The Great Depression Revised

Arguing economics on the internet is a futile and foolish venture.  I really don’t know why I bother sometimes. Especially since I have no credentials to flaunt: I’m not an economist, heavens knows.  But I have read some.  And honestly the things some people say. . . .

Paul Krugman’s even gotten himself in the middle of a kerfuffle, entirely without intending to.  The Wikipedia article on Austrian-school economics, has at times both included-and-not-included a paragraph citing Krugman’s criticism of the Austrians.  Salon’s got the story, but it’s not hard to imagine it; Austrian-school economics fans play, ahem, some tenacious D.  One hardy perennial is the notion that the world-wide financial crisis was caused by foolish government policies, specifically the Clinton administration’s support for affordable first home purchases.  Yes, it was all the fault of Fanny and Freddy.  Not true, but it’s also a belief that’s all but impossible to refute for people who aren’t interested in evidence.

But another one is the Great Depression.  I mean, the two biggest incidents in the last 100 years of the economy going all kerflooey would be stuff economists would want to get their heads around.  One of my favorite versions of this: FDR followed Keynesian policies.  And they didn’t work, prolonging the Depression.  Facts: Keynes didn’t even finish his General Theory of Employment, Interest and Money until 1936.  FDR could hardly have been influenced by it before then.  Keynes did visit America in the middle of the Depression, and he did meet Roosevelt, once, for about an hour, in a conversation Roosevelt, no economist, found deeply baffling. It is true that Keynes admired Roosevelt immensely, but was also pretty critical of a number of New Deal policies. So the ‘New Deal failed because it was Keynesian’ meme is just silly.

Anyway, here’s the latest round:  UCLA economists just published a paper arguing that FDR’s policies prolonged the Great Depression.  By seven years, no less.

My immediate reaction to this headline was laughter.  Roosevelt was elected in 1932, was inaugurated in ’33.  The Great Depression is generally reckoned as having ended in 1940.  Which means, I figured, that these bozos were saying he should have ended the Great Depression ten minutes after taking office.  Full employment, immediately, presumably involving some kind of spell.

That’s not actually what they’re saying.  They’re saying the Depression ended in 1943, and that sensible (non-stimulative, ergo non-Keynesian) policies would have ended it in 1936.  So their argument isn’t entirely silly.  Just mostly.

Here are the facts that are really not in dispute.  This chart shows  annual US GDP.  Our GDP was 103.6 billion in 1929.  The Depression hit that year, and it shows nicely in this chart: 1930=91.2; 1931=76.5; 1932=58.7; 1933=56.4.  That’s when Roosevelt took office, and the New Deal began.  Check the numbers: 1934=66; 1935=73.3; 1936=83.8; 1937=91.9.  Substantial, steady growth every year.  That was the year that Roosevelt, worried about deficits, cut spending, and look what happened: 1938=86.1; 1939=92.2; 1940=101.4.  In other words, by 1940, the economy had grown to its 1929 levels, more or less.  Hard to look at those figures and conclude that the New Deal failed.

And then came the Second World War, and the economy boomed: 1941=126.7; 1942=161.9; 1943=198.6.  And those last three years, according to these UCLA guys, we were still entangled in the woes of the Great Depression?  With that much economic growth? Seriously?

It is certainly true that the Great Depression New Deal-driven recovery was a low employment recovery.  These two UCLA economists think wages were 25% higher during the Depression than they would have been otherwise, and that the economy was artificially depressed by that same percentage.  They briefly describe the methodology they used to calculate the baseline, the assumptions they base it on, and it’s immediately flawed–union strength was growing during this period, and wages would have risen without the New Deal.  Still, unemployment remained far too high during the  depression, and I don’t question at least some aspects of their analysis, that artificially high wages may have depressed new job creation some.

Roosevelt was not an economist.  His approach, during the Depression, was to try everything, and there can be little doubt that some of his less effective initiatives might have counter-acted his more effective stimulative measures.

But what this UCLA analysis misses is this central point: Roosevelt’s great accomplishment was to save capitalism at all.  That was also Keynes’ great achievement.  In the Cambridge of the 1930s, Keynes learned soon enough that most of his fellow economists had concluded that capitalism as an economic system had run its course, that the events of the Depression had conclusively proved its utter failure. Most of his compatriots had either followed Oswald Mosley into fascism, or the much more numerous young Turks of the profession who had turned to Marxism.

It looked like capitalism had failed.  It looked like market economies had dug their own grave.  Were wages artificially high?  Perhaps, sure.  Because they had to be.  The measures Roosevelt used were necessary, and were resented on the left, because they tended to preserve an economic system that looked to be beyond redemption.This is why Joe McCarthy was able to point to so many commies among people who had come of age in the ’30s. Well, okay, he made a lot of it up–this is Joe McCarthy we’re talking about.  But it’s also true that huge numbers of people found Marxism attractive, because, hey, it’s not like capitalism works.

What this critique of the New Deal ignores is the philosophical and historical realities which the New Deal was forced to address.  Roosevelt, by declaring a bank holiday, saved individual banks.  But more importantly, he saved banking as an idea.

Austrian-style economics insists that any government intervention in the economy is harmful, that if we just leave markets completely alone, they’ll self-correct.  Even if this were true–and it isn’t–it’s not politically possible.  If the economy is slumping, voters will always insist that someone do something about it.  And if wages don’t rise, voters will notice that too.

Besides, has anyone else noticed how similar libertarian economics is to communism?  Both insist that the answer to an economic slump is to do nothing.  Austrians say, do nothing, and the economy will self-correct.  Communists say, do nothing, and it will self-destruct, leading to the dictatorship of the proletariat.  Either way, bunnies and unicorns frolic.

Meanwhile, let’s agree that Roosevelt saved our nation.  Saved capitalism, made it work again. Kept enough factories going to enable us to switch to war-time production, made it possible to beat Hitler.

The New Deal worked.  Could it have worked better?  Sure, maybe.  But let’s not make the mistake of basing future policies on fantasies and pipe dreams and projections.  We don’t know what could have happened.  We know what did happen, and how much our country continues to owe Franklin Roosevelt.



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