Arnold Kling vs. Brad DeLong on the New Deal

UPDATE: Bruce Bartlett writes:

I just read your WSJ piece and you make one mistake. If Hoover had been re-elected in 1932, Ogden Mills would have been Treasury secretary, not Andrew Mellon. Mills became secretary on Feb. 13, 1932.

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Arnold Kling vs. Brad DeLong on the New Deal at the Wall Street Journal's website.

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Here are my first drafts for the exercise:

Let me start with our collective best guess about what would have happened in an alternate history--one in which the press discovers and publishes the full details of FDR's polio injuries and irregular family life , and in which in November 1932 Herbert Hoover is reelected to a second term with a narrow margin, and "stays the course" with his first-term economic policies...

In that alternate universe, a group of Harvard economists headed by Joseph Schumpeter were brought down to the White House to advise Herbert Hoover what do about the banking crisis in the winter of 1933. They argued that banks are failing because their fundamentals are unsound, and that it would be improper to rescue bankers who have run their businesses into the ground or depositors who have not been prudent enough at watching the character of the people with whom they have deposited their money. Supported by the articulate Treasury Secretary, Andrew Mellon, they carried they day: "Liquidate labor, liquidate stocks, liquidate the farmes, liquidate real estate," said Mellon. A full-fledged panic would not be a bad thing: It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people..." But the consequence was not people working harder and living a more moral life. Instead, the consequence was an intensification of the Great Depression as the transmission channels analyzed by Ben Bernanke (1983), "Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression," grew much stronger than they were in our actual history.

As more and more banks failed and more and more of the deposits of Americans vanished, the downward spiral of economic activity continued through 1933, 1934, and 1935. Increasing economic uncertainty and fear drove an acceleration of gold outflows from the U.S. accelerated throughout 1933 and 1934. The Federal Reserve--itself under Mellon's, responds by following gold standard orthodoxy: an outflow of gold is a sign that your interest rates are too low and need to be raised. Contractionary open market operations to raise interest rates further reduced the money stock, and this falling-money-stock channels for the intensification of the Great Depression that was stressed by Milton Friedman and Anna Schwartz (1963), A Monetary History of the United States, grew much stronger than they were in our actual history.

As the unemployment rate rose from 25% in 1933 to 33% in 1934 to 40% in 1935, Herbert Hoover vainly tried to restore confidence. "America must cling to the gold standard, for it is our only life raft," Hoover argued. Only confidence that the dollar would stay as good as gold could produce the confidence in the future of America that would induce entrepreneurs to start investing in America once again and so bring about recovery. But as Eichengreen and Sachs were to argue in their 1986 "Exchange Rates and Economic Recovery in the 1930s," Hoover had it exactly backward: no country could even begin to halt the downward spiral that was the Great Depression until it abandoned the gold standard, devalued its exchange rate, boosted its exports, expanded its money stock, and lowered its interest rates.

In 1932 Herbert Hoover had unleashed General Douglas MacArthur to deal with the Bonus March. At his command, Major George F. Patton's 3rd cavalry and other units had driven them with tear gas, swords, and bayonets across the Potomac River bridges and fired their camps, defeating what MacArthur called a communist attempt to overthrow the government of the United States. In 1934 the Bonus Marchers came back--and this time not coming unarmed. In our history Eleanor Roosevelt went down to their camp and had coffee with the Marchers, and Franklin Roosevelt signed up many of them to work on extending U.S. Route 1 through the Florida Keys. Not in the history where Hoover stayed president. Employing marchers by increasing the deficit would destroy confidence, Hoover said. In fact, Hoover declared at the end of 1934, balancing the budget had to take priority over relief, and the federal government would leave all relief expenditures in the hands of the states. Food riots broke out at the start of 1935 in scattered cities.

The Marchers camped in Arlington Cemetery through the winter of 1934-1935. The camp grew, as they were joined by followers of Louisiana's Huey Long, who cried "Share Our Wealth!" and "Nail 'Em Up!" and followers of radio Priest Charles Coughlin, who believed that Herbert Hoover had ruined America in the interest of enriching Wall Street, the international bankers, and the Jews. They placed themselves under the command of retired Marine General Smedley Butler. In March 1935 General MacArthur told President Hoover that he could wait no longer. MacArthur's chief of staff, D.D. Eisenhower, had had grave misgivings in 1932 when MacArthur sent Patton to attack the Bonus Marchers. On March 24, 1935, Eisenhower went to visit General Butler...

[to be continued]

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I, at least, think that as far as recovery was concerned the macroeconomic good done by the New Deal vastly outweighed the structural bad. Any reasonable counterfactual involving no New Deal that I can see has things a good deal worse in the middle and late 1930s than they were in our reality.

But there is an argument to be made that an even better New Deal would have been possible, and ought to have been attainable.

Had Milton Friedman been special assistant to and whispering in the ear of Fed Chair Marriner Eccles in 1936-1938, he would have successfully headed off Eccles's boneheaded idea of raising reserve requirements on banks. Then the late 1930s would have been a much happier time. Had FDR given his baton in 1933 to trustbuster Thurman Arnold rather than to cartelizer Hugh Johnson and had the initial round of the New Deal increased rather than decreased the degree of competition in the American economy, then... well, the neoclassical part of my brain thinks that 1934 and 1935 would have been somewhat happier--but the Fundie Keynesian part of my brain thinks that Hugh Johnson's NRA was irrelevant because aggregate demand was a much bigger problem then than aggregate supply.

Arnold Kling, however, wants to talk about the legacy of the institutions and practices created in the New Deal for us today. For example, do we really need a Securities and Exchange Commission in the form it was cast in 1933 and 1934. Back then everybody, unfairly, blamed Wall Street for the Great Depression. Remember Roosevelt declaration in his inaugural address that the "practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men....The money changers have fled from their high seats in the temple of our civilization."

The New Deal essentially dusted off and implemented the unsuccessful Progressive Era program for the reform of American finance that had been pushed by the likes of Louis Brandeis during the 1900s and the 1910s. And Louis Brandeis was definitely on the side of the upwardly-mobile and the smart and technically competent, as opposed to the side of old wealth and new thrift.

Was dusting-off and implementing Louis Brandeis's generation-earlier plan a very smart idea?There are powerful arguments that in the long run it was not. Financial markets function well for the economy only when they do a good job of seeking out and transmitting information about the likely future of enterprises and industries and getting that information crystalized into prices. This requires that people be incentivized to seek out and uncover important pieces of information by being able to profit handsomely from doing so--which requires that there be a bright visible line between what you can do and what you can't, between legitimate research and illegitimate insider trading.

The SEC as born in the New Deal has always found it relatively difficult to draw such a bright visible line, because its crisis origins have led it to focus on a different problem. You see, financial markets also function well only when they mobilize great masses of savings from scattered individuals by giving them confidence that their investments are liquid in that they can be bought and sold at a fair price. This requires that you not be buying share of a company from a cousin of one of its directors who knows that its market share has collapsed in the current quarter, and not be selling to somebody who knows that the latest sample assayed was extremely encouraging.

Smart financial regulation attains a point of balance. There is not general agreement but at least a general worry that the system the New Deal has left us pays too much attention to the desirability of a level playing field for buyers and sellers, and not enough to the desirability of having truly informed buyers are sellers in the market, and that it gives too much power to entrenched managers and not enough power to insurgent financiers.

It is not possible for even an abnormal person to defend somebody like Chase's Albert Wiggin, who by massively shorting Chase's stock gave himself a mammoth financial incentive to manage the bank as badly as possible, or New York Stock Exchange President Richard Whitney, who reported to Sing Sing in April 1938 for embezzling from the New York Yacht Club as well as others including his own father-in-law. But the neoclassical part of my brain whispers that times of crisis are not the times to design the best institutions for normal times when other and different considerations than those of the then-current crisis should carry greater weight.

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Let me agree with Arnold that deposit insurance was badly handled. But let's not lose sight of the fact that even badly-handled as it was, really-existing deposit insurance was a mammoth improvement over no deposit insurance at all. I think that that is a good thumbnail summary of the entire New Deal: badly-handled, but a vast improvement over the preceding system and over the politically-viable alternatives--with the exception, I would argue, of Agriculture Support and the NRA, which did little if any good at immense long-run cost.

But Arnold now wants to hunt other game: "Just as we revere the constitution as the basis for our government and we revere Abraham Lincoln for ending slavery and preserving the union, we are supposed to revere the New Deal as somehow providing the basis for our modern prosperity. Yet the policies of the New Deal are quite a mixed bag.... Social Security, and its offspring Medicare, are going to be the next great financial crisis in this country." Let me protest the phrase "its offspring, Medicare." Medicare and Medicare are Lyndon Johnson's Great Society--not FDR's New Deal. And let me note that whenever I do the math that back in 2000--before Bush II--the long-run non-health program finances of the federal government looked to be in fine shape. At least as I did the math, even factoring in the forthcoming recessionary period 2001-2003, with then-current tax laws the long-run on-budget surpluses significantly outweighed the long-run off-budget Social Security deficits.

It's more accurate, I think, to say that the U.S. federal government has two fiscal problems: (a) the Bush II administration--with its insistence on not paying for the spending it insists on undertaking (including both the Iraq War and Medicare Part D)--and our long-run health financing problem.

And the health programs... One way to look at it is that it is not a problem but an opportunity. If we restricted Medicare and Medicaid to offer to beneficiaries in the future the levels of care that Medicare and Medicaid recipients received in 2000, we wouldn't have a long-run health-care financing problem. We have one because we expect that Medicare and Medicaid will pay for more care in the future than has been possible in the past; because we expect our doctors, nurses, pharmacists, and researchers to learn how to do amazing things; because we expect these amazing things to also be amazingly expensive; and because we expect America to want to provide access to future medical miracles on the basis not of heal-the-rich-sick but of heal-the-sick.

Does our belief that in general medical care should not be rationed according to ability-to-pay spring from the New Deal, or does it have deeper cultural roots?

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If I can rephrase Arnold Kling's position, it is that the partial success of the New Deal--the recovery from 25% unemployment to roughly 10% unemployment, the recovery from 50% of 1929 industrial production to approximately 120% of 1929 industrial production before WWII began, and then the production and employment (albeit not private consumption) boom of WWII accompanied by total victory--taught us Americans bad lessons about the role of government, or lessons that will be bad for us in the future.

We now believe, I think Arnold thinks, that it is the government's job to provide for us in our medical care, in our old age, and when things go wrong in our work or family life. As a result, we now save too little, have too few children to support us when we get old, and work too little (because we face substantial marginal tax rates). We would be a better society if people knew that if they didn't save for retirement they would be poor in their old age, that if they didn't save for future medical care needs they would die prematurely, that if they didn't have dutiful chldren they would be alone and unnursed in their old age, and if they did not pile up large lumps of precautionary savings then they would lose their middle-class status if they had a heart attack, lost their job, or got divorced.

I find myself agreeing with Arnold Kling to the extent that I think Social Security would work better as a real forced-saving program than it does as a pure pay-as-you-go program. I agree with Arnold Kling in fearing that the health-care financing system we have grown will lead us to fumble a good deal of the opportunities for extending human happiness that are going to be opened up by biomedical research in the next two generations.

But as for the rest of it... Well, I am reminded of my teacher Shannon Stimson's lectures on early Victorian political economy. She noted that to the Victorians private charity should be ample (because that was what Jesus taught, and to keep the poor from starving in masses the streets) but never comprehensive, so that there would always be a few of the poor visibly starving in the streets, so that the poor would know that charity was not something they could count on, so that the poor had the proper incentive to work, to save, to stay married, to have children and bring them up properly. She tries hard to recover this mode of thought, in which the purpose of the economy is to create morally prudent servants who live in the Fear of the Lord. And her students--hedonists living in the California sun early in the 21st century--find it very strange: the purpose of the economy is obviously to enable people to realize their human potential and to satisfy their needs, wants, and dreams.

We California-sun hedonists will readily admit that moral hazard--people gaming the system and not contributing their share--is a pronounced danger in all kinds of insurance programs, especially social insurance. But consider: America is already on the libertarian end of the spectrum of advanced industrial economies. Further leaps in a libertarian direction would make us more the odd one out. The payoffs in increased savings from making the old and the sick who haven't saved poor would have to be demonstrated to be very large before I would conclude that the big problem with American government is that the incentives facing Americans in the economy are too soft and encourage too much slacking. And I haven't seen that demonstrated yet.

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Links:

I like J. Bradford DeLong's Journal of Economic Perspectives article http://econ161.berkeley.edu/pdf_files/Keynesianism_Pennsylvania.pdf and his still unpublished attempt to get at the guts of the economic advice Joseph Schumpeter and others were giving in 1933 http://econ161.berkeley.edu/pdf_files/Liquidation_Cycles.pdf--what John Maynard Keynes called "extraordinary imbecility." An online for-pay version of Joseph Schumpeter et al. (1934), The Economics of the Recovery Program is at http://www.questia.com/library/book/the-economics-of-the-recovery-program-by-douglass-v-brown-edward-chamberlin-seymour-e-harris.jsp. Schumpeter and company were fiercely critical of the New Deal. A contemporary review of their book by Princeton's Otto Nathan is here http://links.jstor.org/sici?sici=0022-3808%28193408%2942%3A4%3C537%3ATEOTRP%3E2.0.CO%3B2-D.

Wikipedia has good background entries on Huey Long http://en.wikipedia.org/wiki/Huey_Long, the Bonus March http://en.wikipedia.org/wiki/Bonus_march, and Father Coughlin http://en.wikipedia.org/wiki/Charles_Coughlin.

For Eichengreen and Sachs on the gold standard and the Great Depression: "Exchange Rates and Economic Recovery in the 1930s" http://scholar.google.com/scholar?num=100&hl=en&lr=&safe=off&c2coff=1&client=safari&q=Eichengreen+and+Sachs&btnG=Search

Ben Bernanke's analysis of the role played by unstemmed financial panics, industrial bankruptcies, and bank closings is Ben Bernanke, Ben, "Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression," American Economic Review, 73, (June) pp. 257-76 at google scholar http://scholar.google.com/scholar?num=100&hl=en&lr=&safe=off&c2coff=1&client=safari&q=Nonmonetary+Effects+of+the+Financial+Crisis+in+the+Propagation+of+the+Great+Depression&btnG=Search. Ben has a nice speech about money, gold, and the Great Depression http://www.federalreserve.gov/boarddocs/speeches/2004/200403022/default.htm.

Milton Friedman and Anna Schwartz's account of the role played in the Great Depression by gold-standard and other policies that contributed to the sharp decline in the money supply is in the "Great Contraction" chapter of their Monetary History of the United States http://scholar.google.com/scholar?num=100&hl=en&lr=&safe=off&c2coff=1&client=safari&q=Monetary+History+of+the+United+States&btnG=Search.

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http://econ161.berkeley.edu/pdf_files/Keynesianism_Pennsylvania.pdf: Joseph Schumpeter, 1934: "[There is a] ...presumption against remedial measures [like cutting taxes, increasing spending, or lowering interest rates]... [because] policies of this class are particularly apt to...produce additional trouble for the future.... [Depressions are] not simply evils, which we might attempt to suppress, but...forms of something which has to be done, namely, adjustment to...change... [and] most of what would be effective in remedying a depression would be equally effective in preventing this adjustment..."

Comments

[John Emerson]

When people talk about American populism, they always mention Huey Long and Father Coughlin. Floyd B. Olson of Minnesota was equally populist but leftist, and he was a successful statesman. 50 years after he was first elected Governor in 1930, Minnesota was still a politically distinctive place. (Alas, since about then it's been reverting to the mean).

[Cranky Observer]

Any chance you could get Harry Turtledove to summarize that for us?

Cranky

[Randolph Fritz]

"We would be a better society if people knew that if they didn't save for retirement they would be poor in their old age [...]"

Y'know, this line of argument reminds me of the arguments for abstinence education and indeed the whole realm of weird sexual laws--pile on the threats and people will behave "better". Yet centuries of threats--even the genuine risk of venereal diseases--has not persuaded many people of the virtues of abstinence, kept people from being unfaithful to their partners, or, well, just about anything. Beyond a certain point, threats are redundant.

I tend to regard such policy ideas as the result of greedy egotism and poor psychology; the people who make them up--mostly people who believe they will never be poor--think the subjects of those policies will knuckle down and accept their place in the lower ranks of the ape hierarchy. And--this is how we know humans are *sapient* apes--what happens instead is that enough people decide the boss ape doesn't deserve his authority and proceed to resist.

[JonF]

Re; As a result, we now save too little, have too few children to support us when we get old, and work too little

Why would anyone with a wit of sense in his head think that getting rid of a social security et al would lead to people having more children? In such a "everyone for himself" situation people would work themselves to the grind and squirrel away every penny they could for the futrure, leaving nothing for the expenses of child-rearing. The birth rate would collapse. In fact, this is pertty much what happened in Russia and Eastern Europe when the social safety net was cut back to bone after the fall of Communism.

[Kate G.]

Cranky observer, I was going to say can't we get S.M. Stirling to do it?

great post, brad, our professors would be proud and bemused.

Kate G.

[anne]

"We would be a better society if people knew that if they didn't save for retirement they would be poor in their old age, that if they didn't save for future medical care needs they would die prematurely, that if they didn't have dutiful chldren they would be alone and unnursed in their old age, and if they did not pile up large lumps of precautionary savings then they would lose their middle-class status if they had a heart attack, lost their job, or got divorced."

Precisely, there is Arnold Kling only milder.

[Cranky Observer]

> Cranky observer, I was going to say can't
> we get S.M. Stirling to do it?

I would read that one too, but I think such a treatment would devolve to a battle between the Fascist Party USA and Communist Party USA troops over the ruins of Detroit, which I don't think is /exactly/ what Mr. DeLong had in mind.

Then again, perhaps it is - since that is the only outcome I can imagine from an unemployment rate of 35% and climbing in 1934. That or a straight-out invitation for the United States to become a vassal state of the Third Reich.

Cranky

[Bruce Moomaw]

A much more likely scenario than Hoover somehow winning would have been that Zangara killed FDR as he intended, rather than Mayor Cermak, and so John Nance Garner -- a conservative Democrat who opposed the New Deal -- had become President and done pretty much the same things Hoover does in Brad's scenario. Then what? A three-way race in 1936 between Garner, the Republican (probably Landon), and Huey Long, with the latter quite possibly winning?

[Sonia]

Perhaps Franklin Roosevelt's greatest achievement apart from Social Security was to give the population hope for better times even while economy stumbled. The alternative scenario exercise illuminates the maxim the perfect is the enemy of the good.

Along the lines of alternative scenarios, suppose that employer health insurance had not taken firm hold by the early 1960s, would the option be the individual high deductible market envisioned by some; a system akin to Medicare; or something along one of the European models? It is also interesting to speculate on how much wealthier the medical community is under Medicare than under almost any alternative scenario.

[Paul G. Brown]

I'm with Sonia.

"We have nothing to fear but fear itself." Seen in context, this was a really potent political tonic. FDR's election was a social signal. Times they are changing.

[piotr]

About Victorian charity tolerating some number of starving poor on the streets: "the few" included at some point most of the Irish.

About Social Security making us save too little: that would imply that Social Security assures prosperous old age, rather than relative poverty well short of starvation. Folks on Social Security without other savings face choices like: is it better to eschew solid foods for the want of dentures (that broke), or almost blindness for the want of glasses (that have complicated prescription) --- a story from NYT, if I recall.

Personally, I treat SS as investment in "fixed income" securities that allow me to put all remaining retirement savings in stock. In the absence, I would need a "balanced portfolio".

In any case, why Germans save too much and Americans, too little? My only observation was that when I had an account in a German thrift, nobody offered me a no-fee credit card, in spite of deposits well above 10^4 euro.

[Cranky Observer]

> A three-way race in 1936 between Garner, the
> Republican (probably Landon), and Huey Long,
> with the latter quite possibly winning?

Huey Long on a Populist ticket? What would the unemployment, infant death, and starvation rates be at that point? If at or above the 35% mentioned in the above scenario (1) who would the Fascist Party candidate be? (2) why would there not have already been a Communist-led revolution?

Cranky

[Barkley Rosser]

Brad,

Very interesting and generally well done. I have one gripe with your counterfactual: why would a deepening depression have led to a run on gold in the US? Aren't you a colleague of Barry Eichengreen? Was it not the inflow of gold into the US as our imports fell after the declines of 1929-30 that led other countries to impose restrictive policies that led to the Great Depression going global? That is how I have been reading Eichengreen in recent years. Would not a further decline in the US economy have reduced imports further, thereby reducing any tendency to a gold outflow and further putting the screws to the rest of the world economy?

In the end, I suspect the outcome would be the same, a worsening global downward spiral. But the mechanism would be a bit different, more like what we already had seen in 1931.

[andres]

Hmmm. That's a good question, Barkley. At the risk of speculating, I would say that there was a significant competition for gold reserves as the Depression picked up speed in the early 1930's. However, this competition may well have turned into a negative-sum game. Rather than eg Britain obtaining gold reserves at the expense of the US, what may have been happening is that the continuing deflation, combined with the fear of domestic currency devaluation relative to gold, led to increasing disintermediation as individuals started to hoard gold, possibly in cooperation with non-bank financial institutions. Has anyone tracked how much gold seemed to leak away from the international reserve system? This might be a decent economic history research topic, but I'm far from an expert in that area.

[Barkley Rosser]

andres,

This is a research project that has already been done. It is the main focus of Eichengreen's book, _Golden Fetters, the Gold Standard and the Great Depression, 1919-1939, 1992, Oxford University Press. Increasingly, lots of economists think that Eichengreen has hit the nail on the head on the central mechanism of how and why an unpleasant recession turned into a global Great Depression after the financial collapse of 1931, which was the largest and most destructive financial collapse to happen in world history.

That Eichengreen is a fellow economic historian in the same department as Brad D., is why I am so surprised that he gave the version of the counterfactual that he did.

[anne]

http://www.feri.org/common/news/details.cfm?QID=2090&clientid=11005

January 20, 1937

The Second Inaugural Address
By Franklin Roosevelt

When four years ago we met to inaugurate a President, the Republic, single-minded in anxiety, stood in spirit here. We dedicated ourselves to the fulfillment of a vision — to speed the time when there would be for all the people that security and peace essential to the pursuit of happiness. We of the Republic pledged ourselves to drive from the temple of our ancient faith those who had profaned it; to end by action, tireless and unafraid, the stagnation and despair of that day. We did those first things first.

Our covenant with ourselves did not stop there. Instinctively we recognized a deeper need — the need to find through government the instrument of our united purpose to solve for the individual the ever-rising problems of a complex civilization. Repeated attempts at their solution without the aid of government had left us baffled and bewildered. For, without that aid, we had been unable to create those moral controls over the services of science which are necessary to make science a useful servant instead of a ruthless master of mankind. To do this we knew that we must find practical controls over blind economic forces and blindly selfish men.

We of the Republic sensed the truth that democratic government has innate capacity to protect its people against disasters once considered inevitable, to solve problems once considered unsolvable. We would not admit that we could not find a way to master economic epidemics just as, after centuries of fatalistic suffering, we had found a way to master epidemics of disease. We refused to leave the problems of our common welfare to be solved by the winds of chance and the hurricanes of disaster.

In this we Americans were discovering no wholly new truth; we were writing a new chapter in our book of self-government.

This year marks the one hundred and fiftieth anniversary of the Constitutional Convention which made us a nation. At that Convention our forefathers found the way out of the chaos which followed the Revolutionary War; they created a strong government with powers of united action sufficient then and now to solve problems utterly beyond individual or local solution. A century and a half ago they established the Federal Government in order to promote the general welfare and secure the blessings of liberty to the American people.

Today we invoke those same powers of government to achieve the same objectives.

Four years of new experience have not belied our historic instinct. They hold out the clear hope that government within communities, government within the separate States, and government of the United States can do the things the times require, without yielding its democracy. Our tasks in the last four years did not force democracy to take a holiday.

Nearly all of us recognize that as intricacies of human relationships increase, so power to govern them also must increase— power to stop evil; power to do good. The essential democracy of our Nation and the safety of our people depend not upon the absence of power, but upon lodging it with those whom the people can change or continue at stated intervals through an honest and free system of elections. The Constitution of 1787 did not make our democracy impotent.

In fact, in these last four years, we have made the exercise of all power more democratic; for we have begun to bring private autocratic powers into their proper subordination to the public's government. The legend that they were invincible — above and beyond the processes of a democracy — has been shattered. They have been challenged and beaten.

Our progress out of the depression is obvious. But that is not all that you and I mean by the new order of things. Our pledge was not merely to do a patchwork job with second-hand materials. By using the new materials of social justice we have undertaken to erect on the old foundations a more enduring structure for the better use of future generations....

[anne]

http://www.feri.org/common/news/details.cfm?QID=2067&clientid=11005

March 4, 1933

The First Inaugural Address
By Franklin Roosevelt

I am certain that my fellow Americans expect that on my induction into the Presidency I will address them with a candor and a decision which the present situation of our Nation impels. This is preeminently the time to speak the truth, the whole truth, frankly and boldly. Nor need we shrink from honestly facing conditions in our country today. This great Nation will endure as it has endured, will revive and will prosper. So, first of all, let me assert my firm belief that the only thing we have to fear is fear itself—nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance. In every dark hour of our national life a leadership of frankness and vigor has met with that understanding and support of the people themselves which is essential to victory. I am convinced that you will again give that support to leadership in these critical days.

In such a spirit on my part and on yours we face our common difficulties. They concern, thank God, only material things. Values have shrunken to fantastic levels; taxes have risen; our ability to pay has fallen; government of all kinds is faced by serious curtailment of income; the means of exchange are frozen in the currents of trade; the withered leaves of industrial enterprise lie on every side;farmers find no markets for their produce; the savings of many years in thousands of families are gone.

More important, a host of unemployed citizens face the grim problem of existence, and an equally great number toil with little return. Only a foolish optimist can deny the dark realities of the moment.

Yet our distress comes from no failure of substance. We are stricken by no plague of locusts. Compared with the perils which our forefathers conquered because they believed and were not afraid we have still much to be thankful for. Nature still offers her bounty and human efforts have multiplied it. Plenty is at our doorstep, but a generous use of it languishes in the very sight of the supply. Primarily this is because rulers of the exchange of mankind's goods have failed through their own stubbornness and their own incompetence, have admitted their failure, and have abdicated. Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men....

[anne]

There is a snese of caring, always caring that comes through, and a willingness to be assertive and experimental and changeable according to the experiment, and there is a political battling demeanor for such was always necessary.

[anne]

http://www.hpol.org/fdr/fala/

The 'Fala' Address

These Republican leaders have not been content with attacks on me, or my wife, or on my sons. No, not content with that, they now include my little dog, Fala. Well, of course, I don't resent attacks, and my family doesn't resent attacks, but Fala does resent them. You know, Fala is Scotch, and being a Scottie, as soon as he learned that the Republican fiction writers in Congress and out had concocted a story that I had left him behind on the Aleutian Islands and had sent a destroyer back to find him--at a cost to the taxpayers of two or three, or eight or twenty million dollars--his Scotch soul was furious. He has not been the same dog since. I am accustomed to hearing malicious falsehoods about myself--such as that old, worm-eaten chestnut that I have represented myself as indispensable. But I think I have a right to resent, to object to libelous statements about my dog.

Franklin Roosevelt
September 23, 1944

[Bruce Moomaw]

Cranky: "Huey Long on a Populist ticket? What would the unemployment, infant death, and starvation rates be at that point? If at or above the 35% mentioned in the above scenario (1) who would the Fascist Party candidate be? (2) why would there not have already been a Communist-led revolution?"

Well, my God, 2 years ago Turtledove wrote a story in which Joe Stalin's family (still the Dzugashvilis) moved to the Central Valley of california in time for young Joe Steele (as he renamed himself) to be born here and run for the 1932 Democratic Presidential nomination, win it by the simple technique of arranging a convenient accident for FDR, and then proceed to Stalinize the US (with the enthusiastic assistance of J. Edgar Hoover, his eventual successor). Harry tends to get carried away on occasion (as in that bizarre series where WW II gets interrupted by an alien invasion of Earth).

My own favorite piece of American alternative-history SF has always been: what if Charles Evans Hughes hadn't accidentally snubbed Gov. Hiram Johnson during his 1916 campaign stop in California, with the result that Woodrow Wilson pulled a 4000-vote upset in that state and so won reelection? Obvious following sequence of events:

(1) Hughes and the GOP, not Wilson and the Dems, suffer from the massive backlash against our entry into WW I.

(2) James Cox thus beats Warren Harding by a landlside in the 1920 presidential election -- along with his promising young running mate, Franklin Roosevelt.

(3) President Cox and the Dems preside over 8 years of prosperity, and Vice President Roosevelt is elected President by a landslide in 1928 -- just in time to get landed with the Depression.

(4) In the 1932 election, President Roosevelt is thus ousted by a landslide by the promising Republican reformer, Herbert Hoover.

[Jonathan Goldberg]

This is Kling's concluding statement (see the original for some links that didn't copy):

"In a libertarian utopia, most families take care of themselves by working, saving, and purchasing insurance. Taxes are low, but charitable contributions are high, and most people who cannot take care of themselves are served by charities. As James Bartholomew points out in "The Welfare State State We're In," private charities have many advantages over government programs. Finally, if people slip through the cracks of charity, government programs could be a last resort.

In the progressive/New Deal utopia, we are all wards of the state. Clever technocrats use the coercive power of the state to put all of us into government-run savings and insurance programs. Brad DeLong and others who believe in the technocratic, welfare-state utopia will point to Europe as an example for the U.S. to follow. However, Europe is in demographic decline. Even the clever technocrats lack a plan for dealing with the pending surge in the ratio of pensioners to workers. The work ethic in Europe is slowly melting away. Among young people, the unemployment rate reaches 20% in several countries. There is something rotten in Denmark, and indeed in the entire concept of the technocratically-run welfare state.

The New Deal gave the American people new faith in large, powerful central government. However, the results of the New Deal did not justify that faith in the 1930s, nor do the results of the welfare state justify such faith today."

This is an amazing mish-mash. First, families purchase insurance, the well-known problems of the private health insurance market having been miraculously overcome. Private charity takes care of anyone so unfortunate as to not be able to afford these purchases.

We then transition smoothly to the claim that government-run programs for health and social insurance that in the real world have been more efficient than private alternatives will make us "wards of the state."

Professor deLong didn't say anything about Europe, but Kling is sure that he will sometime; so, he starts refuting whatever he will say now. Europe, which effectively uses various models of publically run health care, is in awful shape; it can safely be assumed that public programs are the reason for the trouble. For instance, we find the work ethic in Europe "slowly melting away." We know this because, for instance, German machinery is so notoriously shoddy.

He also manages to claim first that Europe has too many old people and then that it has too many young people in the same paragraph.

As for whether the results of either New Deal programs or of current social welfare programs justify a large, powerful central government, it's clear they don't to him. Anyone who starts with a strong enough prior commitment to no government action on anything will agree with him. Those of us who simply want to achieve certain results in an economical and reliable fashion might get a different answer.

Professor deLong didn't say anything about this statement, either in the WSJ forum or in the current post. I don't know whether his silence is charity or exhaustion.

On a different topic, where to get our counterfactuals:

"Harry tends to get carried away on occasion (as in that bizarre series where WW II gets interrupted by an alien invasion of Earth)."

No joke. I read about the first third of the first book in that series; (spoiler warning) the humans win because the invading aliens all break their necks one morning after tying their shoelaces together.

Turtledove's writing is awful. Let's get our counterfactuals from *anywhere* else.

[Bruce Moomaw]

"However, Europe is in demographic decline. Even the clever technocrats lack a plan for dealing with the pending surge in the ratio of pensioners to workers."

How the hell does Kling think the free market can deal with THAT problem any better than government policies do?

The simple fact is that in EVERY part of the world where women -- however poor -- have access to birth control, the birth rate is in sharp decline (contrary to Paul Ehrlich's "Population Bomb" apocalypse). "Science" had a letter on that subject in 2003 -- the year in which, for the first time in history, more than half the human race lived in nations where the birth rate is BELOW the replacement rate (including China, Brazil and Tunisia). The only reason world population is still rising is that there are still two parts of the world where women do NOT have access to, or the right to, birth control -- sub-Saharan Africa and the least enlightened part of the Moslem world, stretching roughly from Pakistan to Saudi Arabia -- and those women are still producing huge families.

[Barry]

Brad: "I find myself agreeing with Arnold Kling to the extent that I think Social Security would work better as a real forced-saving program than it does as a pure pay-as-you-go program."

Brad, to some extent the SS does function this way, for you, me, and the rest of the Baby Boomers. It's called the 'Greenspan plan'.

Every time a liberal doesn't emphsize this, when discussing SS, it concedes something to the SS destroyers.

[Cranky Observer]

Bruce,
I found Turtledove amusing for a while, but after he obtained a word processor and started copying entire chapters from one book to another I gave up. And I agree that at his best he wasn't a great writer.

But my point in my 2nd comment wasn't to divert the thread into a discussion of other alternate histories, but to ask a serious question. The Socialists, Communists, and (especially) proto-Fascists were all gaining strength during the early years of the Depression. I see no need to posit a "Joe Steele" to think that, had things continued to worsen, Fascist candidates would have started to appear on ballots around the country. IOW, it isn't possible to make a pure economic policy analysis without considering the anger of the populace.

Cranky

[Jon Fernquest]

I sure wish I had this when I was teaching intermediate macroeconomics.

Your historical narrative makes the subject more real and memorable for students than for instance, verbalising what is happening as curves shift or a perturbation / shock ripples through equations.

[Paul J. Reber]

BDL wrote:
"I find myself agreeing with Arnold Kling to the extent that I think Social Security would work better as a real forced-saving program than it does as a pure pay-as-you-go program. I agree with Arnold Kling in fearing that the health-care financing system we have grown will lead us to fumble a good deal of the opportunities for extending human happiness that are going to be opened up by biomedical research in the next two generations."

*raises hand*
2 questions please, Prof:
1. I thought I learned here earlier that the one crucial benefit of conceiving SS as "forced savings" instead of the current plan is the ability to protect the money from irresponsible spending. As in the current situation where a few trillion dollars has been looted out of the SS system to cover for massive deficit spending such that the boomers are now facing retirement depending "pieces of paper" which may not be reliable (according to the current admin).

I thought I understood that the libertarian version of the forced savings plan was to make investors of everybody so that (a) on average everybody would get market returns, which may be better than the current system and (b) investment choice quality would lead to further inequality such that some people would do much better, which is theoretically a good thing because it encourages further movement of capital to good investment and more growth (but they don't typically mention who, if anybody, provides the necessary philanthropy to feed the losers).

However, BDL's statement of agreement here is unclear to me -- do I misunderstand that main center/left rationale for forced savings? Or maybe the libertarian rationale? Perhaps he did not mean to agree based on rationale but only that 2 different rationales produced the same recommendation.

2. What is the nature of the fear of missed opportunity in improving healthcare? To me, the inequality in heathcare seems to be the most important issue -- specifically, insuring the many currently uninsured (i.e., proportinally more resources towards the uninsured, less towards insurance company overhead/admin & profits). A secondary concern is the rising cost of healthcare. But can we be sure that rising fraction of GDP dedicated to healthcare is going to be bad for healthcare development? Is it not possible that productivity growth in fields like manufacturing and other production will actually outpace consumption growth? If so, it seems natural that we will reshape expenditures in other areas like healthcare, education and entertainment. I'm out of my depth here, I'm sure, but why couldn't it be the case that our future society (a few decades from now) be fairly optimally configured with health care expenses at 25% of GDP? Wouldn't additional resources/capital in health care generally lead to pressure towards greater technological and productivity growth?

Perhaps I'm missing something, but long-term healthcare cost growth isn't very scary to me (and the "moral hazard" argument/concern bandied about on the right seems to me clearly immoral).

P.S. Loved the alternate history scenario, of course. Very nice encapsulation of a great deal of macroeconomic theory and practice from left/right perspectives.

[Bill Harshaw]

I found it fascinating that you, a supposedly liberal economist, were able to discuss the New Deal with so little attention to unions and agriculture. That's a far cry from the conventional wisdom in the 1950's, when I was growing up. While CW may be wrong, I find it more tempting to think that it's just another swing of the pendulum.

[Bruce Moomaw]

To Cranky: Quoting Dwight Macdonald on the subject of Huey Long: "Long was a real tiger who exploited real issues of social injustice; and had not young Dr. Weiss gunned him down, he might have broken out of his Southern cage onto the national scene with results of which one can say confidently only that they wouldn't have been good." And it was Long, of course, who said that if fascism ever came to the US, it would not be CALLED "fascism". (This was about the same period in which Stalin -- then in the throes of his moony love affair with Hitler -- was starting to say that there was really very little difference between Communism and Fascism.)

[knzn]

"the Fundie Keynesian part of my brain thinks that Hugh Johnson's NRA was irrelevant because aggregate demand was a much bigger problem then than aggregate supply"

Just irrelevant, Brad? A large part of the cause of aggregate demand failure was the fear of deflation. Surely the NRA helped alleviate that fear?

Is this the same Brad DeLong who once wrote a paper with Larry Summers about the stabilizing impact in the postwar period of forces like labor unions that kept wages and prices up?

[I say there were better ways to reflate than the NIRA. But your point is a good one...]