Here’s a letter that I sent recently to the New York Times. (By the way, I should have written that F.D.R.’s policies "prolonged" the Great Depression – rather than "deepened and prolonged" it. A strong case can be made that these policies did both, but that case is more esoteric than the much more straightforward case that the policies prolonged the Depression.)
Obama and F.D.R.
Previous post: Shameless Bragging and Self-Promotion
Podcast RSS Feed
Full EconTalk Text
{ 34 comments }
The problem with these letters is that they don't really change minds. People who agree with the thesis will nod their heads with approval, and those who disagree will shake their heads with disapproval.
I know a letter to the editor is perforce too short to contain much information. However, telling them where to look to read more would be helpful.
There are some powerful resources on the Great Depression, particularly on the Ludwig von Mises Institute website. Rothbard's America's Great Depression and Flynn's A Country Squire in the White House are available for free. Additionally they have a bunch of lectures online on the subject.
I'm sure that there are other resources at other sites as well that are just as useful and comprehensive. Pointing people to them in an op ed would at least get the fence sitters to learn more.
I'm interested in your take on this column from Krugman in which he argues for the effectiveness of FDR's policies:
http://www.nytimes.com/2008/11/10/opinion/10krugman.html?partner=permalink&exprod=permalink
The data presented are somewhere between wrong and misleading. The unemployment rate in 1939 was 12% rather than the 17% cited. The 17% number excludes all workers employed by government temporary work relief programs and is part of an outdated version of the Historical Statistics of the United States. The updated version includes temporary government workers, since they look much more like workers than unemployed people. Perhaps, one can argue that the old statistics are better than the new statistics, but one should include such an explanation rather than just citing unofficial data.
Also, the "remained" seems misleading since the GDP fell from 1933 to 1937 from 21.5% to 9.5% using the official series and from 25% to 15% using the old series Don cites.
Another fact about 1933 to 1939 that always seems to be conspicuously missing from a far right account of those years is that growth was at a 7% annual rate. That is to say, the economy was 50% bigger in 1939 than in 1933. It is suspicious when GDP goes missing from macroeconomic statistics without comment.
There has been some excellent blog discussion on this topic from both sides, if readers are interested:
Rauchway explains the data
Taborrok takes issue with Rauchway taking issue to the WSJ
Taborrok takes issue with Rauchway taking issue to the WSJ
Rauchway rebutts
There is more on Krugman's blog and Delong's blog about exactly how much fiscal stimulus was involved under FDR's first two terms.
I'm interested to see if this comment makes it through the moderation process.
The impetus to do "something…anything" about the economic downturn is almost too strong to fight. Indeed many on both sides of the government interventionist argument are citing FDR as some kind of hero and urging a "New New Deal".
Despite history showing this fallacy over and over again, as Milton Friedman pointed out numerous times, government action on these matters ALWAYS has the opposite effect.
Above I accidententally wrote, "the GDP fell…" when I was discussing unemployment rates, the sentence should read "the unemployment rate fell…" I hope readers were not confused.
The unemployment rate in 1939 was 12% rather than the 17% cited. The 17% number excludes all workers employed by government temporary work relief programs and is part of an outdated version of the Historical Statistics of the United States.
To make the 12% number compare to today's unemployment number, you would have to count people on workfare now as employed. They are currently counted as unemployed. The 17% calculation is much more comparable to the way we calculate unemployment statistics today.
Alex Tabarrok provides a great argument for continuing to count those who are temporarily employed by government make-work projects as unemployed:
"…it's quite reasonable to count people on work-relief as unemployed. Notice that if we counted people on work-relief as employed then eliminating unemployment would be very easy – just require everyone on any kind of unemployment relief to lick stamps. Of course if we made this change, politicians would immediately conspire to hide as much unemployment as possible behind the fig leaf of workfare/work-relief."
Also, the "remained" seems misleading since the GDP fell from 1933 to 1937 from 21.5% to 9.5% using the official series and from 25% to 15% using the old series Don cites.
However, it jumped again to 17% (or 12.5%, using your preferred series) in 1938. It's disingenuous to ignore that.
Didn't the Soviet Union have zero unemployment?
Government statistics are worth the paper they are written on. The question always remains: who gets to decide what?
I suspect that we can have some confidence that the New Deal was no cure and has left us with a very expensive legacy.
-Methinks
Does Alex really have a good argument? He is implicitly arguing that public sector work has zero value, as "licking food stamps" would be, how is that defensible?
What kinds of things were temporary workers doing:
"Within three weeks, CWA Director Harry Hopkins put 2 million people to work, a number that soon doubled as legions of laborers built or repaired more than 800 airports, 3,700 athletic fields and 255,000 miles of roads. … the CWA built or modernized 4,000 school buildings, hired 50,000 teachers for rural schools, and controversially employed about 3,000 artists and writers who, Hopkins insisted, "had to eat, too."
In the coming years, Hopkins' CWA and the Public Works Administration (under "Honest" Harold Ickes) put millions more to work building a network of levees, roads, airports, military bases, schools, community colleges, civic auditoriums, water-delivery systems, sewers, hospitals, zoos and parks still in use today. New Deal workers restored the Statue of Liberty, the Washington Monument and San Francisco's Palace of Fine Arts, and they built the Triborough and San Francisco-Oakland Bay bridges, the Lincoln Tunnel, TVA dams, Treasure Island and the spectacular Timberline Lodge on Mount Hood. Without WPA flood-control projects, last winter's storms would have devastated Southern California at a cost of billions of dollars to taxpayers and insurance companies. Civilian Conservation Corps "boys" stationed in thousands of rural camps meanwhile reforested the nation and clocked in 6.5 million days fighting forest fires. They built 204 museums, restored almost 4,000 historic buildings and constructed 3,116 fire towers and more than 46,000 bridges. While saving families and individuals from destitution, the CCC made the nation's proliferating parklands so gracefully accessible that few who use them are aware of the peacetime "tree army's" heroic contributions to our collective well-being."
Can it really be argued that these things had zero value?
If you just want to follow private sector employment, then do so, just throw out all government workers and look at private nonfarm unemployed workers as a percent of the remaining pool. Rauchway does that: here (apologies this should be the first link in my first post, but the link doesn't work).
The resulting series is that the unemployment drops from 30% in 1933 to 15% 1939 with 10% being the low in 1937.
"Also, the "remained" seems misleading since the GDP fell from 1933 to 1937 from 21.5% to 9.5% using the official series and from 25% to 15% using the old series Don cites.
However, it jumped again to 17% (or 12.5%, using your preferred series) in 1938. It's disingenuous to ignore that."
This is the most manufactured critiques that I've ever seen. The numbers you accuse me of ignoring are in the very first paragraph I wrote. Forgive me for not repeating myself. Not only that, but if you follow my links you can see nice pretty graphs of all the years in between. It seems you find it much more disingenious that I disagree with Don than that I obscure data.
Charlie
Regarding Charlie's point about the increase in GDP between 1933 and 1939, he's correct; it did indeed rise by about 50 percent. But…. well, let me quote an e-mail that the economic historian Bob Higgs sent to me on this point: "No one really disputes this point. But so what? The claim I [Higgs] make (and others make) is not that output did not increase after 1933, but that despite the increase, the economy continued to operate well below its potential (as high rates of unemployment also suggest) until after the war."
On page 106 of Higgs's book DEPRESSION, WAR, AND COLD WAR is a graph that shows quite clearly the continued failure of the 1930s U.S. economy to operate at anywhere close to its potential.
I am incredibly surprised that you had to ask Robert Higgs if it is true that output grew by 50% from 1933-1939. And yet, while your information set has widened with this new data, have your priors changed at all, even the tiniest bit?
"The claim I [Higgs] make (and others make) is not that output did not increase after 1933, but that despite the increase, the economy continued to operate well below its potential (as high rates of unemployment also suggest) until after the war."
Has this claim been disputed by me or anyone?
Please, what does Higgs say about the great monetary contraction between 1929-1933 and the consequent drop in GDP of 20%. How does he defend the adherence to the gold standard?
Charlie
Charlie,
Thank you for the very long list of what government work projects accomplished. However, can you answer this question: was that the most efficient use of the resources? Soviet "employees" also built parks, monuments, museums, wedding cake buildings, etc. If that was such a good use of resources, why did the Soviet Union end in bankruptcy? And if it was such a great use of resources here, then why did we lose so much ground in 1938 and why did the economy continue to operate at such a low level for so long? I'm not beating up on FDR, mind. I couldn't care less about FDR. These are just questions I think are relevant given the enormous growth of government and enormous intervention in the economy during FDR's terms. Before FDR's policies, the economy would grow much faster, suffer setbacks and grow again. With all that intervention, FDR couldn't achieve the growth rates the economy, left to its own devices could. Does that not give you pause?
This is the most manufactured critiques that I've ever seen. The numbers you accuse me of ignoring are in the very first paragraph I wrote.
Your post was – I think intentionally – misleading. You open with an accusation that 17% was misleadingly high and close with the best unemployment number for the decade. You don't mention at all that that employment dropped sharply in 1938 regardless of the series you use. Maybe it wasn't intentional on your part to present the data in a way that one would have to pay especially close attention to your first paragraph and then connect it with your last. The impression one has when reading your post is that you are intentionally making things appear rosier than they were. Don't know if this is what you intended.
Does Alex really have a good argument? He is implicitly arguing that public sector work has zero value, as "licking food stamps" would be, how is that defensible?
No, he isn't. He's arguing that the government can (and if history is any guide will) distort real employment statistics by introducing government make-work projects (licking stamps)to mask real employment. Postal workers are government employees. We can argue whether or not a government run postal system is more efficient than a privately run one. However, I don't think you would argue that a government stamp-licker, or a digger and filler of same ditch is not really "employed". That's the sort of "employment" Tabarrok was talking about, not postal worker or IRS worker or soldier. He also made the point that if you're going to include workfare programs as real employment, then the employment numbers under GWB were much better than 5.1%.
One factor that is often implied in the hymns for FDR, is that it would have been a lot more severe but for all his interventions. And there is no way for us to find that out.
But if history is any guide, it should become obvious to anyone that economy recovered inspite of FDR's interventionism. All the panics and crashes in the U.S Economy until 1929 didn't cause a prolonged depression of the kind that happened during the 1930s. Even during the period when there was no central bank or co-ordinated monetary policy, economy recovered on its own.
Some commenter on marginal revolution blog suggested that the recovery during the earlier panics was possible due to discovery of some new large gold mine. That is the most ridiculous thing I ever heard. With all the modern technology, exploring, finding, building a mine takes decades. More over, most of the gold that was ever mined during the history of civilization is still available above ground, adding any meaningfully substantial supply on top of that is next to impossible. Supply of gold usually grows at around 1% or so per year.
Yeah, unemployment was lower since a lot of people were working in government jobs. But that only shows that government bureaucrats were able, during the Depression, to file papers and assign tasks for employees. If that was the measure of how an economy is doing, then there should never be any downturns.
Anyone can create jobs. But the focus is to get the ECONOMY back on track. To measure that, unemployment figures should exclude government employees.
Having the government create jobs and then considering that as an economic recovery is as meaningless as saying price and wage controls can end inflation.
-Methinks
"With all that intervention, FDR couldn't achieve the growth rates the economy, left to its own devices could. Does that not give you pause?"
The growth rate under FDR from 1933 to 1939 was 7%. If you take the whole of his first two terms, the growth rate is 8.4%. I challenge you to find such high growth rates at any other time over a similar time span in American history. You can find reasons to dislike FDR and many of his policies, but you will find that the "feelings" you get from reading this blog are quite different than the actual data show. Does that give you pause?
"However, I don't think you would argue that a government stamp-licker, or a digger and filler of same ditch is not really "employed"."
Of course, you wouldn't. And if people in FDR's time were employed licking stamps or digging and filling wholes, then Alex would have a point. My point whole point is that they weren't. They were building things that we still use today. Can someone argue that the projects cost more than they were worth? Sure they can. If A.T. had said, "look we should only count a portion of these temporary gov't workers as employed, because they were getting paid more than their marginal product. BTW, here is an estimate for how much an employed worker should count." I'd have no problem with that. But he didn't, he equated building public works with licking stamps and that doesn't pass the laugh test.
Comparing the U.S. under FDR and the U.S.S.R. under Stalin and Lenin is pretty ridiculous. The difference in institutions there and here was quite stark. The difference in the use of government spending, the use of the price system, and the use of courts and private property rights was also stark. There were some steps in that direction, but the gap that remained was still very large.
As to your more general question, why was the great depression the great depression? I won't pretend that I am certain I know the answer, but I certainly wouldn't send you first to Robert Higgs. I would urge you to read Keynes' General Theory, Milton Friedman's Monetary History of the U.S., and Ben Bernanke's Essays on the Great Depression. Some of the greatest minds in economics have debated the causes of the depression, if you are really a truth seeker, go read them. Then, if you want to come back to someone far out of the mainstream like Higgs, at least you come back knowing that you understand and dismiss the arguments most economists find compelling.
Charlie
Will it help if we agree on what should the New Deal have achieved in order for someone to claim that it worked?
1. High GDP?
2. Low Unemployment?
3. Both 1 and 2?
4. Other indicators?
Once we agree on a set of metrics then can we not simply see whether or not those metrics were met?
And yet with all of that GDP growth people were still forced to live in cardboard boxes and eat their own boogers. If anything I take this as yet another classic example of how statistics can be misleading when it comes to judging how flesh-and-blood human beings live. Think of India's gold reserves, Africa's natural resources, they must have been doing fantastically, economically.
Question: How do the make work programs during the depression affect the GDP? I'm not entirely sure how GDP is calculated. I would think that all of those infrastructure projects were buying a lot of materials, wouldn't that have pushed up GDP during the New Deal quite a bit (and artificially)?
In December 1933,the economist John Maynard Keynes wrote an open letter to President Roosevelt, which began:
"You have made yourself the trustee of those in every country who seek to mend the evils of our condition by reasoned experiment within the framework of the existing social system. If you fail, rational change will be gravely prejudiced throughout the world, leaving orthodoxy and revolution to fight it out."
(quoted from Donald Markwell,"John Maynard Keynes and International Relations: Economic Paths to War and Peace", Oxford University Press, 2006, page 176)
Although the circumstances are different, exactly 75 years later President-elect Obama is in something like the same position. People around the world see him as the trustee of their hopes, both for better international relations and for revival of the world economy.
As in FDR's time, when Depression led remorselessly to war, so today, the two may be more closely connected than we would like to think.
President Obama must ensure that the US provides leadership in dealing with the global economic crisis of our day. This, too, is one of the lessons – probably not widely enough appreciated – of FDR's time, and of Keynes's insights (see Markwell's book quoted above).
Adam,
GDP counts government spending as "production" so it's extremely easy to manipulate up, even without counting on inflation.
It should never, ever be used as a measure of wealth growth.
The opening paragraph in the first comment, by tarran, that is pretty much correct. It is true that America is divided into three camps; believers in capitalism and free markets, believers in socialism and regulated life, and the last camp is those who have no clue about either.
However, the value of Don's letters and this Cafe, and the comments is greater than just preaching to first two camps, it is in signaling to the camp that just emerged from battle victorious that while the battle may have been won, the war for the minds of those who have no clue is far from over.
I frequently cut and paste the topics from the hosts and also comments from the posters and send them on to my personal e-mail list because I know that many of those I communicate with would never take the time to research a little and are thus misinformed about vital issues by the MSM.
This way I get good source material for my own evangelic mission on behalf of capitalism and free markets, and my list gets some education.
One thing for sure Saint Franklin is duly enshrined in American history and even in my childhood conservative corner of the world this was/is so, I know because my teachers, parents, and fellow townsmen said so. I didn't learn any contrary information until long after I had left school.
You don't change the mind of a believer, only he can do that. So, keep banging away, Don and Russ. Perhaps someday between beats of their own drum they may hear yours and become intrigued at what you're playing.
GDP measures monetary exchanges and not the real production. In that sense if government can create make work programs like digging ditches and filling them up, it can temporarily boost GDP, but no real wealth will be created.
For those that think that GDP is mismeasured because you believe (against all evidence) public works programs were not of any value. Please, offer up another piece of data that you find more suitable. Surely, not all data can be conspiring against Austrian economics.
Here is another measure of worth: The Dow Jones Industrial Average, (I prefer GDP)
Growth from 1933-1939, Jan. to Jan., 156%
It seems to me that Don made the case that "recovery" didn't happen until well after 1939.
Does 156% "growth" represent "recovery", just a portion of recovery, or perhaps not even close?
You can't dispute anything about Don's Apple cart by pointing out performance in your Orange field.
The question that is in my mind is, how much faster and better would the economy "recovered" had St. Franklin not worked his miracles?
It seems to me that this is the question that economist of the caliber of Don, Russ, Walter, and Thomas, et al, ask in speculation while being convinced that evidence seems to point to the conclusion that without St. Franklin America would probably have "recovered" more quickly.
It is a debate that may never have a definite answer.
Markets swing from extreme undervaluation to extreme over valuation. Dow Jones Industrial Average is only just 30 stocks. SP500 started only 1957, so we don't have a broader index like that to compare. But I did look at Dow Jones Composite Average, which includes DJIA, Transportation and Utility Indexes – a total of 65 stocks. here is what I found from djindexes.com
Dow Jones Composite Ave closed at 44.45 on Jan 31, 1934. It closed at 43.75 on March 31, 1939. In between it had gone as high as 67. Why Jan 31, 1934? because when I searched from 03/01/1933 to 03/31/1939 ( approximately two terms of FDR ), it brought up the data only from Jan 31, 1934.
My take on GDP:
http://ry-acton.blogspot.com/2008/11/statists.html
Charlie:
Growth from 1929->1954: 0%
From 1929 until 1933, the DJIA dropped from 380 to about 45. It then took 21 years for it to reach its former peak.
I would suggest that using it as an indication of FDR's policies (especially when he took office at a particular low) wouldn't help much.
What would be a proper measure? Maybe something along the lines of GDP per capita, adjusted for inflation? I'm not sure if those numbers would be kind to FDR or not, but it's a possible way to go.
Charlie:
First, in considering GDP, you must adjust for inflation. That's easier said than done. We have poor records of economic data from back then, so some fudging is inevitable. For more information, see the terrific Measuring Worth website.
Second, public works projects do result in value, at least sometimes. However, there is also a cost. The argument for public works is Keynesian, and the Keynesian argument that deficit spending can alleviate recessions is defunct. I don't believe any serious economists believe in that anymore, at least as a general principle.
Tarran:
Good point, but I don't understand why you would then proceed to link to a cesspool like mises.org.
Charlie,
. My point whole point is that they weren't. They were building things that we still use today.
So did the Soviets. Parks have value, but is that the most productive use of resources? You seem to be missing Alex's point of not including government make-work projects entirely.
Comparing the U.S. under FDR and the U.S.S.R. under Stalin and Lenin is pretty ridiculous.
I compared the United States economic policies under FDR to Soviet economic policies, not the Soviet Union under Stalin and Lenin. You fabricated that claim on your own. I know it's hard for some Americans to believe but we Soviets didn't just starve the Ukraine and send people to the gulags. We also had to find a way to clothe, feed and house ourselves. We even had economists and everything.
The difference in institutions there and here was quite stark. The difference in the use of government spending, the use of the price system,
Really? What were these vast differences? Do these differences exist merely because you say so do you have evidence? In what way are price controls, wage controls and industrial cartels in the United States different from those same things in Russia? Are Russians guided by some alien force that they would respond differently to such things than Americans?
and the use of courts and private property rights was also stark.
I agree with you on the courts, but that's not an FDR issue, is it? It's FDR's policies we're talking about here. Private property rights are also a legal issue and have nothing to do with FDR's economic policies. Although, personally, I think that wealth redistribution and price and wage controls were a violation of property rights.
The growth rate under FDR from 1933 to 1939 was 7%. If you take the whole of his first two terms, the growth rate is 8.4%. I challenge you to find such high growth rates at any other time over a similar time span in American history.
Big deal. The Soviet Union posted much much higher GDP growth rates. I can produce 120 tons of gigantic, useless ball bearings, carve enormous monuments, build parks and have the government spend like there's no tomorrow and get you awesome GDP numbers. The fact that the government keeps spending on virtually useless stuff doesn't mean the economy is actually growing. How do I know it's relatively useless? Because no private entity undertook those projects – they had better alternative uses for it.
Yet the private economy stagnated and couldn't create jobs during FDR's reign. Why? Did FDR intervene too much?
You seem married to the idea that FDR did everything right. I'm not sure. I'm also not sure that it's that difficult for GDP to grow from the much smaller base on which that growth was calculated owing to the economic plunge that preceded it. I'm also not sure how much of the length and severity of the depression can be attributed to FDR vs. Hoover. Both of them engaged in extreme interventions. What I have become sure of is that most people's opinions are completely politically driven.
Opportunity cost? Now why did ya hafta go and bring economics into this? BTW, statistics are meant to tell us about how humans are actually doing, but they can be misleading for a variety of reasons. In the case of the Great Depression we don't have to wonder: things were sucktasterful for most Americans, rising GDP or no.
Henri Hein,
Here is Prof Walter Williams' recommended websites. He says mises.org is "an excellent reference to current issues in economics and politics". I have been using their resources extensively to educate myself. I have not come across any experience that would suggest that the site is a cesspool. Could you elaborate?
Thanks,
Lots of comments. I don't have time to get to them all right now, but I'd like to hat tip Brad for at least making a testable hypothesis in such a way that new data might change his priors.
To answer the question, real per capita GDP grew 43.5% from 1933 to 1939.
I will extend the same courtesy to Methinks, who argues that I conjecture that the USSR was very different than the USA under FDR without data. You are correct, I don't have the data, but my priors say that if you took the percent of GDP taken up by government expenditures under USSR it would be much higher than that of USA under FDR from 1933-1939. I leave it to Methinks to show me I'm wrong. I also will conjecture (if one really has a passion for research) that the price controls in USSR were much more constrictive and pervasive than those inacted in the US from 1933-1939.
For those of you that are trying to paint me into a view that FDR is a saint and all he touched was gold. I would like to reiterate what I quoted recently in another post on cafe hayek,
"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." -Ben Bernanke
Most every macroeconomist thinks the story of the great depression is about some derivative of monetary or fiscal stimulous. All of the other stuff like price controls or unionization is second or third order stuff. You have to get really far out of the mainstream (Austrians) to here someone argue otherwise.
Charlie
I guess he's talking about those Lew Rockwell/Ron Paul types. With doctrinaire Austrian schoolers, I have to separate what I really like from what strikes me as a bit nutty.
Still, I'd take Paul as prez over McCain or Obama.
Most of the comments on Obama FDR-like plan stress explicitly or implicitly that it is likely to worsen the actual economic situation. I would like to see also comments on the differences and similarities of the political, economic and social context betweeen FDR time and Obama time. I dont think that the fact that FDR plan had failed in the past would necessarily imply Obama (possible)FDR plan will also fail. Or what are precautionary measures to avoid the repetition of the past mistakes?