Poor John Updike. Poor New Yorker. The Great Depression Once Again

Oh, this is sad. Really sad. Depressing. And pathetic. It is really too bad that the New Yorker gave Amity Shlaes's book about the Depression, The Forgotten Man to John Updike to review. A competent editor would have chosen a reviewer who knew economics and history. But Updike is lost from the start:

Laissez-faire Is More: [Shlaes tells us that the 1929] crash preceded an underlying problem, deflation, caused by not enough money in circulation as banks failed and shut their doors; a number of dollar-starved communities—Salt Lake City; Ventura, California; Yellow Springs, Ohio—issued their own scrip, while Presidents Hoover and then Roosevelt supported policies, like the gold standard, aimed at a nonexistent inflation...

We need to stop right there. Roosevelt abandoned the gold standard. That Updike thinks that Roosevelt spent the 1930s clinging to the gold standard to control "a nonexistent inflation" is the first sign that he has lost the game of intellectual three-card monte Amity Shlaes is playing with her readers. If Milton Friedman were here, he would blow the whistle at that point.

Updike goes on:

[T]he gravest problem, as Shlaes sees it, was government “intervention, the lack of faith in the marketplace.” Both Presidents tried to lift wages, when letting them sink would have liberated businesses to start hiring and resume business as usual. Business knows best...

Once again, Milton Friedman would blow the whistle if he were here. The main thing reducing the stock of money was bank failures. The main thing causing bank failures was falling prices of all kinds--of real estate, of consumer goods, and of labor. More of what Milton Friedman's teacher Jacob Viner called "unbalanced deflation" would have produced an even deeper depression.

If only Updike knew this. If only Updike knew that nearly all economists--from Milton Friedman to Ben Bernanke to John Maynard Keynes to John Kenneth Galbraith on left--believed that further and faster deflation would have made the Great Depression worse! Here's John Maynard Keynes's argument: "Changes in Money Wages" http://www.marxists.org/reference/subject/economics/keynes/general-theory/ch19.htm. It was written in 1936, and still reads very well today. But nobody told Updike.

Hoove... was a dynamo... he favored government intervention, as long as it didn’t violate his sense of the Constitution, and sought control over economic events that would, according to Shlaes, have gone better if left alone.... Shlaes pursues her thesis through the thirties, few heroes emerge, and the most highly placed two are not apt to figure in many liberal pantheons: Calvin Coolidge and Andrew Mellon. Coolidge... is presented as a kind of Zen saint, a pillar of inaction.... [Shlaes] underlines Mellon’s honorableness, private generosity, and public spirit...

But she doesn't tell Updike that at the bottom of Mellon's personality was a pronounced social-darwinist streak, a belief that you had to be cruel to be kind. And Updike, of course, doesn't know. So he cannot quote Herbert Hoover's retrospective judgment of Mellon, that the policies Mellon had convinced him to follow made the Great Depression much worse:

[T]he “leave it alone liquidationists” headed by [my] Secretary of the Treasury Mellon... felt that government must keep its hands off and let the slump liquidate itself. Mr. Mellon had only one formula: “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.” He insisted that, when the people get an inflation brainstorm, the only way to get it out of their blood is to let it collapse. He held that even a panic was not altogether a bad thing. He said: “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”...

Updike forges on, lost in the swamp, so lost that he is unable to protest Shlaes's libel that that Roosevelt was practically a fascist and her argument--argument--a very serious argument that has never been made in such detail or such care--that Roosevelt wanted to make the government boss people around because he couldn't use his legs:

Shlaes, in a bold stroke of psychologizing, lays the hyperactivity to “the restlessness of the invalid.” She goes on, “Like an invalid, the country took pleasure in the very thought of motion.” More ominous was Roosevelt’s totalitarian tendency: “His remedies were on a greater scale and often inspired by socialist or fascist models abroad.”

Updike watches Shlaes make the claim that that communist Roosevelt hired other commies as New Dealers:

One of Shlaes’s chapter-length detours deals with a junket... to investigate and report on conditions in the Soviet Union.... [T]he economic commentator Stuart Chase.... Stuart Chase upon his return wrote, “Laissez-faire rides well on covered wagons, not so well on conveyor belts and cement roads.” Collectivism was the inevitable direction. After all, Chase wrote, “why should Russians have all the fun remaking a world?” The poisoned chalice was passed around...

But then she doesn't:

But “few New Dealers were spies or even communists,” she reassures the reader....

At the end of his review, Updike tries to fight back:

[T]he Depression slogged on, ending only in 1940, as the government decisively hiked defense spending.... My father had been reared a Republican, but he switched parties to vote for Roosevelt.... The impression of recovery-—the impression that a President was bending the old rules and, drawing upon his own courage and flamboyance in adversity and illness, stirring things up on behalf of the down-and-out—mattered more than any miscalculations in the moot mathematics of economics. Business, of which Shlaes is so solicitous, is basically merciless.... Government is ultimately a human transaction, and Roosevelt put a cheerful, defiant, caring face on government at a time when faith in democracy was ebbing throughout the Western world. For this inspirational feat he is the twentieth century’s greatest President, to rank with Lincoln and Washington as symbolic figures for a nation to live by.

A better New Yorker editor would have chosen a reviewer who at least knew what an aggregate demand curve was. Here's my take:

http://delong.typepad.com/sdj/2007/02/arnold_kling_vs.html: 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....

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.... Financial markets function well for the economy only when they do a good job of seeking out and transmitting information.... 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....

[On the other hand] 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.... Smart financial regulation attains a point of balance. There is... 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 and sellers....

[L]et's not lose sight of the fact that even badly-handled as it was, really-existing deposit insurance [implemented during the New Deal] 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...

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 abandonment of the gold standard--which Roosevelt did in 1933--as the key to even partial recovery from 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 (1983), "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.

Comments

[Bruce Wilder]

The Great Depression as a distant mirror mostly reveals how difficult it is for economists to see the economic is all its detail.

Everyone seems to want to abstract out the one essential ingredient, the single technical intervention.

If I were to fault Brad DeLong's account for anything, it would be for shrouding the redistributive bounty of a great deflation. That was FDR's great achievement -- taking an economic event, a great deflation, which in the past had been an occasion for massively redistributing wealth and income to the very rich, and turning the economic crisis, and the subsequent war crisis, into occasions for massively redistributing wealth and income downward. Mellon's passion for liquidation of lesser men was just an echo of the liquidations of the 19th century depressions of 1873 and 1893, depressions that gave us the Gilded Age, bankrupting businesses, dissolving savings in bank failures, destroying organized labor.

Bernanke's great insight is that a timely inflation could have saved the privileged position of the very wealthy, and left the mass of Americans in poverty. An inflation to preserve the great wealth of 1% -- that would be the policy of Milton Friedman, which Brad fantasizes about.

The New Deal had many components, which went way beyond dim memories of Progressive reform, and the great surge in wages under Woodrow Wilson's wartime administration. No one living thru the 1920's with their eyes open could have escaped the view that much was corrupted and much neglected in American economic life -- that neglect and rottenness extended far beyond the financial.

The American Farm, particularly in the West and the South, was in trouble. Beyond the electric grid, oppressed by the steady fall of agricultural prices, overpopulated, American agriculture was in very serious trouble in the 1920's. Agricultural supports shielded a lot of farmers from catastrophe, while supporting the migration out of agriculture, and allowed huge increases in productivity; the costs of not having that program would have been the impoverishment of millions. It was a brilliantly successful program. The fact that Nixon's Earl Butz made a complete mess of it, is no reason to slander FDR.

Deposit insurance was another brilliant success. And, again, because Reagan used it to transfer billions to the very wealthy in the Savings and Loan collapse should not be laid at FDR's feet.

[anne]

Disgraceful book and disgraceful reviewer. Pretending to know what you do not know is as bad here as writing a methodically prejudiced, methodically distored political diatribe.

Disgraceful.

[Kieran]

I saw this book advertised recently and my first thought was "Hmm, sounds interesting." Then I saw who was blurbing it and my second thought was "I wonder what the Economic Historians think of this."

[David]

"We need to stop right there. Roosevelt abandoned the gold standard. That Updike thinks that Roosevelt spent the 1930s clinging to the gold standard to control "a nonexistent inflation" is the first sign that he has lost the game of intellectual three-card monte Amity Shlaes is playing with her readers."

Updike doesn't appear to be alone here; an Amazon reviewer calling himself "Newt Gingrich" says the same thing--and throws in the contention that FDR was a high tariff man to boot! Is Shlaes actually peddling this nonsense?

[PSP]

On the contrary, I think Mr. Updike put down the revisionism quite effectively. He simply used a different angle of attack than an economist, based on anecdote and personal history. What he elegantly said was that only someone who didn't live through the Depression could believe the author's revisionism.

There is a need for shredding such nonsense by an economist. But I suggest that the New Yorker would be the last place to expect to see it. Harper's or the Atlantic perhaps, the Washington Monthly or the Prospect for sure, once upon a time in TNR, but not the New Yorker.

I am sorry to say that to expect otherwise is to underestimate the extent to which economists have driven away (from?) the rest of the liberally educated.

And you backing the conservatives up when the subject turns to the NRA doesn't help matters.

P.S. There is no basis for saying that Updike believes that FDR stuck to the gold standard. Updike is clearly presenting the author's assessment, prior to flailing her with his own.

I suspect that if you asked Updike, he would say that the book's thesis is so ridiculous, that pulling out and examining every error of fact was unnecessary and would have exceeded the word limit too.

Would that it be true.

[Arthur Cutten]

One thing we might not overlook is that FDR averted the rise of fascism in the United States, as opposed to several peers, notably Japan, Germany, Italy, Spain, Russia (of the left) and a small host of lessers names. No small achievement, but we too often forget it. But for the grace of Hyde Park we may have gone Huey Long.

With the thunder of the gathering economic storm becoming increasingly near, perhaps we can look forward to another try at getting it right, within the bounds of the localized permutations of globalization and pure fiat currencies.

It will be interesting to see if Brad can play a role this time. I hope that he can. However it goes, it does seem a near certainty that a 'new school' of economics will come out of our latest grand experiment with the mechanics of civilisation, and it would be nice to have someone with depth and intelligence involved first hand.

Hopefully he will have an FDR to work with, and not a Mussolini, Stalin, or Hitler.

[eco@eco.com]

Amity Shlaes is one of those people I would like to meet at one cocktail party, just to retort with a smirk "Dude, you are so stupid."

Seb Mallaby is another one. That man has no clue of his own beat.

[jonfernquest]

Some Dr Frankenstein PR genius can create academics of Paris Hilton magnitude popularity

http://en.wikipedia.org/wiki/The_Absent-Minded_Professor
http://en.wikipedia.org/wiki/Absent-minded_professor

How to become a celebrity class public intellectual, a necessary addition to the PhD curriculum?

[jonfernquest]

Maybe economics needs a Sartre?

http://en.wikipedia.org/wiki/Jean-Paul_Sartre

[christofay]

But our present big name economists don't worry about the Neo Great Depression, here's a quote of a quote from the BIS about Greenspam's fighting a bubble with a bubble:

He writes: "The Bank for International Settlements, the world's most prestigious financial body, has warned that years of loose monetary policy has fuelled a dangerous credit bubble, leaving the global economy more vulnerable to another 1930s-style slump than generally understood. . . . The BIS, the ultimate bank of central bankers, pointed to a confluence a worrying signs, citing mass issuance of new-fangled credit instruments, soaring levels of household debt, extreme appetite for risk shown by investors, and entrenched imbalances in the world currency system." In the words of the BIS itself: "Behind each set of concerns lurks the common factor of highly accommodating financial conditions. Tail events affecting the global economy might at some point have much higher costs than is commonly supposed."
Regarding the bubble-management policies of the Federal Reserve, Mr. Evans-Pritchard writes: "In a thinly-veiled rebuke to the US Federal Reserve, the BIS said central banks were starting to doubt the wisdom of letting asset bubbles build up on the assumption that they could safely be 'cleaned up' afterwards -- which was more or less the strategy pursued by former Fed chief Alan Greenspan after the dotcom bust."

I'll avoid the snarky comments as that certainly will make this post be disappeared. I will say that Greenspam's policies before retirement were the actions of a politicized Fed which is enough to make this post go 'poof.'

[christofay]

Finally a neo-conman has made a sacrifice in wartime, it's way up to 2007 and Nuke Gringrich hasn't gotten himself a new trophy wife. I want to add an exclamation point.

[RKKA]

Thus continues the war against FDR, in the form of the war against his policies that built an economically and politically powerful Middle Class on the wreckage left by Mellon. Scaife, a Mellon heir, funded Heritage and AEI, and the war on the Clintons. His power, and that of those like him, must be destroyed, or we will lose our Republic.

It's that simple.

[jonfernquest]

"I'll avoid the snarky comments..."

This post was about celebrities commenting on subjects they know nothing about.

This is a worrying trend when people are looking to all the answers to web publishing by looking at their web traffic logs.

I can tell you from staring at the real time logs of our little sub-newspaper site, one loose bra strap story can reduce all the monetary policy stories to a rounding error.

Celebrity Updikes should stick to the stuff Updikes know about, even if they are asked to do something else, at least we got this blog to show us.

[jamzo]

like academic history, popular history is an evolving narrative

Amity Shlaes interprets the depression and the new deal form a from a conservative point of view -i would call it a contrarian point of view

the book has significant promotion - she was featured on c-span this past sunday in an hour-long one-on-one interview about her opinion-book

i have no insight into the new yorker's motives in reviewing the book

they are not required to review it

but she is a syndicated columnist with bloomberg news, chicago tribune and finnancial times stamps of approval
and she is reinterpreting the roosevelt narrative

there is something to think about in the new yorker's choice of reviewer

they chose to highlight her interpretation of history with a review by a writer with an enduring interest in her subject matter

they did review the book as an economic fact book

they label the book "A revisionist history of the Depression"

mr updike is a regular reviewer for the new yorker

as a writer he describes his subject as "the American small town, Protestant middle class

he ends the review with the following paragraph

"My father had been reared a Republican, but he switched parties to vote for Roosevelt and never switched back. His memory of being abandoned by society and big business never left him and, for all his paternal kindness and humorousness, communicated itself to me, along with his preference for the political party that offered “the forgotten man” the better break. Roosevelt made such people feel less alone. The impression of recovery—the impression that a President was bending the old rules and, drawing upon his own courage and flamboyance in adversity and illness, stirring things up on behalf of the down-and-out—mattered more than any miscalculations in the moot mathematics of economics. Business, of which Shlaes is so solicitous, is basically merciless, geared to maximize profit. Government is ultimately a human transaction, and Roosevelt put a cheerful, defiant, caring face on government at a time when faith in democracy was ebbing throughout the Western world. For this inspirational feat he is the twentieth century’s greatest President, to rank with Lincoln and Washington as symbolic figures for a nation to live by." ♦

ms shales was writing about interpretation of history and i think mr updike is a worthy reviewer of her interpretation of events

thank you new yorker and thank you mr updike for taking the time to push back on the popular historical narrative

i also think the review is a good comment on the exalted status of corporate interests in our life today

[lgm]

One quibble. I think it was Nixon who took the US off the gold standard. I remember as a kid gold was worth $45/ounce (maybe $35/ounce?). A fixed conversion rate between gold and the US Dollar is the definition of the gold standard, I think.

[normansdog]

Schlaes was a right wing hack at the FT who wrote all sorts of supply side crap and is apparently being rewarded by book deals.
I was rather hoping that she had gone away.
Steve

[wkwillis]

Roosevelt inflated the dollar, true, but not as much as Wall St. had deflated it. If he had pegged the dollar at 50 or 60 dollars an ounce, we might have got out of the Depression faster.
1914-US 20.67 UK 4.24 before WWI inflation.
1920-US 20.67 UK 5.65 after WWI inflation.
1930-US 20.67 UK 4.25 before Depression.
1934-US 35.00 UK 6.88 after Depression.

[andres]

The last paragraph of the review, copied above by jamzo, indicates that the problem is not Updike's political leanings or his attempt to criticize Shlaes, but his lack of analytical tools to do so. The fault lies not with him but with the editor who asked him to do the book review.

Having said that, Brad's criticisms are pretty much spot on, though I would add that he does not mention the international aspect of the GD, as described in Kindleberger's _The World In Depression_ and Peter Temin's lectures _Lessons from the Great Depression_ (the latter is, imo, the best short theoretical treatment on the causes of the GD as well as the recovery).

Also, I think Brad may be shirking his duty in not mentioning that the Friedman-Schwarz explanation of the GD, found in _A Monetary History of the US_ is in fact a misleading half-truth. It is perfectly correct to blame the Fed for not stemming the financial crisis and allowing the money supply to collapse. However, neither the gold standard nor conventional economic opinion is at the center of the Friedman-Schwarz analysis. The Fed was in fact not simply defending the gold standard by allowing real interest rates to increase, but was also following the conventional, _pro-business_ prescriptions of Andrew Mellon and co. Thus, blaming the Fed _exclusively_ for the GD is highly misleading and should, imo, disqualify the _Monetary History_'s chapter on the GD as an impartial analysis.

The real problem was in the macroeconomic theory held by the financial system around the world in the late 1920's, a theory that focused almost obsessively on balancing external capital flows and price stability at the expense of employment and output, which were supposed to take care of themselves. That Shlaes doesn't seem to mention this at all only adds evidence to the charge that she is a right-wing hack trying to rewrite history by doing a hatchet job on Roosevelt and the New Deal.

[Peter K.]

"Business, of which Shlaes is so solicitous, is basically merciless.... Government is ultimately a human transaction, and Roosevelt put a cheerful, defiant, caring face on government at a time when faith in democracy was ebbing throughout the Western world."

I thought Updike put this well.

[andres]

lgm: The US abandoned the gold standard in the 1930's, in the sense of having a pegged exchange rate of gold to US currency that was guaranteed for _all_ transactions. What the US had after the 1930's and up to Nixon's closeout in 1971 was an exclusionary system in which only gold transactions between central banks (eg the Fed and the Bundesbank) were given a fixed gold/currency exchange rate. All other private gold transactions had floating gold/currency exchange rates set by the international gold market.

[andres]

As a historical note, the end of the central bank gold exchange rate system that lgm mentions began in the early 1960's when it became clear that European countries and Japan were accumulating too many US dollar reserves, indicating that the US money supply was expanding too rapidly and that the artificial $35/oz. exchange rate was highly undervaluing gold. In 1964, I think, De Gaulle put a substantial dent in US gold reserves by ordering the Banque de France to sell off its dollar reserves to the Fed (those damn French, always spoiling things).

After that, it slowly became clear that the US did not have enough gold reserves to meet demand if every foreign central bank decided to sell off its dollar reserves, so to avert the danger (which was increasing in view of US inflation), Nixon had the Fed close the gold exchange window with foreign central banks.

So I actually still remember some garbled version of what I read in my international macroeconomics graduate course. Of course, I won't be surprised or offended if Brad or anyone else corrects any errors in the above.

[John]

Brad, and some commenters, are too harsh on Updike. Who better than a noted fiction writer to review Shlaes's revisionist history?

[Sock Puppet of the Great Satan]

"Schlaes was a right wing hack at the FT who wrote all sorts of supply side crap and is apparently being rewarded by book deals."

When did the FT finally dump Schlaes? I'm thinking it was round the time they retained Chris Caldwell, a more intelligent US right winger. Plus, they're now giving more space to the witty Lucy Kellaway.

Seeing Schlaes idiotic blather in the same paper that publishes the magisterial Martin Wolf was just too incongruous.

[Sock Puppet of the Great Satan]

Wonder if Schlaes pointed out that annual economic growth 1933-1941 was 8% p.a.?

Probably not, as no GOP president since we began collecting GDP statistics has matched that in a single year. Not even St. Ronnie.