Henry Morgenthau on the Success of the New Deal
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So Hoover who was president during the stock market crash and saw unemployment go from 3.2% to 24.9% and he presided over a negative GNP of about -8% over 4 years is not to blame for prolonging the Depression. But FDR who after his first 4 years got unemployment down to 14.3% and had an average GNP of close to 9% for 4 years is to blame. Remarkable!
If anything the data suggest Obama better massively deficit spend like during WW2 to swing us out of this. But instead of bombs we'll be making solar cells roads and a new grid.
Muirgeo,
The great fact (as in GREAT Depression) that must be explained is the inordinate length of that severe downturn. Hoover's own policies — contrary to popular myth — were interventionist. Roosevelt's policies, reinforced by increasingly anti-private-property rhetoric from him and his advisers during the 1930s, ensured that the depression lasted far longer than it would otherwise have lasted. The facts are clear that unemployment (no matter how measured) remained high for the duration of the 1930s and capital investment abysmally low. As FDR's own Treasury Sec. Morgenthau conceded in 1939, it's difficult to square these facts with claims that FDR's policies worked well.
The post by Don does not appear to be claiming that anyone caused the Depression, rather that New Deal policies did little to put an end to those disasterous times.
For example, how does the slaughter of six million pigs and the destruction of millions of acres of corn, oats, peaches, etc. help unemployed families secure food, perhaps the most basic of human "needs"?
In regard to the later point by the last commenter, it seems to understand the problem with the war ended the Depression theory by talking about opportunity costs today. Imagine if, intead of making bombs and battleships during WWII, all of that deficit spending was used to build schools and infrastructure in the United States! Imagine further if that spending was undertaken by the creative and energetic private sector, rather than be crowded out by public sector spending.
Nice letter, Laura.
We like FDR for the words he bestowed the U.S and the world in a time of crisis. In Europe we admire him for saving (parts of) the continent in the second world war. But how can a person who "we" owe this much to carry out bad policies? As muirgeo highlight evidence seems to suggest that the Roosevelt administration actually did far better than the Hoover administration with respect ending the depression.
However there is at least two problems associated with this way of looking at data. Firstly correlation is not causality, just because unemployment dropped by 5 percentage point during FDR first 4 years of presidency doesn't mean that his administration can take the credit. Secondly and maybe more importantly how do we know that unemployment wouldn't have dropped to 4 percent had a more libertarian policy been implemented?
Lastly muirgeo suggest that Obama better do massively deficit spending. I agree; such a policy has the potential to benefit every individual on the globe; except maybe for taxpayers, borrowers and/or holders of U.S. assets who some day will have to pay for the deficit spending.
Please let's have some prudent and responsible fiscal policy; for the sake of our children! Oh, a second request: Could we also please have a few parallel universes – for purely scientific reasons of course – to test different hypotheses on how to run the economy. Let's start by examining the current predicament.
I don't think Don's trying to compare FDR's response to the Great Depression to Hoover's. That Hoover's response made things worse is not in dispute. There is no political party that rallies around Hoover's mistakes today seeking to repeat them.
On the other hand, there are a lot of people who think FDR pulled us out of the Depression. In fact, there's scant evidence that's true — and plenty of evidence to the contrary — unless you want to credit his foreign policy with provoking the Japanese to bomb Pearl Harbor. Don reminds us that FDR's economic policies kept the economy in a deep stall for a decade.
World War II ended the depression — and it didn't end it cheaply. People went from unemployment and bread lines to slave labor (the draft), rationing, and wage caps. True, they had much more work than before the war, but they were nearly as poor because the lion's share of the GDP went to the war effort. It was on the backs of that labor, working against an unmistakable threat against humanity itself, that the economy was lifted out of the Depression.
Does anyone think Obama is likely to rally Americans to sacrifice on that level without a crisis like WWII? It was funny to see the dumb looks in Grant Park when Obama was telling them about the sacrifices they'll be asked to make. Somewhat disconnected from the idiot on TV cheering about how Obama was going to pay her mortgage for her, I'd say.
Change is coming, alright.
I sure don't know of very many experts out there that are claiming doing nothing would get us out of this current mess faster.
Also, as always, can anyone point to a similar situation where doing nothing ended such a downturn faster.
Some one once pointed out that we did nothing during the ?1923 downturn and it ended quicker… well except for the 1929 downturn.
Evidence? Anyone?
Muirgeo, you ask "when did doing nothing work". I answer your question with 100% accuracy by pointing to the legislation that didn't get passed during every downturn, recession, and depression prior to the Great Depression. Clearly, this legislation that doesn't exist wasn't responsible for the Greater Depression that didn't happen.
There are no facts you can summon to disprove me. Therefore, you must accept what I say as the gospel truth. Thanks for asking.
…can anyone point to a similar situation where doing nothing ended such a downturn faster…
Probably not. Government tinkering is a necessary precondition for "such a downturn".
For a more less polemic, more mainstream view of the great depression, readers might want to check out Bernanke's Essays on the Great Depression:
"Our [with Martin Parkinson] own view is that the New Deal is better characterized as having "cleared the way" for a natural recovery (for example, by ending deflation and rehabilitating the financial system), rather than as being the engine of recovery itself."
Also, keep in mind that from 1929-1933 US real GDP dropped 25.5%, the next largest downward business cycle move in US history is 10.5%. The great depression wasn't just long, but incredibly severe. It is quite likely the severity contributed to the length.
But instead of bombs we'll be making solar cells roads and a new grid
One, we do not need new roads, especially of your goal is a better environment. We need less driving, and not more. Maybe better public transport, but the government just cannot seem to do that one right in most places. Two, who is going to buy these expensive solar cells, and afford to install these? New grid, how will that benefit us economically? Nevertheless if we could make fuel cells for households affordable, then we have much less need for a new grid.
"Also, as always, can anyone point to a similar situation where doing nothing ended such a downturn faster."
Something can aways be done, but it doesn't have to be what is actually done.
Not doing something that would made things worse is better than doing something.
For example, the Smoot-Hawley Tariff Act was a bad move. Doing nothing would be better. Doing the inverse(repeal all protectionist tariffs) would be even better.
Muirgeo,
Until the progressive era beginning in 1890s, Government hardly got itself involved in the public sector. There were plenty of recessions through out the 19th century. There was one in 1819, 1837, 1893 etc. Economy recovered own its own. There was a panic of 1907, which was handled entirely in the private sector. I am sure there were plenty of others.
The reason why these downturns were short compared to 1930s, 1) there was no Central Bank monetary policy that prolonged the preceding boom
2) there was no intervention with the downturn when market wanted to correct the malinvestments.
WWII didn't end the Depression; it only ended the unemployment by putting 12 million Americans in uniform.
And by the way, the reason Henrey Morgenthau had to admit the New Deal had not worked was because unemployment was still at 20% in 1939, after 7 years of "New Deal".
muirgeo claimed:
If anything the data suggest Obama better massively deficit spend like during WW2 to swing us out of this.
Government spending will not “stimulate” the economy for the simple reason that all government spending is ultimately done at the expense of private spending. To spend, government must either 1) take money directly from the people in taxes, or 2) borrow the money from the people, or 3) print the money up.
If government spends a dollar that it got by taxation, that is simply a dollar spent by government that was not spent by the taxpayer. Likewise, if government spends a dollar it borrowed from the citizens, that is simply another dollar the citizens don’t have to spend. And if government spends a dollar that it printed up, that simply reduces the value of all the citizen’s dollars proportionally. But in no case has government created new, additional purchasing power that can drive new, additional economic activity.
Government spending can divert production (and consequently employment) from one area to another. But it will not, in aggregate, increase production or employment.
Look, if government spending/action were the key to economic growth, we should be experiencing full employment and record economic growth, because the Bush administration has increased government spending by over 1 trillion dollars a year. An increase of a TRILLION dollars per year. Yet, here we are sliding into a recession.