Did the Federal Reserve fall down on the job and fail to do what it could to stem the Great Depression? Yes. Would things have been better if had there been no Federal Reserve at all? Definitely not.
Did the Federal Reserve fall down on the job and fail to do what it could to stem the Great Depression? Yes. Would things have been better if had there been no Federal Reserve at all? Definitely not.
March 20, 2007 at 09:04 PM in Great Depression | Permalink | Comments (0)
The Switch in Time that Saved Nine: While getting ready for my classes this spring on the Great Depression and the coming of the mixed economy, I found myself noticing something in Robert Stern's classic article on "The Commerce Clause and the National Economy" that I had not noticed before: the presence of Frederick H. Wood, formerly general counsel for the Southern Pacific Railroad (the "Octopus") and principal litigation partner at Cravath in the 1930s.
He is there arguing in front of the Supreme Court in both Schechter Poultry and Carter Coal, in both of the cases that are the high-water mark of the judicial resistance to Roosevelt's New Deal before Roosevelt's reelection and the consequent switch in time that saved nine--the shift of Chief Justice Hughes and Justice Roberts to the New Deal side, and then the replacement of two of the dinosaurs by Hugo Black and Stanley Reed:
http://www.jstor.org/cgi-bin/jstor/printpage/0017811x/ap040472/04a00020/0.pdf?backcontext=page&dowhat=Acrobat&config=jstor&[email protected]/01cce4406500501b847ee&0.pdf: Robert L. Stern (1946), "The Commerce Clause and the National Economy, 1933-46," Harvard Law Review 59:5 (May), pp. 645-93: Mr. Joseph Heller, the Schechters' original counsel, effectively convinced the Court of the trivially local nature of some of the practices involved.... [H]umor was not ineffective in ridiculing the code provisions involved. The defendants' argument was concluded by Mr. Frederick H. Wood, of a large New York firm which represented substantial business interests and which came into the case at the last moment; he oratorically contended that such matters should be regulated only by the states...
[...]
James W. Carter brought suit... against the Carter Coal Co., his father, and its other officers, to enjoin the company from accepting the Coal Code.... The case was argued in the district court for two full days by Mr. Frederick H. Wood and Mr. whitney for the plaintiff.... Justice Adkins rendered his oral opinion.... [H]e was compelled by the Schechter case to hold that "as a matter of law" the effect upon interstate commerce of wages and labor relations was... not within the commerce power.... The case was argued [before the Supreme Court] in March [1936] by Mr. Wood.... Mr. Justice Sutherland, speaking for five members of the Court... sidestep[ped] the... constitutionality of the price-fixing provisions... by holding them inseparable from the labor provisions and holding the latter unconstitutional...
[...]
Finally the opinion reached the crucial point. Did labor relations in the vast Jones and Laughlin steel-manufacturing enterprise sufficiently affect interstate commerce? Gone was the verbalism of the Carter [coal] case, the reliance upon such metaphysical concepts as proximate or intermediate causation.... "Actual experience," actual relation to commerce, was henceforth to be the criterion.... Mr. Justice McReynolds, in a bitter dissent... [joined by] Van Devanter, Sutherland, and Butler, accused the majority of abandoning the precepts of the Schechter and Carter decisions.... For the second time in two weeks the Court had in substance overruled cases decided less than one year before on major constitutional issues. No serious effort had been made to distinguish... Carter.... There had been no change in the membership.... What had induced Mr. Justice Roberts to switch?... What of the Chief Justice?...
No one who did not participate in the conferences of the Court will know.... But few attributed the difference in results... to anything... in the cases... their facts, the arguments presented, or the authorities cited. Perhaps the series of violent strikes had educated Mr. Justice Roberts as to the close relationship between labor relations and interstate commerce. But the consensus... was that the Chief Justice and Mr. Justice Roberts believed that the continued nullification of the legislative program demanded by the people and their representatives... would lead to acceptance of the President's Court [packing] plan, and that this would seriously undermine the independence and prestige of the federal judiciary....
At the end of the term, Mr. Justice Van Devanter announced his retirement.... Senator [Hugo] Black successed Mr Justice Van Devanter at the beginning of the October Term, 1937. Mr. Justice Sutherland retired in January, 1938, and Solicitor General Stanley Reed took his place...
Frederick H. Wood shows up in front of the Supreme Court ten times during the New Deal years: NORMAN v. BALTIMORE & O.R. CO. (1935); YOUNGSTOWN SHEET & TUBE CO. v. UNITED STATES (1935); A.L.A. SCHECHTER POULTRY CORPORATION v. UNITED STATES (1935); CARTER v. CARTER COAL CO. (1936); four times in various MORGAN v. U.S. proceedings; FORD MOTOR CO. v. NATIONAL LABOR RELATIONS BOARD (1939); and UNION STOCK YARD & TRANSIT CO. OF CHICAGO v. U.S.
There is an oral tradition at Cravath that Wood headed up a sophisticated long-term anti-New Deal litigation strategy: the fact that the named plaintiffs in the big anti-NRA case were orthodox butchers from Brooklyn is said to be no accident, but instead a successful attempt to pin Louis Brandeis by making him see the case as state power vs. the little guy from his minority religion, and not only to swing his vote but to curb his tongue from having its influence on the rest of the liberal wing of the court. And, indeed, in Schechter the NRA went down 9-0 (a blessing for the country).
Wood and company's victory in Schechter in 1935 on the limits of the Commerce Clause and of the federal government's ability to regulate the national economy was extended the following year in Carter Coal, before collapsing in 1937 with the switch. I find myself wanting to know more about this: did they think that they were going to win--stop the New Deal long enough and that when the dust cleared the 1920s would come back?
I should get myself over to the Boalt Hall Library and hope that their copy of Robert T. Swaine (1946), The Cravath Firm and Its Predecessors is still there, because amazon wants $395 for a copy.
Surprisingly--or maybe not surprisingly--the best short things on the web I see about this come from Time Magazine, back when it was an edgy startup interested in informing its viewers and not an organization that saw pleasing its insider sources as job #1. Consider:
Especially good is Time's series of short pieces on the Gold Clause cases, watching as Chief Justice Charles Evans Hughes twists and turns to avoid repudiating the actions of the Roosevelt administration with respect to government debt while also damning those actions as reprehensible:
http://www.time.com/time/printout/0,8816,787934,00.html: Businessmen knew it, Congress knew it, the Brain Trust knew it, Mr. Homer Stille Cummings knew it: The Justices of the Supreme Court would do their duty as they saw it. Yet somehow nearly everyone had overlooked the obvious fact that the nine potent, grave and reverend judges would first take a good look at that duty. Last week when the Court in unmistakable fashion began that scrutiny, business fell into a dither, Congress chattered, the Brain Trust fretted and the Attorney General blushed.... For years the U. S. Government and most corporations promised to repay lenders their principal and interest "in gold coin of the present standard of weight and fineness." On June 5, 1933 Congress, having authorized the President to suspend the gold standard, forbade the writing of any more gold clauses, declared in effect that all those previously written were legally out of bounds. Hence came the four issues before the Supreme Court last week.
Norman C. Norman, 39, a bachelor in the jewelry manufacturing business with his father in Manhattan, demanded $16.60 from Baltimore & Ohio Railroad. He held a coupon of one of the railroad's bonds calling for an interest payment of $22.50 in gold. Since the railroad could not pay in gold he wanted $39.10 in devalued currency. Lower courts had upheld the railroad's refusal to pay Norman C. Norman the additional $16.60...
http://www.time.com/time/printout/0,8816,754528,00.html: The Court upheld the right of Congress--under the Constitutional power of regulating money--to void gold clauses in private bonds. But no such clean bill of health was given the Government in abrogating the gold clauses of its own bonds. Government bondholders were denied the right to sue in the Court of Claims on the somewhat extraordinary grounds that it is impossible to tell how much damage they have suffered since it is now illegal to own gold. However, the Court did not uphold the propriety of the Government's offering devalued money.... In short, Government bondholders have now the right but no legal opportunity to collect, and morally the Government is no better than a malefactor who takes refuge behind a legal technicality—-in this case the right not to be sued without its own consent. No pretty position is this for any government to be in. It posed a problem in New Deal morals.
Almost as disconcerting to citizens was the news that the legality of the country's monetary policy was approved by only five of the nine Justices of the Court. New Dealers were pleased that Chief Justice Hughes had joined with Liberals Brandeis, Cardozo, Roberts and Stone to give them comfort. Little did they care about the dissent of four Justices, for they look down very long Liberal noses at the four Conservatives: Justices Sutherland, Van Devanter, Butler and McReynolds—in particular at Justice McReynolds.... [T]he majority opinion, upholding the Government in every case without exception, would have seemed stronger had Mr. Hughes not thundered so loud... the dissenting opinion would have borne more weight had it been written by a less uncompromising reactionary than Mr. McReynolds... [who] launched not into an opinion but into an elegy for honesty and good government.
"It seems impossible to overestimate the result of what has been done here this day. . . . God knows, I do not want to talk about such matters but it is my duty. . . . The Constitution is gone. . . . This is Nero in his worst form. We are confronted with a dollar which has been reduced to 60¢ which may be 30¢ tomorrow, 10¢ the next day and 1¢the day following. "We have tried to prevent its entrance into our legal system but have tried in vain..."
I remember listening once to the aged Paul Freund reminisce about working for the Solicitor General in the 1930s. He talked about the government's own litigation strategy, and about Charles Evans Hughes's twists and turns as he found that the government had broken its contract with its bondholders but there were no damages, but he never mentioned Frederick H. Wood.
February 16, 2007 at 09:23 PM in Great Depression, History, Social Democracy | Permalink | Comments (0) | TrackBack (0)
Ezra Klein thinks that it is "cheap irony" that the American Enterprise Institute is following a talk on the Great Depression and the "forgotten man" with a wine-and-cheese reception:
Ezra Klein: Department of Cheap Irony: I'm not really sure what's being discussed at this AEI forum, but it's sort of awesome to host an event on "The Forgotten Man: A New Look at the Great Depression" and follow it up with a wine and cheese reception...
He doesn't know the half of it. It's Amity Shlaes, who you remember--who will be remembered until the disastrous presidency of George W. Bush fades from the memory of humanity--for this commentary on Hurricane Katrina:
The Thought of George W. Bush Is a Spiritual Atom Bomb of Infinite Power!: Amity Shlaes: It is early to be getting partisan about New Orleans. We are still too close to the awfulness of the hurricane.... Still, Iraq has not caused the US to botch Katrina -- either the preparation or response. On the contrary, the fact that the country and President Bush personally were already mobilised for disaster has saved lives.... September 11 changed Mr Bush and the country.... Mr Bush grew into a new role of leader in emergencies.... In addition to its old Federal Emergency Management Agency, [the government] created the Office of Homeland Security to co-ordinate local, state and federal responses. The level of preparedness for a giant storm may not have been obvious outside the country. But the US was prepared for Katrina. All the old and new federal offices worked together and confronted the storm early...
She's coming to AEI to talk about her forthcoming book about the Great Depression--a book blurbed not by an economist or a historian, but by party-line-toeing right-wing hyena-novelist Mark Helprin:
http://www.cfr.org/content/bios/Shlaes%20NarBio%20January%202006.pdf: Novelist Mark Helprin has said of The Forgotten Man, “Were John Kenneth Galbraith and Milton Friedman to spend a century or two reconciling their positions so as to arrive at a clear view of the Great Depression, this would be it.” Her last book, The Greedy Hand: Why Taxes Drive Americans Crazy (Random House/Harvest paperback), was a national bestseller. Miss Shlaes also recently coauthored, with the late Robert Bartley of the Wall Street Journal, the contribution on tax philosophy in Intellect into Influence, a Manhattan Institute retrospective volume...
What does the book say?:
The Forgotten Man: A New History of the Great Depression: Challenging conventional history, Amity Shlaes offers a striking reinterpretation of the Great Depression.... Hoover and Roosevelt failed to understand... heaped massive burdens on the country.... From 1929 to 1940, federal intervention helped to make the Depression great by forgetting the men and women who sought to help themselves. In this illuminating work of history, Shlaes follows the struggles of those now forgotten people, from a family of butchers in Brooklyn who dealt a stunning blow to the New Deal, to Bill W., who founded Alcoholics Anonymous, and Father Divine, a black cult leader. She takes a fresh look at the great scapegoats of the period, from Andrew Mellon to Sam Insull of Chicago.... Authoritative, original, and utterly engrossing...
Original? Certainly. Engrossing? Perhaps. Authoritative? I've always liked Samuel Insull--an excellent engineer, a good manager, and a risk-loving speculator who was in the end taken down by the Morgans. The Supreme Court did a good deed by striking down Roosevelt's NIRA in Schechter Poultry, but the oral tradition at Cravath is said to be that the orthodox "family of butchers in Brooklyn" were chosen as plaintiffs by Frederick H. Wood as part of his long-run anti-New Deal litigation strategy, in this case to swing the vote of Louis Brandeis. But Andrew Mellon?
Here's Herbert Hoover's couldn't-be-harsher view of:
the “leave it alone liquidationists” headed by [my] Secretary of the Treasury Mellon, who 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”...
Milton Friedman likes--alas! liked--to quote R.G. Hawtrey of the British Treasury, who said that Mellon and the others who thought in 1930-1933 that the big danger was excessive inflation were "crying 'Fire! Fire!' in Noah's Flood." A nationwide banking panic is altogether a bad thing. In this dismissal of Mellon's economic policy Friedman was in complete agreement with John Maynard Keynes:
Keynes: It seems an extraordinary imbecility that this wonderful outburst of productive energy [over 1924-1929] should be the prelude to impoverishment and depression [today, in 1932]. Some austere and puritanical souls [like Mellon] regard it both as an inevitable and a desirable nemesis on so much overexpansion, as they call it; a nemesis on man's speculative spirit. It would, they feel, be a victory for the mammon of unrighteousness if so much prosperity was not subsequently balanced by universal bankruptcy. We need, they say, what they politely call a 'prolonged liquidation' to put us right. The liquidation, they tell us, is not yet complete. But in time it will be. And when sufficient time has elapsed for the completion of the liquidation, all will be well with us again...
February 16, 2007 at 09:22 PM in Great Depression, History | Permalink | Comments (0) | TrackBack (0)
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.
Arnold Kling vs. Brad DeLong on the New Deal at the Wall Street Journal's website.
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]
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.
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?
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.
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.
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..."
February 07, 2007 at 09:37 PM in Great Depression, History | Permalink | Comments (0) | TrackBack (0)
According to Theo Balderston in The World Economy and National Economies in the Interwar Slump, the "international view" is the most important contribution to the literature on the Great Depression in the last 20 years. According to Anna Schwartz, it adds nothing to what was known before. With whom do you agree, and why?
January 30, 2007 at 03:12 PM in Great Depression | Permalink | Comments (0)
When Milton Friedman passed away on November 16th, 2006 it was widely observed that his "Monetary History" (coauthored with Anna Schwartz) was the single most influential book in the general area of monetary- and macro-economics written in the 20th century. Why has this book been so influential?
January 30, 2007 at 03:10 PM in Great Depression | Permalink | TrackBack (0)
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