The Economy

[kandrathe]

I was reading an interesting article in Forbes regarding the ARRA, which is that $787 Billion Dollar bill rushed through Congress without anyone reading the final version. The record breaking largest spending bill in the history of humanity, and the one that plunged the US debt further towards the point of no return.

First, the writer is an optimist, so I'm not quite following him on the whole rose colored scenario of "the storm is over", now we can go out and survey the damages and rebuild. He says, "Employment loss is slowing considerably from its levels earlier in the year; industrial output loss has slowed substantially (including the hard-hit construction sector); the stock market has risen nearly 40% since early March and Federal Reserve actions have stabilized the banking sector; and, in fact, several Federal Reserve bank stabilization programs are now being reversed."

But, what did catch my eye was where he said, "In fact, the 1930s Keynesian model that was used to sell the idea of fiscal stimulus to Americans was eliminated from economics decades ago. And this abandonment of Keynesian multipliers does not reflect any ideological or partisan issues that divide conservatives and liberal economists. Rather, it is because the old Keynesian model does not come anywhere close to meeting today's standards for economic analysis."

He ends the article on the pessimistic note, which I can appreciate, saying "Our current crisis may soon be over, but we are in the process of creating a debt crisis of substantial proportion, and one that is not cyclical but rather is permanent. A sensible resolution of this debt crisis fundamentally requires reducing federal spending. This should start by revisiting ARRA."

[Kevin]

I've never really been behind the idea of putting large amounts of spending/purchasing in the hands of people that make choices based on if it will get them re-elected regardless of the outcome of the economic decisions. But it can't be a completely hands off system either. There are still some things I feel should be and need to be in the hands of the government.


But I'm in agreement that the bill was not a good idea and I'm actually looking at drafting a letter to my congress people to tell them they need to re-evaluate it now. Since a lot of it hasn't been spent or even earmarked to be spent, now is a good time to cut it too.

[Jester]

But, what did catch my eye was where he said, "In fact, the 1930s Keynesian model that was used to sell the idea of fiscal stimulus to Americans was eliminated from economics decades ago. And this abandonment of Keynesian multipliers does not reflect any ideological or partisan issues that divide conservatives and liberal economists. Rather, it is because the old Keynesian model does not come anywhere close to meeting today's standards for economic analysis."

He ends the article on the pessimistic note, which I can appreciate, saying "Our current crisis may soon be over, but we are in the process of creating a debt crisis of substantial proportion, and one that is not cyclical but rather is permanent. A sensible resolution of this debt crisis fundamentally requires reducing federal spending. This should start by revisiting ARRA."

I doubt Paul Krugman would agree. Nor Brad DeLong. Nor Christina Romer.

The basic logic of their position seems to be: Keynes' theories are fundamentally about what do in a crisis, not what to do in the long term. Spending has a stimulus effect when the market has imploded, and should be encouraged in the short run in order to improve the situation for the long run. Once things are back on an even keel, money can then be diverted towards paying down the debt. But moving too quickly on that risks squandering resources by prolonging the depression.

It's tough to know who's right, but it's simply not true that Keynes' theories were "eliminated" decades ago. They are alive, and in this particular situation, doing quite well.

-Jester

[kandrathe]

It's tough to know who's right, but it's simply not true that Keynes' theories were "eliminated" decades ago. They are alive, and in this particular situation, doing quite well.

So, then... Inflation is Good!

If you can believe anything published by the Cato Institute... Barack Obama's Keynesian Mistake, says "Federal policymakers are moving ahead with a huge $800-billion stimulus plan to return the U.S. economy to growth. Will it work? Decades of macroeconomic research suggest that it won't. Indeed, the revival of old-fashioned Keynesianism to fight the recession seems to stem more from political expediency than modern economic theory or historical experience."

"The current stimulus plan would impose a large debt burden on young Americans, but would do little, if anything, to help the economy grow. Indeed, it could have similar effects as New Deal programs, which Milton Friedman concluded "hampered recovery from the contraction, prolonged and added to unemployment and set the stage for ever more intrusive and costly government."

How do you know that the interference in the economy of 2008/2009, is not akin to what the government did in 1933?

[Jester]

How do you know that the interference in the economy of 2008/2009, is not akin to what the government did in 1933?

If you listen to the Krugman side of the argument (he is not alone, but is the public face) what the government is doing now (and should be doing more of) is what FDR kind of did in the New Deal, but not enough: spend money to kickstart the economy, and save balancing the budget for a time when doing so will not slow down recovery. In the Krugman story, one only need to look at the GDP and employment figures: GDP bottomed out in 1933, and rose quite dramatically in the years that followed, along with employment. The exception is during 1937, when FDR tried to balance the budget, causing the recovery to temporarily reverse.

Or, graphically:



It seems tough to me to argue that the 1933 plan was a mistake, considering the shape of the graph. Friedman, Mankiw and Taylor would no doubt disagree. And counterfactuals are hard to argue with: who really knows what would have happened had alternate policies been pursued? We can predict using one theory or another, but the evidence is from the results of the implemented policies, not alternate ones.

So, no, I don't know whether it's akin to what the government did in 1933, but then, there is no scholarly consensus about what the government did in 1933, nor what it should have done.

Well, there is one thing that there's more or less consensus on, Austrians aside: during the great depression, the Fed should have increased the money supply, and instead, they decreased it. That's Friedman for you: Inflation would have been good, too bad they didn't do that. :D

-Jester

[kandrathe]

If you listen to the Krugman side of the argument (he is not alone, but is the public face) what the government is doing now (and should be doing more of) is what FDR kind of did in the New Deal, but not enough: spend money to kickstart the economy, and save balancing the budget for a time when doing so will not slow down recovery. In the Krugman story, one only need to look at the GDP and employment figures: GDP bottomed out in 1933, and rose quite dramatically in the years that followed, along with employment. The exception is during 1937, when FDR tried to balance the budget, causing the recovery to temporarily reverse.

While Krugman writes for the Times, in the Economy section, and has a Phd. in economics, and may very well win a Nobel prize some day, I don't really consider him an economist. If you read his writings, he demonstrates continually that he does not believe in the laws of economics. He is a (maybe THE most) devoted follower of Keynes. What Krugman seems to be to me is a socialist, and uses economics to shower praise upon socialist policies and he believes that all ills can be resolved through State intervention. One of Keynes (and Krugman) beliefs is that saving by wealthy people is one reason that aggregate demand dries up, therefore upper-income individuals must always be heavily taxed so their money will be spent and not saved.

It seems tough to me to argue that the 1933 plan was a mistake, considering the shape of the graph. Friedman, Mankiw and Taylor would no doubt disagree. And counterfactuals are hard to argue with: who really knows what would have happened had alternate policies been pursued? We can predict using one theory or another, but the evidence is from the results of the implemented policies, not alternate ones.

The hard part about looking at graphs like that, is that the line represents the results of many factors that may have been implemented 3 to 5 years before the fruits blossomed. I never attributed the tech bubble burst in the fall of 2000 to the newly elected Bush, but rather the result of policies carried out by prior administrations, including Bush Sr.

So, no, I don't know whether it's akin to what the government did in 1933, but then, there is no scholarly consensus about what the government did in 1933, nor what it should have done.

In a twisted way, it was Wilson who brought the US out of the Great Depression. By going back on his word and forcing Germany to sign a one sided armistice for WWI, it was actually Wilson (along with our allies) who set the stage for WWII, which brought us out of the Great Depression. Of course, FDR's socialist policies and the loss of freedom during WWII brought us the USA I rail against so often.

Well, there is one thing that there's more or less consensus on, Austrians aside: during the great depression, the Fed should have increased the money supply, and instead, they decreased it. That's Friedman for you: Inflation would have been good, too bad they didn't do that.

At least Von Mises is credited with forecasting the Depression and its causes.

[Jester]

While Krugman writes for the Times, in the Economy section, and has a Phd. in economics, and may very well win a Nobel prize some day, I don't really consider him an economist.

Uh, he's also a Professor of Economics at Princeton, which is maybe a notch or two dozen above just having a PhD. His column for the NYT is moonlighting. And he won the 'Nobel' last year. You can have your opinion about the correctness of his theories. But saying he isn't an economist is just absurd.

If you read his writings, he demonstrates continually that he does not believe in the laws of economics.

Yeah, if you think the "laws of economics" begin and end with Von Mises.

He is a (maybe THE most) devoted follower of Keynes. What Krugman seems to be to me is a socialist, and uses economics to shower praise upon socialist policies and he believes that all ills can be resolved through State intervention.

Those sentences are contradictory. Keynes was not a socialist. He thought socialism was a terrible idea. So, incidentally, does Krugman. But don't let their actual opinions stop you from throwing around epithets.

The hard part about looking at graphs like that, is that the line represents the results of many factors that may have been implemented 3 to 5 years before the fruits blossomed.

Good luck trying to argue the "Herbert Hoover got an unfair shake because his genius economic ideas only came to fruition under FDR". I don't think *any* side of the debate is pushing that one, but feel free to give it a whirl.

I never attributed the tech bubble burst in the fall of 2000 to the newly elected Bush, but rather the result of policies carried out by prior administrations, including Bush Sr.

I think it was mostly the result of investors going completely nuts for anything with tech attached to it, vastly overinflating the value of companies which were making no money, and had no plans to ever make money. Animal spirits, and what have you.

In a twisted way, it was Wilson who brought the US out of the Great Depression. By going back on his word and forcing Germany to sign a one sided armistice for WWI, it was actually Wilson (along with our allies) who set the stage for WWII, which brought us out of the Great Depression.

... and the years 1933-1939 just fell into a hole and were forgotten? GDP had recovered to about its previous level before the US began pumping out arms for WWII.

Of course, were we to grant your argument, in a twisted way, it wasn't really Wilson that brought you out of the Great Depression. The guy you'd want to thank would be Hitler.

Of course, FDR's socialist policies and the loss of freedom during WWII brought us the USA I rail against so often.At least Von Mises is credited with forecasting the Depression and its causes.

I'm not sure I buy his story of what caused the great depression, or the Austrian Business Cycle theory generally, but I can tell you this: the sooner a nation got the hell off gold, the sooner it recovered from the great depression. That's just empirically true. Von Mises' advice to lock the currency to gold would have been economic suicide.

http://img.skitch.com/20090418-ni25ke6b5u5...h3qs.render.png

I'm not going to make the silly claim that Von Mises is not an economist because he doesn't believe in the same economic principles that I do. But he was far too dogmatic about gold. That's just plain terrible advice. Even Milton Friedman knew that was obvious.

-Jester

[--Pete]

Hi,

. . . Hitler.

Godwin!!!!! j/k:)

Or maybe it was Gavrilo Princip, without whom there would have been no WW I, thus no WW II.

Or we can blame it on Pope Leo III for crowning Charlemagne and starting the whole Holy Roman Empire nonsense.

Actually, the best statement made so far in this thread is yours; "And counterfactuals are hard to argue with: who really knows what would have happened had alternate policies been pursued?" This whole topic is nothing more than a dispute about economic theories with all the usual suspects taking on the usual sides. Me? I'd rather read Turtledove.;)

Although I must say that I find it humorous that kandrathe argues a time delay between economic causes and events. It isn't that I don't think that such a delay exists, it's that I don't think the delay is so variable as kandrathe makes it out to be. And so coincidentally variable that it supports all his claims.

Me, I'm retreating back to the middle. Freezing on one side, burning on the other, on the average, it's just right. :whistling:

--Pete

[kandrathe]

Uh, he's also a Professor of Economics at Princeton, which is maybe a notch or two dozen above just having a PhD. His column for the NYT is moonlighting. And he won the 'Nobel' last year. You can have your opinion about the correctness of his theories. But saying he isn't an economist is just absurd.

Well, he doesn't believe in the standard rules of economics, not just the Austrians rules. *sigh* Yes, he won the Nobel prize. He has done as much for economics (pandering to democrats and socialists) as Al Gore has done for world peace (through peddling energy use offsets). I remember the days when the Nobel prize was reserved for people based upon merit. To be fair, his award was given for his academic work on international markets before he became a talking head for democrats. He should have shared the prize with Helpman, and possibly Brander and Spencer who were reaching the same conclusions at the same time. His work at the Times is actually an embarrassment to the field of economics. Baring the obvious tilt of William L. Anderson (Von Mises Institute), I agree with his appraisal of Krugman.

Yeah, if you think the "laws of economics" begin and end with Von Mises.

No, there is room for Hayak, Malthus, Ricardo, Mill, Marshall, and even Friedman. I'm not opposed to considering the MIT or Chicago approach to economics as long as their theories are validated with real world predictive value. I would stand with Hayak however, in calling for a better mathematical approach to describing economic systems. I have no time for "animal spirits".

Those sentences are contradictory. Keynes was not a socialist. He thought socialism was a terrible idea. So, incidentally, does Krugman. But don't let their actual opinions stop you from throwing around epithets.

One can be an adherent of Keynes and a socialist at the same time. Keynesian theory works to undermine economic stability creating the perpetual need for government interventions that over time destroy the free market and give no option other than a socialist market economy. It was Lenin who said, “I will quote another economic source which assumes particularly great significance, the British diplomat Keynes, the author of The Economic Consequences Of The Peace, who on the instructions of his government, took part in the Versailles peace negotiations, watched them directly from the purely bourgeois point of view, studied the subject step by step, and took part in the conference as an economist. He arrived at conclusions which are stronger, more striking and more instructive than any a Communist revolutionary could advance, because they are conclusions drawn by an acknowledged bourgeois....” And, let me see... There are so many examples of Krugman's socialist rants, but here is a good example where he concludes, "No, what the economy needs now is something to take the place of retrenching consumers. That means a major fiscal stimulus. And this time the stimulus should take the form of actual government spending rather than rebate checks that consumers probably wouldn’t spend." Do you think he wanted the government to hire people to dig holes, then fill them up again? And, regarding the simple solution, here is where you must also get your opinion that raising taxes will resolve the deficit problem. Because, you know, Keynes must have been correct about keeping savings out of the hands of the wealthy, right? I predict there will be a big shock this year when tax revenues are tabulated. The 2009 Q1 YoY revenues were -29.4% from 2008. Unemployment continues to rise, meaning Q2 earnings and revenues will probably be worse. If you can believe in Hauser's law, then month by month tax revenues for the first half of 2009 are down about 25%. According to Hauser then, the GDP will contract by an equal percentage.

Good luck trying to argue the "Herbert Hoover got an unfair shake because his genius economic ideas only came to fruition under FDR". I don't think *any* side of the debate is pushing that one, but feel free to give it a whirl.

Hoover acted as any good Keynesian would, he cut income tax rates by one percentage point retroactively to the 1929 tax year and began increasing federal spending by 42 percent from fiscal year 1930 to 1932. Also, tax revenues tanked leading to *huge* deficit spending, which was a point FDR railed against during his campaign. Hoover's biggest mistake was to interfere in the first place(Smoot-Hawley Tariff Act). He demanded that businesses not reduce wages, or cut payrolls, as he believed that worker purchasing power was the cornerstone of economic strength. He used the force of law to keep prices and wages high. What is most misleading about your GDP graph is that government spending is lumped in as well. The problem is that the government is not a producer of wealth, so the graph is not indicative of production, but rather consumption.

I think it was mostly the result of investors going completely nuts for anything with tech attached to it, vastly over-inflating the value of companies which were making no money, and had no plans to ever make money. Animal spirits, and what have you.

Right, animal spirits. :blink: Probably, the tech bubble was due to the "grow big fast" theory of dot com success which led to too few ventures getting too big a share of venture capital. So, the result was that there were too few eggs in the basket. Over 50% of dot com startups survived the financial crisis, which indicates that their business models were probably the ones not based upon "irrational exuberance". But, yes, I was flabbergasted by the market cap to earnings ratios at that time, and it was a major factor that led me to move my investments to staples and cash in late 1999.

... and the years 1933-1939 just fell into a hole and were forgotten? GDP had recovered to about its previous level before the US began pumping out arms for WWII.

Ah, yes, the government was spending vast amounts of borrowed money, but what about unemployment? From the graphs I've seen, employment never reached pre-1929 levels until recruitment began for rebuilding the military (1940) prior to WWII. From 1930 to 1940, the expenditures of the US government tripled while tax receipts dropped precipitously and rebounded to a flat average increase by 1938 . Sound familiar? Oh, yes, that is the same massive deficit spending plan for the next 10 years.

The guy you'd want to thank would be Hitler.

No, not really. Germany's upheaval was an inevitable result of Wilson's cowardice (Lloyd George, and Clemenceau as well) in standing up to the financial interests in the US who wanted their money back.

I'm not sure I buy his story of what caused the great depression, or the Austrian Business Cycle theory generally, but I can tell you this: the sooner a nation got the hell off gold, the sooner it recovered from the great depression. That's just empirically true. Von Mises' advice to lock the currency to gold would have been economic suicide.

Don't you agree though that having the currency backed by *some* reserve fund is more stabilizing for that currency? The reason the US Dollar has been the currency of choice for the world for the past decades is due to the Bona Fides of the stability of the US government and the production capacity of the US population. If you increase debt, decrease employment, and destroy US industry, don't you believe this will impact the value of the dollar, and consequently the price we need to pay to service our ballooning debts? Thus, as debt and the costs of debt service increase, while tax revenues, employment and real GDP decreases, we enter the downward spiral into a failed state.

I'm not going to make the silly claim that Von Mises is not an economist because he doesn't believe in the same economic principles that I do. But he was far too dogmatic about gold. That's just plain terrible advice. Even Milton Friedman knew that was obvious.

I'd have to agree with George Selgin, who said, "Von Mises defended the gold standard, not because he considered it ideal or because he thought fiat money immoral, but because he was convinced that a managed fiat money would prove less stable than gold." I'm not particular about what the US government uses to back its currency, but it would prove to be more stable if they did use some rare commodity(-ies) as a standard rather than rely on perpetual solvency.

Edit: I just saw this headline, Bank Chief Tells of Pressure to Buy Merrill Lynch, which is not the position of a government who promotes *free* enterprise.

[naverone]

Right, animal spirits. :blink: Probably, the tech bubble was due to the "grow big fast" theory of dot com success which led to too few ventures getting too big a share of venture capital. So, the result was that there were too few eggs in the basket. Over 50% of dot com startups survived the financial crisis, which indicates that their business models were probably the ones not based upon "irrational exuberance". But, yes, I was flabbergasted by the market cap to earnings ratios at that time, and it was a major factor that led me to move my investments to staples and cash in late 1999.

Can you help me understand this? Where did you pull the 50% number from? Which "market cap to earnings ratio" did you follow?

Cheers,
Naverone

ps Congrats on timing the market :w00t:

[Jester]

Wow is this not going to go anywhere fast. Let's see if I can summarize.

No. Krugman is an economist. Only madmen and Austrians thinks otherwise. You can't be a socialist and a Keynesian, at least not if you give a flying fig about what Keynes actually thought or said. Krugman is also not a socialist, except in Austrian-land, where everyone is a socialist who isn't to the right of Thatcher. Remember when Von Mises walked out of the Mont Pelerin society, calling them all socialists? Good times.

Economists, all the way from Friedman to Hayek? What a spectrum. Economics must be a very small profession in your world.

Yes, Animal Spirits. 50% is a pretty high attrition rate. If all investment capital lost 50%, on average, right off the bat, we'd never have any growth, ever.

Could you perhaps link to something more specific than the aggregated economic data for the *entire history of the United States*? It's a little tough to know what you're talking about.

The "Hoover was a big spender" argument is just strange. Smoot-Hawley was a huge mistake, but it was hardly a socialist one.

Hauser's Law is a rule of thumb. It doesn't actually drag GDP down to tax receipts, or vice versa, and it's silly to suggest otherwise.

Unemployment in the great depression shows the same trend as GDP. It shoots up with the crash, it slowly falls under FDR from 1933-1937, then increases a little in 1938, then drops slightly, then dramatically as WWII ramps up. How is this a different story from GDP?

-Jester

[kandrathe]

No. Krugman is an economist. Only madmen and Austrians thinks otherwise.

Well, I'm not an Austrian.

You can't be a socialist and a Keynesian, at least not if you give a flying fig about what Keynes actually thought or said. Krugman is also not a socialist, except in Austrian-land, where everyone is a socialist who isn't to the right of Thatcher. Remember when Von Mises walked out of the Mont Pelerin society, calling them all socialists? Good times.

When you advocate practices which give economic control of the economy to the State, you are advocating a socialist economy. Keynes claimed his motivation was to save Capitalism, and yes, he was against Marxist economic theories which eerily mirrored his own. The rub is that for good or ill intentions, his theories result in a socialist economic state. Krugman, the "progressive" is more the socialist than Keynes, because it is obvious from his extensive writings that his intentions are anti-capitalist and pro-government and pro-labor.

Economists, all the way from Friedman to Hayek?

Out of context and misquoted. I am open minded to considering all economic models that have demonstrated real world value.

If all investment capital lost 50%, on average, right off the bat, we'd never have any growth, ever.

Um, you risk a million in venture capital in the hopes you get a Google.com rather than a Pet.com. VC's analyze risk to reward ratios, and the ones that do it poorly soon are out of the game.

Could you perhaps link to something more specific than the aggregated economic data for the *entire history of the United States*? It's a little tough to know what you're talking about.

Section 1, table 1.1 at the very top would do fine.

The "Hoover was a big spender" argument is just strange. Smoot-Hawley was a huge mistake, but it was hardly a socialist one.

That Hoover made big mistakes is not in question. His response to the growing economic crisis was a Keynesian response, although his legislative interventions in the market are most assuredly the cause of the Great Depression. I don't think Hoover was a socialist, but merely befuddled as was our most recent Pres. Bush who left all that numbers stuff to Messrs. Paulsen and Geithner.

Hauser's Law is a rule of thumb. It doesn't actually drag GDP down to tax receipts, or vice versa, and it's silly to suggest otherwise.

I never made those claims, and it is silly to suggest that I did.

How is this a different story from GDP?

Again, as I said earlier, GDP reflects the US government's deficit spending. Much like going to your HS reunion in a borrowed Ferrari, your GDP graph is made to impress the ignorant. The GDP figures you cite show the illusion of production that does not exist without the State propping up the numbers. The better measure of the *real* economy is to look at employment, and tax revenues. Tax revenues were depressed until 1938 when finally, a recovery actually took hold as the US and allies prepared for a war driving up industrial production and demand for raw materials. The US exported war materials to Europe throughout the pre-war period (1936 to 1941).<blockquote></blockquote>So, in analyzing the numbers from 1929, to 1938, do you see anything auspicious in the private sector activity? During this period, only the government portion of GDP showed any significant change. The 1938 private sector economy is still well below what it was in 1929. Do you think Obama might suggest tripling our defense spending to stimulate industrial production?

[Jester]

I think we'll just leave most of this as it is, I don't think it's gong anywhere. However, the depression data might be of some help.

Your system of analysis a priori rejects government spending as an actual portion of GDP, or of economic growth. By that logic, the Soviets didn't have the second-largest economy in the world, they had the smallest. The entire concept of the New Deal was for the government to prop up the economy through deficit spending, so yes, that is obviously what we see. And it worked! Employment was up. Production was up. Standard of living was up. More or less everything was up, even the deficit, although debt-to-GDP did not increase substantially until WWII.

Looking at your chart, you see this. From 1933, when FDR gained the Presidency, to 1938, after which point WWII might be washing out any effect, you see GDP increase across the board. Private investment was up from 1.7 billion to 7.1 billion, and even up to 12.2 billion at its 1937 peak. Consumer spending was up almost 50% from the 1933 minimum. That's growth, no matter which way you slice it. Things had completely tanked by 1933. FDR had no magic wand that would restore the economy to 1929 levels after a crash that spectacular (look at your own numbers for just how spectacular it was... private investment dropped by more than the total government spending!). Factories were idle, money was no longer circulating, the whole thing was a mess.

Besides, 1929 levels for private investment were unsustainably high: that's why there was a crash! Maybe you believe the Keynesian 'animal spirits' story, or maybe you believe the Austrian 'easy credit' story, or the Friedman 'great contraction' story. But whatever it was, 1929 is not a reasonable benchmark year for measuring recovery. At least 1933 has 2 advantages as a base year: It was the minimum, and it was the year FDR took office.

Or let's look at employment. Unemployment peaks in 1933, and drops more or less steadily from there. Again, things improve under FDR, before the war has even started. Unemployment may have been around 18% even as late as 1938, but that's because it had shot up to 25% by 1933. And that's if you don't include WPA jobs, which were almost certainly not as productive as ordinary jobs, but did put people to work who otherwise would have been doing absolutely nothing. The mess left by the depression was enormous, and FDR's policies have to be judged in terms of cleaning up that mess, not compared to some hypothetical fully functioning economy.

However, FDR made some serious mistakes. First, he didn't spend enough. Trying to keep budgets roughly balanced was antithetical to the point of the stimulus, and Keynes told him so at the time. He didn't listen, and so, the recovery was not a fast as it could have been, and there was the recession of 1937. Second, many of his social reform policies were misguided and heavy-handed. (Others were brilliant, but it was a mixed bag.) But, on the whole, the numbers speak for themselves: Economy crashes under Hoover, 1929-33, economy recovers somewhat 1933-1939, economy recovers strongly during WWII due to massive government programs, then prospers for almost thirty years afterwards. You can draw a counterfactual where the economy does even better after the crash, but you can't argue away actual growth, in private investment, in employment, in output, across the board.

-Jester

[kandrathe]

Your system of analysis a priori rejects government spending as an actual portion of GDP, or of economic growth. By that logic, the Soviets didn't have the second-largest economy in the world, they had the smallest. The entire concept of the New Deal was for the government to prop up the economy through deficit spending, so yes, that is obviously what we see. And it worked! Employment was up. Production was up. Standard of living was up. More or less everything was up, even the deficit, although debt-to-GDP did not increase substantially until WWII.

Looking at your chart, you see this. From 1933, when FDR gained the Presidency, to 1938, after which point WWII might be washing out any effect, you see GDP increase across the board. Private investment was up from 1.7 billion to 7.1 billion, and even up to 12.2 billion at its 1937 peak. Consumer spending was up almost 50% from the 1933 minimum. That's growth, no matter which way you slice it. Things had completely tanked by 1933. FDR had no magic wand that would restore the economy to 1929 levels after a crash that spectacular (look at your own numbers for just how spectacular it was... private investment dropped by more than the total government spending!). Factories were idle, money was no longer circulating, the whole thing was a mess.

Well, if you measure from the bottom everything looks great. The 1938 economy was still not nearly what the economy was in 1929.

Besides, 1929 levels for private investment were unsustainably high: that's why there was a crash! Maybe you believe the Keynesian 'animal spirits' story, or maybe you believe the Austrian 'easy credit' story, or the Friedman 'great contraction' story. But whatever it was, 1929 is not a reasonable benchmark year for measuring recovery. At least 1933 has 2 advantages as a base year: It was the minimum, and it was the year FDR took office.

I'll concede that 1929 may have been the top of the hill, but also 1933 was the bottom of the valley. Neither is probably the correct position to view the entirety.

Or let's look at employment. Unemployment peaks in 1933, and drops more or less steadily from there. Again, things improve under FDR, before the war has even started. Unemployment may have been around 18% even as late as 1938, but that's because it had shot up to 25% by 1933. And that's if you don't include WPA jobs, which were almost certainly not as productive as ordinary jobs, but did put people to work who otherwise would have been doing absolutely nothing. The mess left by the depression was enormous, and FDR's policies have to be judged in terms of cleaning up that mess, not compared to some hypothetical fully functioning economy.

The PWA and the CWA employed over 4 million people within 2 months. I kind of look at them as unemployment compensation with some dignity.

However, FDR made some serious mistakes. First, he didn't spend enough. Trying to keep budgets roughly balanced was antithetical to the point of the stimulus, and Keynes told him so at the time. He didn't listen, and so, the recovery was not a fast as it could have been, and there was the recession of 1937. Second, many of his social reform policies were misguided and heavy-handed. (Others were brilliant, but it was a mixed bag.) But, on the whole, the numbers speak for themselves: Economy crashes under Hoover, 1929-33, economy recovers somewhat 1933-1939, economy recovers strongly during WWII due to massive government programs, then prospers for almost thirty years afterwards. You can draw a counterfactual where the economy does even better after the crash, but you can't argue away actual growth, in private investment, in employment, in output, across the board.

It's hard to measure how much of the US growth after 1944 was due to WWII positioning the US as the one remaining untouched industrial producer. In fact, the auto industry was a direct result of building peace time rather than war time vehicles.

[--Pete]

Hi,

Well, if you measure from the bottom everything looks great. The 1938 economy was still not nearly what the economy was in 1929.

But the whole point is that the 1929 economy was a bubble. Which is a large part of what caused the crash. So, to expect an economy to reach the 1929 level is to ask for the whole mess to be repeated. If you want to work from a valid baseline, take the mid '20s (say 1923 to 1927); it was still a period of excessive growth, but it was at least a bit reasonable.

--Pete

[kandrathe]

Hi,
But the whole point is that the 1929 economy was a bubble. Which is a large part of what caused the crash. So, to expect an economy to reach the 1929 level is to ask for the whole mess to be repeated. If you want to work from a valid baseline, take the mid '20s (say 1923 to 1927); it was still a period of excessive growth, but it was at least a bit reasonable.

--Pete

Here is a chart that might help.
<blockquote></blockquote>

Normal to me looks like about $750 billion (or, comparing apples to oranges, 1930's GDP seems on par). Figure in about 10% of that line being New Deal government deficit spending as well. Of course, ignore the bit of "correlation indicates causality" nonsense.

[--Pete]

Hi,

Here is a chart that might help.

Well, I stand back a bit, squint, and it looks like if you extend the trend (growth, but declining growth) of the mid 20's you hit the curve again about '37 or '8. The bubble starting in '28, the burst of '29, and the whole '30 to '37 (maybe '38) depression looks just like a big blip in a gradually growing economy. Of course, you can't really go back much before '20 (WW I and post war effects) or after '39 (WW II effects). A lot of industrialization going on from about the turn of the century, so a longer baseline really doesn't exist.

Overall, inconclusive any way you slice it. Doubly so as support for counterfactuals.

Oh, and BTW, isn't the bottom exactly where one should measure recovery from? After all, from the peak to the trough is the decline and from the trough to the next peak *is* the recovery.

Frankly, unless we develop experimental cosmology then sociology, economics, government, foreign policy, etc., are all belief systems, not sciences nor even supportable theories. Wake me up when we have a means of running controlled, repeatable, experiments;)

--Pete

[kandrathe]

Well, I stand back a bit, squint, and it looks like if you extend the trend (growth, but declining growth) of the mid 20's you hit the curve again about '37 or '8. The bubble starting in '28, the burst of '29, and the whole '30 to '37 (maybe '38) depression looks just like a big blip in a gradually growing economy. Of course, you can't really go back much before '20 (WW I and post war effects) or after '39 (WW II effects). A lot of industrialization going on from about the turn of the century, so a longer baseline really doesn't exist.

That is what I saw as well.

Oh, and BTW, isn't the bottom exactly where one should measure recovery from? After all, from the peak to the trough is the decline and from the trough to the next peak *is* the recovery.

My take on it is the neither peak nor valley but rather the deviation from the norm, and examining the probable causes for those deviations. It is clear that the actions of the government during the Hoover administration caused a bad situation to go very bad, but it is not clear to me that "The New Deal" did anything more than subvert the reins of government power. What is interesting to me is that Keynesian's only follow his advice for increased government spending in the bad times, but never balance the budget and run surpluses to pay back the debt in the good times. They just take the increased revenues and spend more.

Frankly, unless we develop experimental cosmology then sociology, economics, government, foreign policy, etc., are all belief systems, not sciences nor even supportable theories. Wake me up when we have a means of running controlled, repeatable, experiments;)

I'm with you on separating the statistical modeling sciences, from the *hard* sciences. The best you can hope for is a good simulation.

[Jester]

Well, if you measure from the bottom everything looks great. The 1938 economy was still not nearly what the economy was in 1929.I'll concede that 1929 may have been the top of the hill, but also 1933 was the bottom of the valley. Neither is probably the correct position to view the entirety.

As I said from the start, constructing counterfactuals is difficult, and you need some theory to base it on. If you start with an Austrian theory that says all government intervention is definitionally wasteful, then obviously, the 1933-1939 recovery is just a pale shadow of what it might have been sans New Deal. If you start from a Keynesian theory, then the recovery is modest, but a vast improvement over what it would have been with balanced budgets and the gold standard. If you start from Friedman, then the recovery is entirely due to reflating the currency, and the New Deal is just a sideshow. But no matter where you start from, and under what model, you have no crystal ball. You are reliant on your presuppositions, and have no tangible evidence to go on. What evidence we do have clearly shows that the economy recovered somewhat. Either you see that as an impressive recovery from a massive crash, or you see it as a recession prolonged by unwise choices. But there is no magic to tell us which is true.

The PWA and the CWA employed over 4 million people within 2 months. I kind of look at them as unemployment compensation with some dignity.

That seems a bit harsh, but obviously we're going to disagree about this. But it seems clear to me that the government-created jobs at least served an important welfare function, and were at least economically neutral. With unemployment as high as it was, any job was a pretty good job, and infrastructure built with lazy labour is better than nothing at all. The alternative, even in the best-case scenario, would have been greater suffering in the short run, even if it was better for the economy in the long run (which I'm not convinced of.)

It's hard to measure how much of the US growth after 1944 was due to WWII positioning the US as the one remaining untouched industrial producer. In fact, the auto industry was a direct result of building peace time rather than war time vehicles.

This argument would be stronger if it weren't for the fact that Germany and Japan, the most devastated wartime powers, were also the most impressive economic successes in the post-war period, including becoming auto industry powers. But yes, being a full-fledged, un-bombed industrial power was certainly a huge help to the US economy in the postwar period.

-Jester

[Jester]

What is interesting to me is that Keynesian's only follow his advice for increased government spending in the bad times, but never balance the budget and run surpluses to pay back the debt in the good times.

But they do. The closest the budgets have ever come in the US to being balanced were under Carter and Clinton. The "conservatives", Reagan and Bush, have been the most wastrel administrations around.

Balancing budgets is not easy work. But by and large, it's been work done by "spendthrift" Democrats, and not "conservative" Republicans. Just look at the tables you linked; the correlation is obvious.

-Jester