New Deal economics

Everybody’s talking new New Deal these days — and, predictably, the FDR-haters are out in force, with all the usual claims about FDR having actually made the Great Depression worse. (To the right, way back when, FDR was “That Man.” Now Obama is “that one.” Interesting.)

Eric Rauchway is all over this. Basically, the anti-FDR argument on the data is based on (a) considering people employed by the WPA “unemployed” (even though they were getting paid, and building public works that are in use to this day) plus (b) always focusing on 1938 — the year in which the economy suffered a serious setback from the progress of the previous four years.

Let me offer two pictures, beyond what Eric provides, to clarify things.

First, here’s real GDP (in logs) from 1929 to 1941, plus the trend. (That’s to bypass the employment nonsense). You can see that the economy made up a lot of the output gap before the 1938 setback, but by no means all.

INSERT DESCRIPTIONIncomplete recovery

Now, you might say that the incomplete recovery shows that “pump-priming”, Keynesian fiscal policy doesn’t work. Except that the New Deal didn’t pursue Keynesian policies. Properly measured, that is, by using the cyclically adjusted deficit, fiscal policy was only modestly expansionary, at least compared with the depth of the slump. Here’s the Cary Brown estimates, from Brad DeLong:

INSERT DESCRIPTIONLimited fiscal force

Net stimulus of around 3 percent of GDP — not much, when you’ve got a 42 percent output gap. FDR might have been more of a Keynesian if Keynesian economics had existed — The General Theory wasn’t published until 1936. Note in particular that in 1937-38 FDR was persuaded to do the “responsible” thing and cut back — and that’s what led to the bad year in 1938, which to the WSJ crowd defines the New Deal.

Implications for Obama: be inspired by FDR, but don’t imitate him slavishly. In particular, your economic policy should be bolder, not more cautious.

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Josh Koenig November 8, 2008 · 4:04 pm

Word. There’s a huge potential convergence in terms of the scale of investment needed for salvaging the economic picture, and the scale of investment needed to re-tool the nation for a 21st century energy, information and transportation infrastructure.

It’ll probably end up becoming another bubble (that seems to be the American way), but this time instead of a bunch of giant cars and ugly houses in the stinking desert, we’ll get a carbon-neutral energy surplus and kick-ass internet.

Fattyk November 8, 2008 · 4:07 pm

C’mon…the employment vs. unemployment issue is a red herring. The real issue is whether paying a salary or contributing to the GDP through BORROWING is actually “fixing” the economy. Kicking the can down the road is all that Keynsian policy does when you are a debtor nation. You only create more debt that needs to be serviced at some point. Thinking that just the small anount of interest on that debt is the only cost for the short-term increase in “spending…not productive growth” is a joke. Eventually you have to pay off that debt or you will be forced to default when you no longer can. The only way to get out of a debt leveraged asset bubble is through paying down the debt or dfaulting on it until you revert back to a an affordable spend level…period. You can’t build a truly productive economy on debt and you can’t stimulate a productive economy through more debt. You definitely can’t offset a massive credit bubble with debt.

Until Keynsians reconize there is a difference between a debtor nation implementing Keynes and a debt-free, trade-positive country implementing Keynes, they will continue to pummel the economy with unsustainable debt-based “stimulus” that fails to work.

John November 8, 2008 · 4:29 pm

Paul,
Bless you for these instructive posts and advice to our new president. I’m sad that our country has been put into this shape by the Bushies and Reaganites, and hope that those with intellectual honesty and skill can bring it back.

Acton. November 8, 2008 · 4:34 pm

Interesting. In 1937, in the middle of the Great Depression, the GDP chart says that the country was just as prosperous as in 1929, at the apex of a decade long boom and a bull market.

GDP data m’adore.

John Feier November 8, 2008 · 5:01 pm

We are headed for a third-world economy and the only way out of it is to raise the standard of living for the rest of the world. Is there a New Deal plan for the world?

Don the libertarian Democrat November 8, 2008 · 5:24 pm

So many things must be different now:
1) Actions of the Fed
2) Farming being a smaller part of our economy
3) FDIC insurance, UI, SS insurance
that I have to wonder if this is just a substitute forum for current political points being made, and not a forum for the most cogent economic reasoning to be put forth.

Whatever FDR did or did not do, how about people just offering up particular proposals and arguing for them, using the 1930’s if and when appropriate, without getting into some tangential personal or party line issues.

jon becker November 8, 2008 · 5:45 pm

I wholeheatedly agree with your conclusion – the needs of the day (arguably MORE critical than those of the Great Depression) beg for daring, forward thinking, yes even audacious policies to address the unprecedented trifecta of economy, environmental emergency, and security. We’ve thoroughly exhausted our time for procrastination; there are no shortage of credible experts who argue that we’ve already passed assorted tipping points. The challenges of sustainable energy and resource utilization, addressing global climate change, poverty, and human rights, are remarkably daunting from technological, political, and sociological points of view – but then again so was the idea that a black person could be seriously even considered for the position of President of the United States, and look what 65 some million of us agreed to on November 4. So go Barack Obama, go – time waits for no one, and history will remember whether you moved forward with vision and courage, or retreated to safe/ultimately doomed approaches to the great challenges we face.

David Traxel November 8, 2008 · 6:00 pm

One would think that with the scholarly efforts of Krugman and Rauchway, and many others, the distortions of FDR’s policies would finally be put to rest. The fact that they are not shows the strength of the ideological push behind them.

James Westgard November 8, 2008 · 6:25 pm

I’m puzzled why you drew the trend line in the first graph from 1929 to 1941. FDR did not become president until 1933; before that was Hoover. The slope of the trend line from 1933 to 1941 is very steep (especially for semilog coordinates), and 1937 variation is only a small glitch. It looks to me like the New Deal was a Great Deal for America.

Pazooter in WA November 8, 2008 · 6:46 pm

I’m an econorube, but that to me doesn’t appear to be a trend line as it doesn’t take into account the statistic at every interval between the beginning and end points. More of a net-gain line?

kalpal November 8, 2008 · 7:05 pm

Having dealt often with conservatives and governments I have long ago learned that they may do may stupid things and they forgive themselves repeatedly. You do one stupid thing and you will never hear the end of it.

When tehy attack they choose a weak point and deny that all else is not relevant to the discussion.

Michael Patrick November 8, 2008 · 7:22 pm

The real test will be on issues that have not been discussed like H1-B visas. I think there is plenty of momentum around using deficit spending to prime the pump. Even the GOP is on board…however they would use the money to encourage more of the same. The bubbles have maintained “more of the same” and the GOP will now try to direct the economic recovery money to “more of the same” policy.

I think we will know if a President Obama really does listen to the people if he ends the visa programs. Visas are manipulation of the labor markets to suit the needs of corporations. They distort the US education markets by discouraging US students from entering math and science programs. The proof is in the decline in US student enrollment in these programs. As H1-B quotas have increased the enrollment of students in computer science has decreased. I

I have been a programmer for 15 years and it is truly shocking how many H1-B workers there are that are taking jobs that Americans could do if given the chance. If the market was allowed to work, US corporations would have to pay more and that would encourage students to enter. Its really very simple market forces at work. We just need the government and Bill Gates to get out of the way.

Again, since this issue only impacts a relatively small segment of the overall economy I see this as a real test. The forces against working US programmers are strong, greedy, and organized while engineers and programmers are not. Let’s see if Obama can truly lead. I and my family pray he can.

c.perry November 8, 2008 · 7:42 pm

I am so afraid that the new administration’s response to the current problems will be timid. With a advisory group that represents traditional thinking and is not divorced from supply side economics, we are apt to have an inadequate approach.
It will take bold strokes to save us from years of economic despair and the possibility of political unrest. Franklin D. Roosevelt probably saved the country. Few seem to realize that the option was demonstrated by General McArthur. Most Americans are broke. They are being put out of work by the hundreds of thousands. They are losing the value of their homes in the millions monthly. Little things are not going to fix this. It will take a lot of money to create a demand economy but working America must be refinanced. As an octogenarian I remember the post world war years when taxes were much higher but a man could support a family with one job. Despite the high taxes demand caused fortunes to be made and conpanies created.

Larry Pius November 8, 2008 · 8:45 pm

The new New Deal cannot save us. All of the bailout money that we can print up cannot possibly save us from the inevitable economic collapse that we are facing simply because so many of the jobs that were once supporting the buying power of our middle class and in turn supporting our economy have now been largely exported to third world countries. So what happens after the first trillion of bailout money is spent and gone… then what, just print up another trillion or two? There will still be nobody left to buy anything, and building some highways and bridges will not make much of a dent in that reality. So get ready for that US$2000 loaf of bread that we learned about in ECO 101, doesn’t seem to be that far away the way things are going.

Unfortunately the latter day robber barons in their frenzied race to export our jobs to reduce their production costs forgot to factor in the fact that the jobs they were eliminating were those belonging to THEIR CUSTOMERS, the people who were buying all their stuff. Sure, go ahead and bail out GM, Ford and Chrysler, and once they use up their bailout money and there is still nobody left to buy their cars because all of the jobs are still overseas… then what?

And who’s kidding who about being saved by the green economy? It’s obvious that once we develop all the new technologies, most of the manufacturing jobs will then be shipped overseas just like the rest of our jobs have been in the past to places where people in poverty will work for a small fraction of American wages to produce it all.

The real villain is free trade, and a way MUST be found to dramatically scale it back, and soon if there is to be any hope of any kind of saving our country from a much more terrible economic tragedy than anything that we have ever imagined facing before. It won’t be easy because the blood is already in the water and the global job hunting sharks will not care too much for having the valves turned back reducing the flow of American jobs to their shores as we re-establish a more universally sane set of trading policies, but the sooner we get started the better.

K. Wayne Peterson November 8, 2008 · 8:52 pm

How I wish everyone would read your book, The Conscience of a Liberal. It provides very clear evidence of the very clear differences between Republicans and Democrats. More importantly, I wish every elected Democrat and President-elect Obama advisors would read this book and realize that this is exactly the right time to be bullish about setting an agenda based on correcting the disparities that exist and which gave rise to the current dismal economic situation we are now in.

Jim in Chicago November 8, 2008 · 8:54 pm

Excellent advice. I hope Obama follows it. I’m worried that Prof. Krugman may have marginalized himself and reduced his potential influence on the Obama agenda by his ridiculous Hillary worship during the campaign, however….

(I made this same comment on the previous thread, but it’s even more relevant to this one, I think.)

B.Givi November 8, 2008 · 9:08 pm

Seems convincing. Question is have you got an invitation from Obama team yet or they sour over the primaries?
I always thought that listening to a noble laureate might be a tactful thing to do, but what do I know!

paul lewin November 8, 2008 · 9:42 pm

Already the genius pundits who thought the free market would cure all a re advising that Obama must go slow on his agenda. God forbid that a real reform program be put in place before the sacred free market is preserved. See Tyler Cowen and Peter Bernstein in todays paper. Nonesense, it is possible to move the whole program ahead and still deal with the economic crises at thesame time, as long as we don';t concern ourselves with bailing out the free market boosters who got us in this mess, and the sanctimonious pundits who worship at their alter.

Brian Lee November 8, 2008 · 9:49 pm

Yes, Obama should be bold. And he should remember that Keynes’ approach required international, not just national, economic action. And that this can only happen properly if the US gives leadership in it. To see how Keynes approached this in his day, check out a book by D Markwell, “John Maynard Keynes and International Relations”. I am worried that the US today – despite some good moves, like George W Bush calling next week’s global economic summit, and Barack Obama saying Friday that “We must also remember that the financial crisis is increasingly global and requires a global response.” – won’t give the international leadership that the global economy requires. It is important that the President-elect, in (e.g.) choosing to talk about domestic issues but to avoid the global economic summit, not send the wrong signal. His choice of Secretary of the Treasury will be important here. Do Timothy Geithner or Larry Summers (or whoever else is being considered) have the right approach to the international economic leadership the US must give if the US is itself to recover and stay recovered long-term? Paul Krugman – do you??

crystal November 8, 2008 · 11:14 pm

This is an interesting post. I’ve heard a great deal of talk about how Obama will be like FDR. My grandmother who is 90 was the first one to give me a history lesson on how similar things are as they were then.

Joe Smith November 8, 2008 · 11:48 pm

All of which is very well but: (1) we are already stimulating the economy with deficit spending over 3% and (2) FDR’s big mistake was the NRA and if Nancy Pelosi has her way, Obama will repeat that disastrous assault on the economy and individual freedom.

Seth November 9, 2008 · 12:50 am

The FDR-bashers are pretty pathetic, but there is one lingering concern which I fear no one is addressing so far. World War II ruined all of our industrial competitors. Had that not happened, would the US have been so prosperous in the following decades? Back then we were a power very much on the rise. Now we are in relative decline. Even if we don’t revisit the darker parts of the 1930’s, I suspect Americans are in for a long period of disagreeably slow growth as we fall back in line with the rest of the developed world. Not just below trend growth, but a slower trend.

Brett November 9, 2008 · 2:01 am

I think they might be thinking more about things like the National Industrial Recovery Act and the like, which caused a steep drop in industrial production. Although I don’t blame FDR for improving labor standards and the like, there’s no denying that he had some probably wrong views on economics, and some of his policies like the above worked to constrain production.

Brett November 9, 2008 · 2:07 am

Err, change that to the National Recovery Act – eliminate the “industrial” part. Although some of its components – like minimum wage – were good, the idea it had of basically creating cartels in various industries was a bad idea, and the whole thing was a complete embarrassment (even to FDR) by the time it was struck down in 1935.

Porlock Junior November 9, 2008 · 2:51 am

The FDR analogy has been in the wind for a little while now, and something occurred to me that I’d really like an economically informed comment on. It’s s thing so obvious that I feel stupid for not seeing it 40 years ago; but maybe it’s a consolation if everybody else is as stupid.

The received wisdom is that FDR’s Keynesian policies didn’t really fix the Depression at all; that had to wait till the War took over and restored economic activity. Well, will someone tell me just how the War was different from Keynesian spending?

Oh, sure, Keynes didn’t want to kill millions of people and lay waste to whole provinces of Europe, I know that. But economically, setting aside that sort of moralistic value judgment, what did the war bring about? Massive spending without worrying at all about deficits. Taking vast numbers of unemployed and employing them at government expense — lousy pay, but off the unemplyment rolls! Paying people to dig ditches and fill them up again, a fine Depression cliche — only here they made masses of things explicitly intended to blow up. Now there’s a market you can’t glut. (“I don’t know what / Compares with smut”)

One could go on at length and wax satirical, but truly, why am I supposed to believe that the economic recovery through war spending is anything but a proof that the (alleged) Keynesian policies were not carried out strongly enough?