Lessons from the Great Depression Blogging

Apropos of Krugman's evisceration of the underbriefed George F. Will http://delong.typepad.com/sdj/2008/11/what-a-change-t.html:

I have never been able to make any sense at all of the right-wing claim that the New Deal prolonged the Great Depression by creating a "crisis of confidence" that crippled private investment as American businessmen feared and hated "that Communist Roosevelt." The crisis of confidence was created by the stock market crash, the deflation, and the bank failures of 1929-1933. Private investment recovered in a very healthy fashion as Roosevelt's New Deal policies took effect.

The interruption of the Roosevelt Recovery in 1937-1938 is, I think, wel understood: Roosevelt's decision to adopt more "orthodox" economic policies and try to move the budget toward balance and the Federal Reserve's decision to contract the money supply by raising bank reserve requirements provide ample explanation of that downturn. And once those two factors had run its course the continuation of Roosevelt's policies was no obstacle to an investment recovery driven by war-related exports monetary expansion produced by capital flight from Europe.

You can argue--and I occasionally do--that had the Supreme Court not ruled the NIRA unconstitutional it would have exerted a significant drag on medium-run economic recovery. But the Supreme Court did rule the NIRA unconstitutional, 9-0, Brandeis voting alongside MacReynolds.

Sumner H. Slichter (1938), "The Downturn of 1937," Review of Economics and Statistics 20:3 (August), pp. 97-110.

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UPDATE: Pro-Growth Liberal also weighs in: http://econospeak.blogspot.com/2008/11/net-investment-under-fdr-krugman-v-will.html.

And we have http://www.huffingtonpost.com/2008/11/17/paul-krugman-schools-geor_n_144298.html, http://yglesias.thinkprogress.org/archives/2008/11/will_v_krugman_on_the_depression.php, http://www.thewashingtonnote.com/archives/2008/11/a_sweet_77_seco/, http://mainstusa.blogspot.com/2008/11/krugman-explains-depression-to-george.html, http://firedoglake.com/2008/11/17/early-morning-swim-special-krugman-pwns-will-edition/, http://www.washingtonmonthly.com/archives/individual/2008_11/015686.php, http://sanseverything.wordpress.com/2008/11/16/bambi-versus-godzilla-the-economic-edition/.

And Debra Cooper emails:

Back in the bad ole days, not so long ago....George Will would have said his nonsense, looking and sounding professorial; Cokie Roberts would have seconded in her no nonsense kind of way (after all her parents were Democratic party icons) and the another lie would have sustained the right wing economic hegemony on elite opinion. Now we have a Nobel Prize winning economist to put away in a few quick, well chosen, well sourced progressive views that George Will just spouts crap.

Paul has had a column since 2000, but he hasn't had the impact he deserved. The internet has lent great support to that.

In addition to taking due credit for the election of a center left Democrat, the netroots should take an enormous and continuing bow for changing the media environment for the better.

Comments

[nathan]

perhaps we should use bailout money to improve management quality at banks on bailout money - administered by public universities and public institutions.

http://tiny.cc/7GQge

[Neil B]

Brad, perhaps you are just posing this as wink-wink rhetorical question:
"I have never been able to make any sense at all of the right-wing claim that the New Deal prolonged the Great Depression by creating a "crisis of confidence" that crippled private investment ..."

I suppose you mean, make "sense" of it as economic science. But as so many have explained (and e.g. in comments to Kevin Drum, Steve Benen etc.) most of The Right is not interested in "science" - i.e., a reality-based understanding of what really happens, what really works or doesn't etc. The posit things in terms of tactical/strategic advantage to their cause, and then rationalize to fit that. (Compare my comment in "Republicans Dive Deeper into Fantasy.")

I suppose they were doing that in decades/centuries past; I don't know much about their early practices - does anyone around here have better scoop on that?

[spencer]

If you make real nonresidential investment from 1929 to 1940 a function of three variables:

1. Corporate profits.
2. The GDP Gap a proxy for capacity utilization
3. The stock market as a proxy for the cost of capital.

One can explain essentially all of the early 1930s drop in capital spending and the mid-to late- 1930s rebound in capital spending without the need for any other variables.

These three variables are ones that numerous large scale economic models use to explain or forecast capital spending in current models, so these are not some weird set of explanatory variables. Rather they are exactly what both experience and theory tell you that you should use.

An exercise of using these three variables to explain business investment in the New Deal clearly and conclusively disprove the conservative rewriting of history.

[pgl]

Thanks for mentioning my little contribution. Great job of showing the time series for gross investment - to which all I did was to show how the net investment series mirrored the gross investment and did peak above zero for a couple of years.

[maynardGkeynes]

Speaking of a bad rap, let's talk about the NRA. In fact, the NRA was exactly what was needed in a deflationary time. It allowed businesses to form cartels and share the monopoly rents with workers in the form of higher wages, which had the effect of raising wages and prices. This is precisely the right medicine when the major problem is deflation, as it was during the Great Depression. You may recall that part of Gerry Ford's WIN ("Whip Inflation Now") program was vigorous antitrust enforcement and a jawboning against unions. The Great Depression posed the opposite problem, calling for an inflationary government policy in favor of higher union wages and the easing of antitrust enforcement. Maybe we should try it again.

[Robert Waldmann]

There is not just the usual bad faith here. There are I think 3 honest mistakes behind the claim that the New Deal was bad for business

1) People will pay attention to nominal variables. Can't be helped. It is especially difficult for people to get their heads around deflation. Since real investment recovered to pre-depression levels, I conclude that nominal investment didn't. I haven't seen the numbers but I bet they have influenced sincere people (plural just means 2 or more).

1) Lebergott's unemployment series (he's not necessarily in good faith but was the standard authoritative source for decades. I used his numbers). Lebergott chose to count people working for the WPA as unemployed (but people working for state, local and other Federal government as employed). Now WPA employment would be expected to reduce non WPA employment -- 0 crowding out is implausible. In any case, defining the main employment program as a failure by definition, makes a huge difference and confuses people who assume that "unemployed" meant the same thing in 1933 and in 1936. Hmm now where did I read about that ?

3) total ignorance of basic facts. Most people haven't seen the graph of US real per capita GNP which you posted above our desk at the NBER. Now it isn't so super honest to opine without checking the most basic facts, but people do.

[Rakesh Bhandari]

Well, someone needs to be a contrarian here. Not to say that the New Deal depressed private investment that was already depressed but rather to say that deficit spending did not do much to lift investment.

*Private investment never regained strength to bring unemployment below 14%
*It's possible that FDR's return to orthodoxy in 1937 was as much a response to signs of declines in private investment as it was a cause thereof. The timing is not well specified in the graph above
*To the extent that profits and therewith investment showed some recovery, it may have been more the result of the monopolization of business than it was
the result of the stimulus from government deficit spending. Moreover, some recovery of investment may have obtained after its collapse even without FDR's deficit spending.

It seems to me that the Keynesian deficit spenders are not providing us sufficient evidence to show that Keynesian deficit spending can stimulate private investment if that deficit spending is large enough.

In fact the evidence that both Professors DeLong and Krugman are citing is so thin to lead one to believe that they have something of a magical belief in deficit spending as the solution--or should I say panacea--to recession.

Contrarian in the house.

[Rakesh Bhandari]

I am not sure whether people have read the Sumner Slichter paper at the end of Professor DeLong's blog, but see points 12, 13 and 14 in the last two pages: they are a devastating criticism of a magical belief in the efficacy of Keynesian deficit spending in the face of real profitability difficulties. I am completely baffled as to why Professor DeLong has cite it. On the other hand, there is a minor school of Ricardianism that has an interesting theory of profit.

[Barry]

"3) total ignorance of basic facts. Most people haven't seen the graph of US real per capita GNP which you posted above our desk at the NBER. Now it isn't so super honest to opine without checking the most basic facts, but people do."

Posted by: Robert Waldmann

That graph makes right-wing claims totally ridiculous, at best. Which is why it's so uncommon to see it posted by right-wingers.

[Neil B]

BTW, let me again call for Obama to put Paul Krugman into a top post in his Administration.

[Bill Stepp]

Where did the figures on the graph's y-axis come from?
Also what do these numbers represent?

[hdthoreau]

*It's possible that FDR's return to orthodoxy in 1937 was as much a response to signs of declines in private investment as it was a cause thereof. The timing is not well specified in the graph above

It seems to me that the Keynesian deficit spenders are not providing us sufficient evidence to show that Keynesian deficit spending can stimulate private investment if that deficit spending is large enough.

In fact the evidence that both Professors DeLong and Krugman are citing is so thin to lead one to believe that they have something of a magical belief in deficit spending as the solution--or should I say panacea--to recession.

Contrarian in the house.
Posted by: Rakesh Bhandari | November 17, 2008 at 08:42 PM

I wanted to expound on some of your statements. First, you assert that FDR's return to orthodoxy in 1937 might have been a response to signs of declines in private investment as much as it was a cause thereof. However, there is no mystery as to why he returned to returned to orthodoxy.
First, you have understand why FDR was elected in the first place. FDR did not campaign on what is now thought of as the New Deal policies. Indeed, he campaigned on balancing the budget. During the campaign, he ridiculed Hoover's huge deficits. Roosevelt campaigned on the Democratic platform advocating "immediate and drastic reductions of all public expenditures." Fast forward to 1936, all the main economic indicators had regained the levels of the late 1920s, except for unemployment, which remained high. In FDR's Jan 1936 budget message, the president asserted that a balanced budget was now in sight. In his Jan 1937 budget message, FDR reported "Industrial production, factory payrolls, and farm prices have steadily risen. These gains make it possible to reduce for the fiscal year 1938 many expenditures of the Federal government which the depression made necessary." So, in 1937 FDR proceeded to reduce fiscal expenditures. Also, you have to remember that in Jan 1936 Congress overrode FDR's second veto concerning a bonus for veteran's in the form of bonds. On June 15 1936, payment of $1.7B was made to veterans. FDR urged veterans to retain the bonds(the vets spent them). Of them, $1.4B had been cashed and spent by the end of 1936 leading to a upsurge in automobile production and residential housing, effectively a huge stimulus. Now, with the termination of this artificial prop in 1937, the simultaneous reduction in Federal spending, and the introduction of social security taxes, consumer demand fell off considerably, the economy contracted, and voila FDR changed his fiscal thinking: in the words of Secretary Morgenthau, "The early New Dealers from Roosevelt were looking forward to a balanced budget...But in the course of time new theories, based in part on the reasoning of John Marynard Keynes..had come into vogue." Indeed on April 14 1938 he called for an antideflation program of $3B for public works.
Declines in private investment had nothing to do with his return to orthodoxy, indeed, he was far more orthodox at heart to begin with but correctly changed his tune when the orthodoxy fell flat on its face. QED

Now to address your claim about whether evidence exists that Keynesian deficit spending can stimulate private investment if that deficit spending is large enough. Well, that's not a terribly elusive piece of evidence...WWII being unmistakably it. Now, its hardly a magical belief to posit that WWII was deficit spending par excellence, and thus Krugman and DeLong are quite on target when they speak of pursuing countercyclical fiscal policies. QED

Hope this clears illuminates the discussion.

[hdthoreau]

*It's possible that FDR's return to orthodoxy in 1937 was as much a response to signs of declines in private investment as it was a cause thereof. The timing is not well specified in the graph above

It seems to me that the Keynesian deficit spenders are not providing us sufficient evidence to show that Keynesian deficit spending can stimulate private investment if that deficit spending is large enough.

In fact the evidence that both Professors DeLong and Krugman are citing is so thin to lead one to believe that they have something of a magical belief in deficit spending as the solution--or should I say panacea--to recession.

Contrarian in the house.
Posted by: Rakesh Bhandari | November 17, 2008 at 08:42 PM

I wanted to expound on some of your statements. First, you assert that FDR's return to orthodoxy in 1937 might have been a response to signs of declines in private investment as much as it was a cause thereof. However, there is no mystery as to why he returned to returned to orthodoxy.
First, you have understand why FDR was elected in the first place. FDR did not campaign on what is now thought of as the New Deal policies. Indeed, he campaigned on balancing the budget. During the campaign, he ridiculed Hoover's huge deficits. Roosevelt campaigned on the Democratic platform advocating "immediate and drastic reductions of all public expenditures." Fast forward to 1936, all the main economic indicators had regained the levels of the late 1920s, except for unemployment, which remained high. In FDR's Jan 1936 budget message, the president asserted that a balanced budget was now in sight. In his Jan 1937 budget message, FDR reported "Industrial production, factory payrolls, and farm prices have steadily risen. These gains make it possible to reduce for the fiscal year 1938 many expenditures of the Federal government which the depression made necessary." So, in 1937 FDR proceeded to reduce fiscal expenditures. Also, you have to remember that in Jan 1936 Congress overrode FDR's second veto concerning a bonus for veteran's in the form of bonds. On June 15 1936, payment of $1.7B was made to veterans. FDR urged veterans to retain the bonds(the vets spent them). Of them, $1.4B had been cashed and spent by the end of 1936 leading to a upsurge in automobile production and residential housing, effectively a huge stimulus. Now, with the termination of this artificial prop in 1937, the simultaneous reduction in Federal spending, and the introduction of social security taxes, consumer demand fell off considerably, the economy contracted, and voila FDR changed his fiscal thinking: in the words of Secretary Morgenthau, "The early New Dealers from Roosevelt were looking forward to a balanced budget...But in the course of time new theories, based in part on the reasoning of John Marynard Keynes..had come into vogue." Indeed on April 14 1938 he called for an antideflation program of $3B for public works.
Declines in private investment had nothing to do with his return to orthodoxy, indeed, he was far more orthodox at heart to begin with but correctly changed his tune when the orthodoxy fell flat on its face. QED

Now to address your claim about whether evidence exists that Keynesian deficit spending can stimulate private investment if that deficit spending is large enough. Well, that's not a terribly elusive piece of evidence to find...WWII undeniably being it. Now, its hardly a magical belief to posit that WWII was deficit spending par excellence, and thus Krugman and DeLong are quite on target when they speak of pursuing countercyclical fiscal policies. QED

Hope this illuminates the discussion.

[hdthoreau]

*It's possible that FDR's return to orthodoxy in 1937 was as much a response to signs of declines in private investment as it was a cause thereof. The timing is not well specified in the graph above

It seems to me that the Keynesian deficit spenders are not providing us sufficient evidence to show that Keynesian deficit spending can stimulate private investment if that deficit spending is large enough.

In fact the evidence that both Professors DeLong and Krugman are citing is so thin to lead one to believe that they have something of a magical belief in deficit spending as the solution--or should I say panacea--to recession.

Contrarian in the house.
Posted by: Rakesh Bhandari | November 17, 2008 at 08:42 PM

I wanted to expound on some of your statements. First, you assert that FDR's return to orthodoxy in 1937 might have been a response to signs of declines in private investment as much as it was a cause thereof. However, there is no mystery as to why he returned to returned to orthodoxy.
First, you have understand why FDR was elected in the first place. FDR did not campaign on what is now thought of as the New Deal policies. Indeed, he campaigned on balancing the budget. During the campaign, he ridiculed Hoover's huge deficits. Roosevelt campaigned on the Democratic platform advocating "immediate and drastic reductions of all public expenditures." Fast forward to 1936, all the main economic indicators had regained the levels of the late 1920s, except for unemployment, which remained high. In FDR's Jan 1936 budget message, the president asserted that a balanced budget was now in sight. In his Jan 1937 budget message, FDR reported "Industrial production, factory payrolls, and farm prices have steadily risen. These gains make it possible to reduce for the fiscal year 1938 many expenditures of the Federal government which the depression made necessary." So, in 1937 FDR proceeded to reduce fiscal expenditures. Also, you have to remember that in Jan 1936 Congress overrode FDR's second veto concerning a bonus for veteran's in the form of bonds. On June 15 1936, payment of $1.7B was made to veterans. FDR urged veterans to retain the bonds(the vets spent them). Of them, $1.4B had been cashed and spent by the end of 1936 leading to a upsurge in automobile production and residential housing, effectively a huge stimulus. Now, with the termination of this artificial prop in 1937, the simultaneous reduction in Federal spending, and the introduction of social security taxes, consumer demand fell off considerably, the economy contracted, and voila FDR changed his fiscal thinking: in the words of Secretary Morgenthau, "The early New Dealers from Roosevelt were looking forward to a balanced budget...But in the course of time new theories, based in part on the reasoning of John Marynard Keynes..had come into vogue." Indeed on April 14 1938 he called for an antideflation program of $3B for public works.
Declines in private investment had nothing to do with his return to orthodoxy, indeed, he was far more orthodox at heart to begin with but correctly changed his tune when the orthodoxy fell flat on its face. QED

Now to address your claim about whether evidence exists that Keynesian deficit spending can stimulate private investment if that deficit spending is large enough. Well, that's not a terribly elusive piece of evidence to find...WWII undeniably being it. Now, its hardly a magical belief to posit that WWII was deficit spending par excellence, and thus Krugman and DeLong are quite on target when they speak of pursuing countercyclical fiscal policies. QED

Hope this illuminates the discussion.

[Rakesh Bhandari]

No Slichter shows that the economy had not recovered by 1936. To the extent that there was investment, it was largely inventory accumulation due to fear of inflation. Unemployment remained high, and profitability difficulties remained severe. For Slichter it's not surprising that investment dipped again in 1937, for FDR's policies had not solved the underlying real problem of insufficient profitability. Moreover, Slichter is clear that it was not so much the decline of consumption--especially as enabled by government policy--that explains the downturn in 1937. Consumption was weak due to rising prices. Slichter explicitly shows that the reduction in veterans' benefits cannot explain the downturn.
Again I am surprised that Professor DeLong cites Slichter's article in defense of the simplistic idea that deficit spending solves all, and when it does not, then more deficit spending would solve all.
I am not saying that deficit spending did not make things better than they otherwise would have been, but it did not prevent the downturn of 1937 because it can't address the fundamental problem in business confidence in regards to anticipated profitability. That seems to be one of Slichter's conclusions.
Only when the rules of the private economy were decisively broken by war did the economy recover, but the life of the economy then depended on politics of death.
Keynesianism became thanatopolitics.