst market-makers and consumers that the problem is being dealt with, while saving millions of people from the misery of unemployment. If we’re going to administer medicine, it should be a placebo.

And once again:

The sooner you abandon "orthodox" concern with budget balance and reassuring markets in the hopes of gaining their "confidence," the better.