Price Fishback: What Do the New Deal and World War II Tell Us About the Prospects for a Stimulus Package?

Economic historian Price Fishback, who recently guest blogged about the original Home Owners’ Loan Corporation, is back for an encore. This time, he tackles the issue of whether the New Deal and World War II are good examples of Keynesian stimuli. If you want to see these sorts of issues tackled in greater detail, check out Newdeal2.

I always thought they were; but using data, Fishback makes a simple and compelling case that they are not.

I learned a lot from his piece, and I suspect many of you will as well. In my opinion, this sort of writing is exactly what academic economists should be doing to help shape the public debate.


What Do the New Deal and World War II Tell Us About the Prospects for a Stimulus Package?
By Price Fishback
A Guest Post

Everybody is talking about the stimulus package, and many are citing the New Deal and World War II as classic examples of successful stimulus programs. In punditry history, the federal government spent large amounts of money on works projects in the 1930′s and munitions in the 1940′s, and these were important stimuli to the American economy. Readers should beware, because the history is more complicated than the two-line descriptions.

The New Deal

Federal spending rose from 4 percent to 8 percent of G.D.P. during the New Deal in the largest peacetime expansion in federal outlays in U.S. history. Yet this was not an example of Keynesian stimulus to the economy. Economists and economic historians have known this for the past 70 years, yet the myth lives on. The accompanying chart, which measures everything in real 1958 dollars for the 1930′s, shows why. The definitive analysis is more complicated, but the figure is a good shorthand way to show this.

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The chart shows federal-government outlays, the budget deficit, and the difference between G.N.P. in that year and G.N.P. in 1929. The problem to be resolved was to reduce the huge gap in annual real G.N.P., which had fallen 33 percent below the 1929 level.

The graph shows that federal spending comes nowhere close to replacing that gap. Once we take into account the taxation during the 1930′s, we can see that the budget deficits of the 1930′s and one balanced budget were tiny relative to the size of the problem.

John Maynard Keynes published an open letter to Franklin Roosevelt in major American newspapers saying more spending was not enough; the government needed to run larger deficits. As Keynes’s arguments were fleshed out after the 1930′s, various scholars ranging from Abba Lerner to E. Cary Brown to Claude Pepper have re-examined the New Deal budgets. They all agree that the New Deal cannot be described as a Keynesian stimulus program. We can only hope that the word will finally spread widely enough now to correct the myth.

If not Keynesian policy, what was the New Deal? It was a broad-ranging mix of spending, regulation, lending, taxation, and monetary policies that can best be described as “See a problem and try to fix it.” In many situations the fix for one problem exacerbated other problems. The programs to raise farm prices hurt work relief recipients, while attempts to raise wages and prices contributed to more unemployment, and thus a greater need for relief spending. My focus here is on spending, but the reader can find more information on the New Deal in the material discussed at the end of this piece.

The main New Deal spending programs that might be described as stimulus programs are the relief and public works during the New Deal. The relief programs started with the Federal Emergency Relief Administration (F.E.R.A.), which started in mid-1933 and was phased out after June 1935. The federal government distributed grants to the states for two types of relief: work relief and direct relief in the form of cash, food, and clothing. In the face of 25 percent unemployment rates, this was truly relief for the unemployed and people in dire trouble. Relief administrators evaluated the incomes and basic needs of relief applicants and tried to give them enough direct relief or enough payments for work relief jobs to allow the family to survive at a very basic level of living.

The best-remembered federal relief program is the Works Progress Administration (W.P.A.), which replaced the F.E.R.A. in July 1935 as the primary emergency work relief program. The W.P.A. was created as part of a series of compromises between F.D.R. and the two houses of Congress in 1935. The executive branch was given more control over emergency work relief in the W.P.A., which would eventually be eliminated in 1942. Responsibility for direct relief for “unemployables” was returned to state and local governments. Finally, the Social Security Act established the old-age pensions known now as social security, and created a series of state/federal programs for unemployment insurance, aid to dependent children, old-age assistance, and aid to the blind. The latter group of programs replaced state programs in place in many of the states.

As people invoke the W.P.A. and F.E.R.A. work relief projects as templates for modern stimulus programs, they do not really understand how they worked.

While it’s true that the F.E.R.A. and W.P.A. built many roads, buildings, and public works, they were designed as “relief” programs with work requirements. The goal was to help families reach a minimum level of income, and the average payment per hour on these programs was roughly 40 percent of the wage being paid on the non-relief public works projects described below.

The pay was so low because the unemployment rates between 1933 and 1939 ranged between 14 percent and 25 percent, Roosevelt was trying to keep budget deficits in check, and the administration was trying to help as many people as possible reach a basic standard of living.

This focus on providing a basic standard of living contributed to an improved situation on several socio-economic dimensions. Recent studies of the relief programs in the largest cities suggest that spending an additional $2.5 million in year-2008 dollars (about $200,000 in 1935) on relief was associated with a reduction of 1 infant death, 1 suicide, 2.5 deaths from infectious and parasitic diseases, 1 death from diarrhea, and 21 property crimes.

Despite this success, my sense is that most people are not interested in recreating a system where people are paid such low wages to contribute to building public works for the rest of the society. The modern social-insurance structures of unemployment insurance and a wide variety of health, nutrition, and welfare programs are already in place to help resolve these types of problems.

The New Deal programs that better fit what the stimulus proponents have in mind are less well known and include the Public Works Administration (P.W.A.), the Public Roads Administration (P.R.A.), and the Public Buildings Administration (P.B.A.). There was also the Civil Works Administration (C.W.A.) that paid full wages but ran as a relief program employing 4 million people during four months of the winter of 1933/1934.

These programs built dams, sewers, bridges, roads, and buildings, as did the W.P.A. and F.E.R.A. The difference was that the programs contracted with private contractors, who then hired workers at the typical wages paid in the construction industry.

How successful were they at stimulating the economy? As yet, the only estimates we have are for the combined effects of the public works and relief programs. Studies that examine their success at the county level suggest that an additional grant dollar per person distributed to a county for public works and relief during the period of 1933 to 1939 contributed to a rise in in-migration and an increase in income per person in the county of about 80 cents in 1939. We should remember, however, that this was during a period when there were huge numbers of unemployed workers available for work. Even during this period, some studies find evidence of crowding out of private employment. Today, with unemployment rates below 7 percent, it is likely that such public-works spending would crowd out a significant amount of private construction.

My own recommendation would be to evaluate the modern public-works programs more on the basis of the specific productivity of the programs rather than as stimuli to the economy. We know that we have an aging infrastructure of roads, bridges, and dams. The costs and benefits of the replacements would be my focus in evaluating whether to spend the money or not.

World War II

It is widely held that World War II was a huge Keynesian stimulus that finally brought us out of the Great Depression. On the surface, the facts seem to fit. The federal government devoted 44 percent of G.D.P. to fighting the war and ran very large deficits. Unemployment rates fell below 2 percent even as large numbers of women entered the work force.

In a series of academic papers, Robert Higgs of the Independent Institute has raised doubts about this rosy picture of Keynesian stimulus. The war economy was a very unusual setting. While running large deficits, the federal government took command over large segments of the economy, allocated a large part of the resources to the war effort, put 15 percent of the working-age population in the military, and established wage and price controls.

The official statistics on private consumption during World War II suggest that real consumption expenditures rose, but they use official-controlled prices that misrepresent the true price of consumer goods in the period.

After relatively minor adjustments to reflect the real prices, real consumption in the middle of the war was lower than it was in 1941. Most in the military were risking life and limb in foreign lands. On the home front, people could not buy new autos, tires, and many appliances at any price. Rationing programs sharply limited access to meat, sugar, gasoline, and a wide array of other products.

Life during World War II was largely a continuation of the deprivation of the Great Depression, with two exceptions: Fighting the war put many in the frame of mind that they were sacrificing for a much larger goal of winning the war, and people accumulated savings because there was not much they could buy at the time.

One sign that Keynesian budget deficits were not the key to bringing the U.S. out of the Great Depression is what happened after the war. Every Keynesian predicted that the private economy would go into a recession because the large government budget deficits would be eliminated and so many men would be returning from the war jobless. Instead, as government deficits receded, private consumption and investment boomed. Resources were no longer allocated to producing munitions and instead were devoted to production of typical consumer goods and services.

Some people might misconstrue this discussion as saying that the U.S. should not have fought the war. The point here is that World War II was a period of sacrifice when many Americans experienced deprivation on par with what they experienced in the latter stages of the Great Depression. Vast budget deficits were not a stimulus in the normal sense of the word because the U.S. was a command economy devoted to an all-out war effort. William Tecumseh Sherman famously stated, “War is hell.” We should add the phrase, “even when financed by large budget deficits.”

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COMMENTS: 65


  1. Wonks Anonymous says:

    And I beg to differ. We all know that the New Deal was weak medicine. The mobilization during WWII worked. The reason that the private economy took up the gap after the war was precisely because of the jobs created during the war.

    WWII lowered consumption and increased employment and investment – all those auto plants could produce cars after they stopped producing tanks. Meanwhile households that had come near to bankruptcy were flush with war bonds and ready to buy goods that they had not been able to during the war.

    So right now our households are all but bankrupt from playing the patsy in multiple rounds of monetary stimulus – you borrow and spend, we make profits. We have no realistic prospect for increased demand in the near future except the government. Given our problems with energy driven inflation we need to make some serious changes.

    Maybe it’s time for a national mobilization as in WWII?

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  2. sajid khan says:

    world War 11 played a major role in stimulating the economy. If unemployment came down to 2 percent, people in the military and defense production had the jobs
    and proabably saved much of it because of the rationing and shortages during the war. After the war the demand increased sharply because people had the money earned during the war. This couldn’t have happened without the
    war. That is the reason the unemployment was high and demand low before the war. The comparison of the economic situation before and after the war clearly shows
    the important role of the war in pulling USA out of the depression.

    Sajid Khan, NJ

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  3. CT reader says:

    Could you please comment on the GI bill? I recently heard Dr. Robert Shiller speak, and he indicated that after adjusting for inflation, the only real period of growth in real estate prices was post WWII. Perhaps a new GI bill could help stabilize housing.

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  4. AaronS says:

    I have long marvelled at the “works” done back in the 30s and 40s–the national park lodges, trails, overlooks, roads, and so forth. Whatever the economics, those folks did something wonderful for future generations.

    I am thinking that the government might kill two birds with one stone by creating a “works” program that was centered on alternative energy. For instance, a grand program to implement the Pickens Plan (the wind part anyway) would put a lot of people to work AND would reduce our dependence on foreign oil.

    Over time, such an endeavor would keep American money at home. The energy companies that receive that money could invest or expand, all serving to create jobs. And I need not go into how that would free America’s economy from the whims of OPEC.

    Just my thoughts.

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  5. Allan says:

    The lessons observed here seem to always be forgotten.

    Government is a necessary evil but it is never the answer to economic problems.

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  6. Jan Christiansen says:

    By comparing performance to 1929 this type of analysis falls into the same trap as a lot of current thinking: the wishful delusion that the peak of a bubble somehow represents a sustainable equilibrium which can be restored if we just pour enough juice to economy.

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  7. Forensic economist says:

    On the other hand, if the PWA, CCC, etc hadn’t happened the depression would have been worse. It is not that the new deal didn’t do anything, it didn’t do enough.

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  8. bob sallamack says:

    Keynesian budget deficits are simply the idea of using government funds to pump capital into an economy where capital has dried up.

    In a weak economy a government can sit by and do nothing or it can take actions to revive the economy.

    Government spending during World War II built up the industrial base of the United States and jobs in this industrial base provided Americans with the money to purchase products.

    Before government spending the industrial base of the United States lay in ruins because of the lack of capital.

    The current industrial base of the United States lay in ruins because of the poor economic policies of the past 30 years and a belief that a large supply of cheap capital would always be available.

    Keynesian budget deficits will be needed for years to rebuild the industrial base.

    Keynesian budget deficits can be effective when they are used wisely. The current use of over a trillion dollars of Keynesian budget deficits to banks indicate that are ineffective if they are not used wisely.

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  9. lester says:

    The lesson of WWII government economic stimulation is so clear, how can anyone not see it? However, there may be a real question about why it worked to end the great depression. After all, war materials have virtually no economic value and all the government money spent on it was an economic waste. The WPA programs which created real products of real economic value didn’t pull the country out of the depression. However, there may have been factors at work in the mid 1930′s which are not being accounted for in the Fishback analysis. Perhaps the conclusion the could be drawn is that the New Deal government stimulus was just not big enough to end the depression.

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  10. Wade K., WI says:

    So… what exactly brought us out of the Great Depression? Was it deficit spending by our families? Was it the increased productivity from all the new infrastructure? Was it a more fair distribution of the newly created wealth (as represented by the ratio of CEO salaries to hourly worker’s wages?

    It would have been nice if you told us your answer to what it was in addition to telling us what it wasn’t.

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  11. David Isenbergh says:

    The thrust of this article seems a bit misplaced, for the some of the following reasons:
    First, as the article’s graph illustrates, the amount of government deficit spending during the 30′s was modest by today’s standards. Still, the growth in GNP corresponds quite closely to the level of government spending and deficit increase. Productionr growth (as well as employment levels) increased steadily until 1937-1938, when Roosevelt decided to reduce spending while increasing taxes in an attempt to balance the budget: the result, as reflected in our graph, was a sudden downturn in GNP combined with increased unemployment. As soon as Roosevelt reversed gears, the upward trend in GNP & employment resumed.
    Second, Price Fishback assumes that our current Federal & State programs designed to keep people fed, clothed, warm and housed are entirely adequate. This view, commonly held by academic and ideological economists and commentators, is very simply wrong. The truth is that unemployment benefits are currently available for a very limited amount of time –mostly less than a year– and as for welfare, relatively few people are eligible (mostly unemployed single moms and totally disabled individuals) and the payments even then are less than adequate. Thus, in the event of a deep recession or depression, millions of individuals and families will need material support far beyond what the Government’s current mandate provides.
    Third –it is noteworthy that Fishback’s graph does not extend beyond 1940-41. But it was precisely during the war years & their immediate aftermath (1942-1946) that deficit spending really took off: In fact, the Federal deficit as a fraction of the Nation’s economy/production was higher during that period than it ever was before, or, for that matter, since. And subsequently the U.S. economy soared as it never had before.
    Thus the historical facts in question hardly constitute a refutation of the efficacity of Keynesian deficit spending. Quite the contrary.

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  12. Jacob says:

    I don’t think that people are advocating a new New Deal because they have misinterpreted it as a true Keynesian stimulus. I don’t think that most journalists understand what that is, and I didn’t think anyone believed in classical Keynesianism anymore. Take it from someone who has experienced that theory first hand: it does not work (although it is much preferable to laissez-faire).

    People advocate a new New Deal precisely because the New Deal included a broad range of measures, where government regulation was just as important as government spending. It was an overhaul of an outdated economic system, which is what we need today.

    The writer touches on the reason why Keynesianism doesn’t work, which is the belief that throwing money at something, just anything, will somehow make the economy better. Imagine that you felt like you were missing something in your life, and then went in to a store and started shopping blind folded. Would that make you happy?

    http://www.usparliament.blogspot.com

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  13. Pierce Randall says:

    That the New Deal wasn’t particularly Keynesian should be obvious. It was also unsuccessful in 1937, when a balanced budget led to a recession.

    World War II is trickier. Yeah, consumption might fall as 15% of the working population is overseas, but the economic stimulus in the US after the war might be the chickens coming home to roost, so to speak, in deferred consumption by those individuals, and their families. Also, debt as a percentage of GDP declined significantly following World War II, but the total value of the debt (what the government does and does not pay off) stayed much more consistant. Public debt by 1950 was still in the $250 billion range. It was $40 billion in 1940.

    World War II was a weird war, anway. You look at any other war — Korea, World War I, the Civil War, 1812 — the economy slumped significantly as government paid off its debts.

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  14. jrh says:

    If we truly apply the lessons of the New Deal/WW II, then we can restore the economy in four easy steps

    1) reduce consumption
    2) increase savings
    3) invest in directly productive assets such as factories (rather than leverage-based speculation)
    4) blow up the rest of the world’s infrastructure, so they have to buy our products

    If we aren’t willing to do (4), then it’s not at all clear what direct solutions we can extract from this period of history.

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  15. G-AZ says:

    In the past 100 years, the machine has replaced human labor to the point that the necessities of life can be produced with just a small fraction of our available manpower.

    In all of human history, there is no precedent for this situation.

    We have had no better idea of how to organize ourselves, our labor, our society, our government, etc., than by working like mad to make stuff for consumption.

    Now that’s not working anymore.

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  16. FreedomWorks says:

    The other factor for ending the Depression was a complete reversal in trade policy at the end of World War II. The GATT agreement marked a return to freer trade and brought huge economic benefits.

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  17. JeffC says:

    What that Keynesian view seems to be missing is a consideration of productivity. I believe that WW II’s key economic outcome was pushing the country to commit to R & D, in spite of necessary sacrifices in other areas. This led to increases in productivity, superior technology to other countries, and consequently more opportunities for everyone.

    The modern U.S. has been shirking its commitment to R & D, as well as infrastructure modernization. Government may not be able to develop every new technology itself, but it can play a key role in steering the country toward the right mindset.

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  18. Victor Grauer says:

    I heartily agree with Fishback’s very logical (though thinly veiled) argument for socialism. If Roosevelt’s efforts had been more thoroughly planned and less piecemeal then the various aid packages need not have had such contradictory and inequitable effects. If they had not been watered down by needless compromises, they would certainly have had a greater impact.

    As for World War II. The extraordinary insensitivity of economists to basic human values never ceases to amaze me. World War II was far and away the greatest disaster ever to befall humankind. It was good for NOTHING. Its effect on the economy was that we survived it and were able, by some miracle, to move on. Period!

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  19. Michael says:

    There is no magic bullet, the government cannot fix the economy because the government does not create wealth. Wealth is created by entrepreneurial citizens and hard work. That is what WWII gave us.

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  20. rsmail says:

    Doesn’t this ignore the immense public spending on the Marshall Plan and GI Bill which significantly bolstered demand during demobilization?

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  21. Edmond says:

    The problem arises in the overvalue of individuality. There is no compromise to the greater good, as everybody is a “(wo)man by (her)self”.

    Several economists theorize that this ingrained individualism in the capitalist system is paramount to its survival and the well being of society as it entails healthy competition in which the economy of most (if not all) parties will flourish–although I think ants know better.

    Look at the successful econopolitical (if you will) organization of ants. There is a specimen which organizes labor according to the age of the ant, and thus you don’t have a twenty year old individual supervising a fifty year old one in this type of economy–for the sake of analogy–neither there’s is unemployment as labor is mandated and organized from the top; it is not left to a laissez faire roll of the dice–this means more stability. But mostly, each individual looks after the society as a whole, even before the individual does after himself.

    The Laissez faire experiment means that the thirst for profit trumps sometimes even basic human rights and also the ecosystem.

    But some ants know better.

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  22. Jay S says:

    WW II created a coiled spring economic situation in which high employment with nothing to buy set the economy for a rocket launch once consumer goods again became available.

    Another aspect was the huge jump in household creation as returning GIs married and became parents, adding more demand.

    There’s nothing like this today, unless Uncle Sam wants to declare war on energy dependence … including banning procreation until we stop importing foreign oil!

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  23. Paul Z says:

    Responding to Allan, Government is not a necessary evil, but rather part of our social fabric and our responsibility to one another.

    Consumer demands ebb and flow – impacted by the emergence of technologies, wars, acts of nature, acts of greed. Those events arise, mobilize and inspire, then fade – ready to yield to the next wave. Man made or not, as we see clearly now, these mobilizations are extremely difficult to control and predict.

    Meanwhile, and with much more consistency, people are born and need educations, have special needs – or not, they need to travel from place to place, safely with protected borders and towns, and they die. Hopefully with dignity, and only with the support of a responsible government.

    i struggle to understand what part of that is evil. The titans of business have no legal responsibility to any of us. They can choose to sit on the sidelines until things look attractive to them. Our government and it’s officials have to show up every day.

    The government might be struggling with what to do right now, but everyone I know with any money at all is sitting on it – me too. We can because we choose to – our government can’t choose, it must act now.

    People are not finding the answers in the private sector, so naturally we’re turning to the government. We’ll only get through this sanely by opening up to the best of both private and public contribution. One cannot thrive without the other. A catalyst will come from somewhere – it always does. Let’s not make it a war.

    All other ideas are welcome! Let’s do this together.

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  24. misterb says:

    By focussing purely on economics, I think most of what actually changed during WWII is missed. WWII fundamentally changed technology, world view and America’s perception of its place in the world. These parameters more than pure economics contributed to a general sense of hope and growth that led to the long-term expansion of the American economy that lasted into the 70′s.
    What we need now is not so much economic interference but psychological strengthening – once we have hope and plans for our future, then investment will once again seem reasonable. Government should look to symbolic investments rather than bail-outs. The “broken-window” method of cleaning up crime has its analogy in the building of camp sites and fixing bridges – instead of living in a crumbling environment – we would be living in a renewed environment – making us feel better about ourselves and better about investing in our futures.

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  25. Mike says:

    This essay is interesting, but I’m not sure the appropriate conclusions are clearly drawn. I see these to be:

    (1) Does large deficit spending lift a nation out of recession/depression? Ans: we don’t know, because the prototypical model we thought we had — the New Deal — didn’t really involve huge deficits.

    (2) Does starting an expensive war lift a nation out of recession/depression? Ans: seemingly not, unless somehow the effects are delayed until after the war is over.

    (3) Does large government spending/relief programs lift a nation out of recession/depression? Ans: seemingly so, but it is hard to distinguish effects of infrastructure investment and relieve spending, and it’s hard to see the value of aspects of these unless unemployment rates reach ~20%.

    To me, these conclusions do not really inform the debate over what to do with the present recession, except to say we shouldn’t *assume* deficit spending is an answer — it might or it might not be — and we should guess that at least if matters get much worse, a mixture of infrastructure investment and relief programs should help.

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  26. Michael says:

    @ Edmond, #21

    What you are describing is communism. Which is an amazing system. For ants. Unfortunately human beings are not mindless drones (most of us, anyways), so communism does not work, which every communist nation thus far has proven.

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  27. Floyd Herbert says:

    The point about the weakness of Keynesian stimulus during the depression and WWII is well taken, but it is a basic tenet of the “Neo-Classical Synthesis” that the stimulus is weakened by the consumers’ tendency to save.

    When people spend everything they get, the injected money cycles around the economy many, many times, and the net economic activity is greatly increased. When they save, the cycles are few because money bleeds away into small bank accounts and doesn’t do much. During the depression and now, we’re all saving every penny, so Keynesian stimulus is weak. Only after the artificial reboot of WWII, when people had a lot of money in their pockets and were in an upbeat, celebratory mood, did their tendency to save decrease, and the savings themselves, when spent, plus any budget-deficit money injections, had a large Keynesian multiplier.

    Thus our defeatist attitude is partly responsible for the current weakness of Keynesian stimulus. Perhaps if media hysteria calms down (the election is over, He got elected, stop screaming), then future stimuli will gain traction.

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  28. Irene says:

    I’m confused.

    If all there was to it was deficit spending, the US budget has a $455 billion deficit for 2008 and it is projected to rocket up to unsustainable levels in the future because of entitlement spending and current debt,…..

    We’re also in a war right now…..

    So shouldn’t we be sitting in a bed of roses?

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  29. RandFan says:

    To Edmond (# 21)–

    I am deeply troubled by your mindset. Utilitarianism is a dangerous moral philosophy precisely because you think you actually can identify what “the greater good” is for “the greatest number.” Friedrich Hayek explains cogently in his writings that only the prescient “mind” of the free market–not any single human being–can produce an efficient, orderly, AND free society. It is precisely BECAUSE people–not ants–have minds that they can apply their native ingenuity to problems and, in a society of unfettered exchange, can compete in the “market place of ideas” to make themselves AND the world a better place. On the contrary, when ants and bees lose their Queen, they lose direction and they die. Period. the point is that all collectivist schemes are doomed to fail because they place unjustified faith in central planners. You do have one thing right though–a more utilitarian, collectivist approach would ensure that we end up with the other vermin on the “ant heap of history.”

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  30. Brian says:

    I agree with AaronS; I am always impressed when I see WPA works. Regardless of the economics, historically it was a fascinating program.

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  31. Jason says:

    It seems clear to me why WWII brought us out of the Great Depression:

    The government needed factories and people educated in how to operate them. So it paid to build an industrial base and it paid to train people in how to operate it.

    That large investment in factories and in training left a scenario where people had the skills and tools to make money.

    People don’t need a hand out. People don’t need a busy-work job. They need training and investment in skills that can produce value.

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  32. Jen says:

    Thanks, you given me all lot to think about.

    What confuses me about our current situation is the impact of globalization and automation on our GDP. Medium wage jobs are being rapidly elimination through outsourcing or automation, resulting in few options for workers. The choice becomes “Would you like fries with that?” or massive student loan debt.

    I’m an engineer, not an economist, but I can’t see an economic engine driven by a low wage service sector class and a high wage college educated class. That’s a recipe for a 3rd world country, a place where people drive a BMW or take the bus. There has got to be a large middle to drive consumption on a broad scale. We’ve floated in recent years by relying on debt and cheap imported goods, but the underlying system is fracturing.

    How does earning a low wage, far below your prior level, much different than being unemployed? Your ability to contribute to the economy at every level is diminished, and without an education, the doors for advancement are closed. Multiplied across enough people, there may not be breadline but you’ll never regain the same economic power

    My off the cuff answer to the mess is a forced savings plan – make everyone save and invest 10% of their income (on top of retirement), and only let them access the money ever few years or for important stuff. Like a classic savings bond, but managed more like a 401K. Some will save it, many will splurge. Lower the tax rate on those earnings to keep people from griping about as much. People would be forced to live below their income, the money would help the market in the short term and later act as its own stimulus check, much like bonds and rationing during WWII. A bit nanny state-ish, but it would lesson people’s incentive to go into debt while keeping an incentive to earn more.

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  33. bill says:

    #29 RandFan

    No time to read #21, but I don’t think it’s such either or for determining greater good. For example, don’t you think that for the greater good, we might want to avoid a another Great Depression? By the way, efficiency and orderly is hardly this free person’s highest idea. Indeed, it might strike some as Fascist sounding.

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  34. J. M. Keynes says:

    I’d say survival qualifies as a greater good for a greater number. Please give the ants (and the bees) their due. They’ve been around how long, 100 million years or so? How long have we been around (no creationists please)? Will we be around in 100 thousand years, let alone 100 million. Ayn was a fan of Adolf anyway, a fellow nutcase, which begs the question of why Alan G. and Milton F. were so fond of her and her cult of selfishness. But I digress. The ants will be here to clean up our bones.

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  35. JeffC says:

    Not being an economist myself, I suspect this question may be naive, BUT… shouldn’t we be thinking about how to improve the economy by actually improving some particular good or service?

    The various macroeconomic fixes which are being bandied about, as well as some of the more targeted single-firm approaches (if you can considering bailing out AIG a micro approach), seem to be missing the point. i.e. they inject money into sectors that have lost a lot more money than is being injected. Given that, it’s no surprise that conditions remain ripe for this new money to be leeched away as well.

    While these macro approaches are undoubtedly important in the short term for broad issues like employment, inflation, etc, it’s very difficult to see how they could help us actually IMPROVE (and not just bailout) any good or service in the economy. I would like to see the govt enunciate a concrete plan for infrastructure or R&D that at least sounds capable of leading to a better (and not just bailed-out) future. At the very least, that could generate some positive political support, unlike debates over abstruse macroeconomic levers.

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  36. Careysub says:

    Fishback’s guest editorial (and the introduction to it) suffer critically from not bothering to define the “Keynesian stimulus” doctrine which it purports to debunk.

    If the reader supposes that this doctrine holds that government deficit spending can effectively stimulate a depressed economy then the graph appears to support this, not refute it.

    When the government boosted its spending, and began running a sizable deficit, economic activity (even measured relative to the bubble economy of 1929) recovered. When the government eliminated the deficit stimulus, the economy declined (seemingly the stimulus was simply not strong enough to “reboot” the economy into self-sustaining mode).

    When the huge deficits of WWII came about, economic activity exploded and never looked back.

    Fishback cites various reasons for declaring all of this “non-Keynesian” – apparently disapproving of the specific spending measures used, and by citing that during the middle of the war, when resources were being poured into the war effort, real consumption dropped.

    But no where is it explained why any of these specifics disproves the “Keynesian stimulus.” Is it because “Keynesian stimulus” has a specific academic definition, and other deficit spending stimuli exist that are “non-Keynesian”?

    If Fishback sought to disprove that government deficit spending is an effective economic stimulus he failed in this endeavor.

    I doubt anyone (other than an academic economist) much cares whether an effective stimulus is Keynesian or non-Keynesian.

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  37. Don L says:

    That GNP rose faster than government spending during the 1930s does not mean that increased government spending was ineffective (i.e., that there was no Keynesian effect). The author ignores the multiplier effect of government spending. See any basic text on macroeconomic policy.

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  38. Jeffrey says:

    So WWII deficit spending didn’t help the economy? Then what caused the “private consumption and investment boom”? Or did it just come from the economic ether?

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  39. OuPhrontis says:

    Most economists, and certainly this author, usually suffer from too much education and an addiction to quantitative analysis. Roosevelt and his administrators didn’t intend to stimulate the wrecked economy. I suspect they knew the economy would have to re-set and recover on its own. Their intentions and the stop-gap alphabet soup of programs they designed were humanitarian, practical and successful in averting widespread starvation and social collapse. The 30′s and 40′s were a period of unprecedented global challenges that required a level of leadership and creativity which, in hindsight, seems far beyond the ability of our current leaders. Even ascertaining the salient aspects of the present collapse with a view towards helping people in trouble appears over their heads. Theorists and historians would do well to remind us all of the struggles, solutions and eventual success of The Greatest Generation as our own economy seeks equilibrium.

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  40. Thomas says:

    Look at the per capita numbers

    GDP GNP Per. Inc Per Cons.
    1929 7099 7160 5848 5427
    1930 6418 6477 5413 5082
    1931 5960 6006 5183 4888
    1932 5152 5189 4469 4426
    1933 5056 5088 4315 4305
    1934 5567 5596 4700 4580
    1935 6021 6055 5121 4827
    1936 6761 6789 5723 5282
    1937 7065 7102 5882 5444
    1938 6769 6807 5505 5314
    1939 7256 7296 5914 5565

    Note that 1929 levels had been reestablished by 1939. Growth was very rapid 34-39.

    1934 1935 1936 1937 1938 1939
    10.1% 8.2% 12.3% 4.5% -4.2% 7.2%

    Why? Recovery of confidence. FDR was right, we had nothing to fear but fear itself.

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  41. JP says:

    Is it me, or does the fact that people saved money because the goods were not available seem to hold some key concept here?

    There were shortages brought about by rationing, military goods were produced so people were working in jobs needed for the war effort. The military guys eventually came home with a pocketful of cash and the GI Bill and tons of new advanced technology to fiddle around with and expand. So, new businesses and services (colleges) expanded in order to separate people from this new horde of cash… and people, having gone without for so long wanted to spend and live a little.

    So what’s the lesson? Save more, sacrifice your lifestyle for a few years, scrimp and save even more wherever you can, and then pay cash from there on out? Seems like a hard sell to Gen Y and X.

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  42. Brian Lee says:

    It is too often ignored in the current debate that John Maynard Keynes believed in the importance of international economic cooperation – of the coordination between major economies of their economic policies (e.g. fiscal/monetary stimulus) and ideally the creation of international economic institutions that created a framework in which countries could safely pursue policies for high employment (i.e. without risk of exchange crises, etc).

    This is very evident from any close-up study of Keynes himself – such as the biographies of him by Roy Harrod, Robert Skidelsky, and Donald Moggridge – and by such works as Donald Markwell’s “John Maynard Keynes and International Relations”.

    Keynes wanted FDR to provide interantioanl leadership on economic matters. This is something that the world economy needs today from the US – and which it is in the interests of the US itself to provide, given the dependence of its economy on that of the wider world.

    FDR, of course, both presided over a strongly pro-free trade administration, and during World War 2 helped provide leadership – in partnership with the British, with Keynesian ideas in central place – in the creation of international institutions for international economic coperation.

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  43. Debbie says:

    I’m no economist, but it seems to me that the US has spent the past 8 years going the route of a large war funded by deficit spending. This hasn’t helped the economy; in fact, it may be what got the US into this mess. How about ending the war and directing public funds towards products that will improve the US infrastructure and help real people?

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  44. LAG says:

    “Maybe it’s time for a national mobilization as in WWII?
    — Wonks Anonymous”

    What an incredibly fascist thought! Let’s see, the party members will be in charge, we can come up with some great work songs (Obama ober alles), wear colorful uniforms (I look good in brown), punish those who don’t play, and etc, etc.

    Can we please drop the ‘moral equivalent of war’ and the lessons of both world wars (Wilson was FDR’s teacher in this)? In this case, less is more – get the socio-fascist government off of our backs.

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  45. Jes says:

    The Post-War boom was highly amplified by and more due to the fact that all other pre-war industrial competitors were basically wiped off the map by the war. This left the US with the only working industrial infrastructure.

    The problem is that that same infrastructure was in place when those former competitors finally did rebuild with new, better designed and implemented replacement infrastructure.

    And it’s exactly when those competitors began to come on line when the US economy first started to be “not so” golden starting in the late 1950s (e.g. sputnik), continuing into the early 1960 with the Vietnam War (was it simply the same delusion of “war will jump start us out of these problems?”) and then finally coming to a head with the Arab Oil Embargo, the exit from Vietnam (partly for economic costs it incurred) and the full exit from the gold standard.

    The difference now is that currency is totally disconnected from value, specifically US productive capacity and we’ve largely either dismantled or decayed our pre-depression industrial infrastructure to a point that we can’t produce enough to pay our way out of the currency-value debt in anyone’s lifetime.

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  46. David says:

    I just lost faith in Freakonomics:

    This article is misleading. I do agree with the author that FDRs New Deal through 1941 was not enough of a stimulus package to have a large Keynesian effect:

    “John Maynard Keynes published an open letter to Franklin Roosevelt in major American newspapers saying more spending was not enough;
    the government needed to run larger deficits. … They all agree that the New Deal cannot be described as a Keynesian stimulus program.”

    It wasn’t enough deficit spending but it was sure better than before 1932. Hopefully, Obama will not err on the not spending enough side.

    My main objections lie with the WWII part:

    Why does the chart for the article end at 1941? Seems like a very suspicious end point especially since the article goes on to attack WWII spending also.

    The author states:

    “After relatively minor adjustments to reflect the real prices, real consumption in the middle of the war was lower than it was in 1941. Most in the military were risking life and limb in foreign lands. On the home front, people could not buy new autos, tires, and many appliances at any price. Rationing programs sharply limited access to meat, sugar, gasoline, and a wide array of other products.”

    I guess the money we spent on bullets, tanks, airplanes, aircraft carriers etc doesn’t count as spending? What? Why did we have these rationing programs unless demand was higher than supply?

    Or what about this paragraph:

    “One sign that Keynesian budget deficits were not the key to bringing the U.S. out of the Great Depression is what happened after the war. Every
    Keynesian predicted that the private economy would go into a recession because the large government budget deficits would be eliminated
    and so many men would be returning from the war jobless. Instead, as government deficits receded, private consumption and investment
    boomed. Resources were no longer allocated to producing munitions and instead were devoted to production of typical consumer goods
    and services.”

    Perhaps, the Keynesians of the time were worried about this. However, I would say that what happened after the war is exactly how an effective fiscal stimulus package should work. Consumer spending and business investment started to increase because of increased confidence. Because of this jobs were created for the war jobless. One of the biggest booms in our nation’s history ensued.

    Or am I missing something?

    ~D.

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  47. Paris says:

    I am always amazed when I see people try to say bluntly, that the New Deal did not get the US out of the Great Depression. The easiest/most thorough way for me to explain otherwise is a quick lesson in logic, regardless of what you believe to be true- certain undeniable facts remain.
    (1) The US economy has been, since the early 1900′s, a consumer/services based economy. With unemployment at 25% at the low peak of the Depression- the US economy was due for an epic collapse based on the fact that the unemployed without money were not buying goods and services. Even though they were offered low wage jobs with the WPA and other similar projects, they began making money and could begin buying goods and services (granted, it would be at a greatly reduced rate).

    (2) The public works projects created by this force of cheap labor created an infrastructure upon which many other businesses could thrive. Trains could transport goods across the country through the patchwork of rail that was created… Trucks could finally bring cargo from one side of the country to the next at much quicker rates. Prior to the national highway system- trucks could not make trips across the country due to the fact that tires and the axles could not withstand a 3000 mile trip on dirt/rocky roads.

    (3) The automobile industry EXPLODED because the cost of cars had greatly decreased and, the maintenance of the vehicles decreased as well, simultaneously due to the new roads that decreased wear and tear on the cars main parts.

    (4) Being the last viable first world country standing after WWII, our factories built the world’s goods in plants that were built to increase our capacities for the war time efforts and thus helped us AFTER the War.

    These factors alone are worth giving the New Deal credit for getting us out of the Great Depression. Lastly, it created a new consumer class out of the Elderly by creating the Social Security Act.

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  48. pratik says:

    I agree to some extent with discussions – and I’m afraid teh British Chancellor is going to get things badly wrong in his Pre-Budget Report this week, justified on the back of faux Keynesianism.

    Giving hundreds of millions extra to different government departments to increase spending won’t work (and I know because I’m a consultant who has worked for public sector clients for over 2 years).

    I offer an example of a government department, to remain unnamed, who will receive hundreds of millions extra in spending. Problem is, the important civil servants in that department don’t know what to do with the money, and know that spending it isn’t in the country’s interests because it would be wasted. But spend it they must, when the Treasury provides them with the cash in a few weeks.

    They intend to spend it on something they know will be wasteful, just so that they are seen to be following orders.

    It will potentially crowd out th eprivate sector in a big way and misallocate resources in a series of markets that ought to be shrinking, or at least growing at a very slow rate. Instead they will continue booming and divert resources from elsewhere int the economy.

    I cover a little of this at http://pratiksrandomwalk.blogspot.com/2008/11/time-for-keynes-to-some-extent.html if anyone’s interested.

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  49. Jan Christiansen says:

    JeffC at #35 is right. The focus of policy going forward has to be on improving productivity as a means to improve the standard of living. The bubble in living standards that accompanied the bubbles in the housing, stock and bond markets cannot be re-instated on a sustainable basis by fiscal or monetary policy. The first thing the new administration should do is eliminate subsidies on cotton and corn.

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  50. Richard Murphy says:

    Wrong Price, you need to look at the lag effect of the Depression stimulus’ programs. It looks to me that from 1934 onwards GNP was moving in the right direction (with the exception of 1938 where GNP growth slowed because the lower expenditure in 1937…again reflects the lag effect)

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  51. Dirk says:

    What pulled the US out of depression is what pulled Japan out of their long slump- more money.

    It’s actually an enumerated power of the Federal government to PRINT MONEY. If there is not enough money, then deflation sets in, and those with money have incentive to hoard it, not spend and invest it. Negative wealth effect creates further reduced spending, debt defaults rise, and you have the negative spiral of the 30s- and today.

    I’m as shocked that there is not broad consensus that this crash was created like all the others- contraction in credit and money (as defined in the broad sense)- and it’s solution will require new money to heat up inflation (creating incentives to spend and invest- think solar for oil).

    But I shouldn’t be shocked, as there isn’t as broad a consensus that capitalism is vastly superior to socialism as I’d have thought, either.

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  52. Jason S says:

    #34 J. M. Keynes:

    Firstly, I would like to ask you what it is about the life experience of ants and bees you find so attractive. Does it not occur to you at all that such a life, to a human mind, is not worth living? I know I would rather be dead than a mindless, automated drone enslaved to a common purpose not of my own choosing.

    Secondly, I will request that you furnish us with one grain of proof – just one – that Ayn Rand was an admirer of Hitler. There are many ways to engage in stimulating adult debate – telling lies is not one of them.

    Furthermore, I find it incredible that this entire threat can pass so far without one mention of the work of UCLA economists Harold L. Cole and Lee E. Ohanian, whose extensive study has concluded that the New Deal policies prolonged the Depression for 7 years.

    http://newsroom.ucla.edu/portal/ucla/FDR-s-Policies-Prolonged-Depression-5409.aspx?RelNum=5409

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  53. Mario Sanchez says:

    To CT Reader:

    Inflation adjusted real-estate prices surged for a few years immediately after WW2, reaching a median home price of approx $125,000-$130,000 (in 2008 dollars), then stayed stagnant until about the early/mid 1990′s (when they were at about $150,000-$160,000 (in 2008 dollars). They surged again for a decade, reaching near $250,000 in 2005 and have dropped nearly 20% since. This is off the top of my head & based on the Home Price Index, so the numbers may not be precise, but the trends and scope of change are accurate.

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  54. Tom says:

    The phenomena of the Depression, WWII, and the subsequent boom years cannot be explained adequately by the economic policies of the time because the driving force of those economics is, in the end, mass psychology. When we had a stock market crash, followed by some bank failures in 1929-1931, people, and especially investors, sensed that trouble was coming and stopped spending and investing. In this classic paradox of thrift, that lack of spending and investment cost them dearly, leading to a much wider banking crisis and a general contraction of the economy, often wiping out those savings that were so thriftily hidden away. 10 years passed.

    Then we won a war. People felt good. A large fraction of the populace had been in the military, where they had spent what they had, when they had it. Happy days were here again. So people spent money. Investors invested in the expectation that people would spend money. Yes, it helped that a lot of spare capacity was there from war-time, but that really only affected events in that it was possible to grow quickly without inflation. The growth was a result of the psychology of the times.

    So remember. The thrift so admired in your Depression era grandparents (or great-grandparents) was a survival mechanism, which, economy-wide, was in fact the rut that we dearly needed to get out of to get the economy working. The Depression, though triggered by a financial crisis, was caused and maintained by mass pessimism, not by the presence or lack of any government program. The solution was that people started feeling good about themselves again, which led to spending and investment.

    So try to look on the bright side. Don’t hoard your money just because your neighbor lost his job. Spend prudently, but don’t view thrift as a positive in and of itself. The only thing we have to fear is fear itself. Being positive and optimistic is the only way we have ever prospered, and that will continue to be the case forever more.

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  55. Steve Roth says:

    Obviously the war spending (debt increase from 50 to 120% of GDP) didn’t create immediate prosperity. There was a world war on.

    But it broke the back of the depression, setting us up for the prolonged prosperity boom once the war’s distortions were removed.

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  56. Nicolas says:

    The thing is, in the ’30s, there was welfare, there were programs to make unemployed persons get a job, poorly paid, working for the state (at large), and there were rich people losing much of their worth. I guess the gap between the upper echelon of the society and the lower one was smaller in 1939 than in 1929… Then came the war, and suddenly everyone was needed at work or under the flag. Rationing was in force, and the living was not rosy, a kind of prolongation of the depression, as was stated by other commenters. But then, people worked, again, and wealthy ones were paying huge taxes, way over what is paid today, This contributed as well to shrinking the societal economic gap.

    In recent years, let’s say since Reagan, GDP and GNP may have continued to increase, but this has been to the profit of an ever shrinking proportion of the population. Shops are closed, not only because of economic difficulties, like now, but also because of non-competitiveness, like a few months ago. Non-competitiveness means that the capital invested in the to-be-closed-shop does not bring back as much ROI as if it were invested in another shop in another country, with lower wages. So, the capital will go somewhere else, the ROI will still be larger and larger, but this will “help” an ever shrinking part of the population, and everybody else, including newly unemployed people or people with lower income (and lower status) jobs will be granted easy credit, so that the economy can continue to roll, like if we had invented perpetual movement. And to be certain that GNP and GDP increase yet even more, the capital will find a way to make it grow while betting on the difficulties of a sector or a company, or by inventing exotical financial instruments that about nobody will understand, so nobody will regulate either, and everything will look so fine, up to…

    Wasn’t it an American president that said you can fool everybody some time, or a few persons all the time, but you can’t fool everybody all the time… ?

    (I hope this is clear; English is not my first language…)

    Up to

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  57. Juan Carlos says:

    A lot of people opining here seem to be very fond of socialism or to put it in a less controversial way, centrally planned economy. They are very confident that a benevolent State, guided by wise men will steer the economy and the society smoothly to prosperity and fulfill the “common good”.
    First they all forget the lessons of history. Such a system in many different variants, from mild to harsh, has been tried and failed every time. From the Fabian socialism of post-war Britain or India to the communism of the Soviet Union and China. The failures have ranged from subpar performances relative to freer economies to mass starvation and sharp declines in the standard of living, not to mention mass murder and repression. And in every case economic liberalization has brought about much greater economic growth and lifted millions out of poverty.
    Second, they forget why we are in the current mess, with government and its “wise men” setting up the conditions that brought us here. Don’t forget also the “wise men” in the private but heavily regulated financial industry. All what they did was with the best of the intentions and to the best of their knowledge. Yet, look at the mess all this social engineering created.
    Greenspan and Bernanke thought they were doing a great job managing the dollar and were celebrated right and left for that while they were creating the mother of all asset bubbles just after pinching a milder one (the dot.com). Congress, with bipartisan support, worked hard to foster home ownership, again with the best of intentions, trying everything from lowering lending standards to allow, better, to push they own created monsters Fannie and Freddy to take on more risk. Then the geeks at the financial service industry created all kind of instruments based on mathematical/statistical models, very “scientific” and “quantitive” that were suppose to reduce risk for everybody’s benefit, again, good intentions, laudable goals, but collapsed miserably.
    I am not going to say that free markets under the rule of law are going to be flawless, there is nothing like that on Earth, we people are not perfect and there is no doubt that, as someone pointed out above, mass psychology among many other factors contributes to bubbles and busts. But it is time to put to rest the idea that a centrally planned economy, a group of wise men dedicated to social engineering are going to bring us to Nirvana, most likely it will bring us anywhere from social and economic malaise to Hell.
    What we need now is regime stability to restore confidence, give some aid to the people affected even at the cost of more deficit and at the same time reduce the burden on savings and investments, not temporarily but permanently so business and consumers have a clear perspective of what the government policy is going to be. It is time also to stop more social engineering fantasies like carbon caps or taxes that threaten to put an incredible burden on the economy.
    Juan C. de Cardenas

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  58. J Thomas says:

    “Today, with unemployment rates below 7 percent, it is likely that such public-works spending would crowd out a significant amount of private construction.”

    If unemployment stays below 6% at decent wages, we won’t need a public works program, unless we want to replace our aging infrastructure.

    Isn’t all the crisis talk based on the assumption that we’ll actually have a deep recession? Chances are, if we do have a deep recession unemployment will go above 7% and likely far above 7%. And then your assumptions are utterly invalid.

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  59. The Frugal Libertarian says:

    Who cares how Keynesian the New Deal was? The discussion should be about whether the New Deal made things even worst. A couple of economist from UCLA just published evidence that it prolonged the Depression by seven years. We should also be discussing the true cause
    of boom and bust cycles so we can make them less likely in the future.
    http://www.thefrugallibertarian.com

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  60. Nicolas says:

    Maybe socialism has been tried and has failed. Fine. But what kind of a depression do we need to figure that capitalism could somehow fail? Or has indeed failed, be it only locally?

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  61. Juan Carlos says:

    Nicolas,
    Everything on this Earth “fail” at one point or the other. A crisis in a more or less free market economy at one point is inevitable, problems, imbalances accumulate and need a correction, people get draw into the latest mania of the day, get into too much credit, governments make mistakes, often on pressures from their constituencies and at one point a “crisis” need to happen to restore balance.
    It is sad but that’s how the world is. Just like Nature have storms, floods, droughts and quakes. Society and the economy are, like Nature, an extremely complex system, even more complex because it is composed of self-conscious, willing beings and contains Nature itself. Nobody designed it. This is hard to comprehend to many people that thinks that just because society has human actors, it must be design by somebody or at least susceptible to mass reengineering. It is not because it is too complex for even a committee of the best minds to run, much less design. We must be humble and be very careful when we tinker it.
    Now it is the same to say that Nature “failed” because we had Katrina or several mass extinctions, or wild changes in climate through the history of this planet, than to say that a free market economy which is an spontaneously organized system “failed” because every now and then there is a correction or a crisis if you wish.
    By the way I have always wondered how is that our friends on the Left that like to ridicule “intelligent design” when it comes to nature and life, failed to comprehend that society is not an “intelligent design” but a self developed and self-evolving complex system.

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  62. Eric M. Jones says:

    Instead of buying something new I buy everything except food and gas on Ebay for a lot less money. And when I am through using it , I resell it on Ebay. So very few people are employed to make new stuff anymore.

    The solution to the economic downturn is clear:

    —Delenda est Ebay

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  63. J VERCELLONE says:

    the debt from world war two was quickly paid off (1950 the debt was paid in full)by expansion of real producitvity,low inflation,low or no deficit spending,a very inifinitmaly small gap between super rich(there wasnt but two dozen families that were very rich in the 40s,50s and 60s.)compared to todays million plus millionaires.compare that with huge growth of government overspending since 1980,decline in productivity,moderate to high inflation.the usa keynesian economic only created two things the super rich and the poor,it has not made the majority of the usa richer,since that is all that usa government has created then it is useless bunch of anti constitutionalist plutocrats

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  64. rudy says:

    The only information I can infer from the referenced graph above is that the government pumped modest amounts of stimulus money into the economy without incurring substantial deficits. Meanwhile, the GNP trends upwards over this period of stimulus. If anything can be said from this very limited view of the available New Deal data, isn’t it that stimulus money did indeed grow the GNP in the 30′s? If not, I must be missing something.

    Also, this is such a complex topic that we still don’t have a 20/20 hindsight view on it 70+ years later. Moreover, today’s economic picture is truly global, making the problem even more complex. With that said, how can we apply 1930′s economic theory to a 21st century global context? Fishback and company also ignore the social and psychological aspect of an economic decline. I know a lot of people that are afraid to spend their money (in real estate especially) because they are afraid they might lose their jobs. How about this equation: stimulus = confidence.

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  65. dpocius says:

    It seems to me that the lion’s share of deficit-sourced spending the government does ought to be targeted towards infrastructure investments. Several posters have already noted the continuing benefits of Depression-era public-works programs. In addition to providing employment to those who needed it at the time, the efforts of that employment are, in many cases, still benefiting us today. Perhaps we the people should be gambling on long-term, multiply-beneficial projects that sideline-sitting privateers haven’t the investment stomach for, such as a national system of energy-saving solar and wind powered bullet trains that, in addition to obvious economic and environmental benefits, will starve for cash the oil-rich nations that host the Islamist nutjobs that have declared cosmic war on Western civilisation. I’m sure a bit of out-of-the-box thinking will discover even better ways to use the money we are borrowing from our grandchildren to leave them with lasting improvements to their world.

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