Will vs. Krugman (and DeLong and Econospeak)

by Russ Roberts on November 18, 2008

in Great Depression

Brad DeLong quotes commenter Steve Benen (HT: Tyler at Marginal Revolution):

The Washington Monthly: On ABC’s "This Week" earlier, George Will explained his belief that FDR financial/regulatory policies discouraged investment and created an environment in which the "depression became the Great Depression." Fortunately, Will was sitting next to Paul Krugman. To hear Will tell it, the Roosevelt administration stood in the way of investors. In a fairly devastating 45 seconds, Krugman not only set the record straight, but explained that it was FDR’s desire to balance the budget and cut federal spending that contributed to a decline in 1937.

I know Krugman has a Nobel Prize and Will doesn’t, but what actually happened to investment in the 1930s? DeLong notes that gross real private domestic investment rose during the 1930s. Econospeak weighs in (HT again to MR, same post) with data on net private investment, claiming it disproves Will’s argument:

Will not only tried to claim that FDR somehow spooked investment demand but he also suggested that net investment was negative during the 1930’s. Krugman’s counter was that investment demand tends to be pro-cyclical so it fell during the 1929 to 1932 period but rose from 1932 to 1937 as real GDP rose. Fortunately we can turn to this source for the NIPA tables. Table 1.1.6, line 6 provides us with gross investment, while table 1.7.6, line 5 provides us with private depreciation. The difference is net investment, which we have graphed from 1929 to 1941. The pro-cyclical nature of net investment that Krugman noted is rather clearly shown. We also see that net investment was positive in 1936, 1937, and 1939.

If some pundit like Will is going to mention an economic time series such as net investment, shouldn’t he be required to get the facts straight? Maybe such pundits should also be required to bring along correctly drawn charts of the series that they mention.

Alas for Krugman, DeLong, and Econospeak, the data actually make Will look good. Here’s Econospeak’s chart:

A1 As DeLong argues, gross investment is positive. As Econospeak argues, net investment is positive for some of the years. So it wasn’t negative for every single year of the 1930s.

But Will is right on what matters. The sum of all investment in the 1930s is NEGATIVE. (You can see that by looking at the graph and noting that the area below the zero line is much greater than the area above it.) That is, the positive years don’t make up for the negative years. Net investment in the 1930s is negative. That is, gross investment between 1930 and 1939 does not make up for depreciation. It’s not even close. Will is right–the investment climate in the 1930s was lousy. Now it may be that the data on depreciation and investment are not very accurate. But these data support Will, not Krugman.

Here are the data points that are plotted above:

1930  -15.9   
1931  -38.4   
1932  -63.5   
1933  -55.7   
1934  -40.5   
1935  -14.0   
1936      0.7   
1937    16.8   
1938  -15.5   
1939      0.8

That adds up to a reduction in capital (gross investment minus depreciation) of $225 billion (in real terms in year 2000 dollars. So yes, there were three years that were positive in the 1930s. But the over the whole period, a disaster.

I’m not an expert on NIPA, so if Econospeak has used the wrong data, please let me know.

Be Sociable, Share!



98 comments    Share Share    Print    Email


Chris November 18, 2008 at 4:40 pm

This doesn't tell the whole story. Is this expected behavior during slow downs? Did a slow down of investment cause the depression or was it merely a result of the depression?

How do time series look in other recessionary/depression periods?

For all that we (the reader) know this is merely how investment is supposed to look.

Marc November 18, 2008 at 4:49 pm

I see two things in the charts. First, as you say net investment in the 1930s is negative. But what about the changes in direction of the trends.

While investment is negative from 1929 to 1936 it changed direction in 1932 and in 1937. What does that correlate with? Can we reliably assign any causal link to those changes?

To me, too much of the discussion about economics of this era (and most others for that matter) falls into the category of "Lies, damn lies and statistics." Everyone seems to be able to tell a story that fits the data to match their world view. I'm having hard time believing any of it anymore.

dg lesvic November 18, 2008 at 4:49 pm

This case illustrates the dilemna we're in.

In a world ruled by emotions with a short attention span, we cannot afford to get bogged down in endless statistical disputes that hardly anyone will pay attention to.

We need an attention grabber, and one punch knock-out blow, a karate kick right in the old bread basket, where the Left really lives.

And, where is that?

Prof Boudreaux has told us.

The "bottom line" was "redistribution."

Since the Left depends entirely upon the assumption that taking from the rich to give to the poor reduces inequality, it would be utterly demolished by the opposite-most conclusion that it didn't reduce but increased inequality.

Why not see what the Krugmans would have to say about that?

Don Boudreaux November 18, 2008 at 4:55 pm

In response to Chris's comment, I post in its entirety a comment that Alex Tabarrok wrote this morning for his and Tyler Cowen's blog, Marginal Revolution:

"Capital consumption allowance is depreciation. Thus if gross investment is positive and net investment around zero that means that the capital stock is just being maintained. If net investment is less than zero then the capital stock is shrinking.

Shockingly, the capital stock was lower in 1940 than it was in 1930. I think this illustrates better than any other statistic the failure of investment to recover during the Great Depression and New Deal."

And this fact makes it very, very difficult to argue with a straight face that New Deal policies saved Americans from the Great Depression.

BoscoH November 18, 2008 at 5:31 pm

(Irony alert!) A shame we don't have a couple more years of data on the chart. Things look like they really take off once Japanese Americans are sent to internment camps!

Will and Krugman are talking past each other. They're both right. Net investment for the 30s was negative. And net investment rose steadily after FDR was elected. The interesting part of the curve is the rapid dip from 1929 to 1932. At this time, historically, how clear was it that there would be regime change? How clear was it what the next regime would do? Compared to present day, it was pretty clear this year that McCain wasn't going to win. But it's still unclear what Obama will unleash on the country. Did investment dry up because savings was expended or because of uncertainty about the future? It probably takes historians to figure this out.

Dave November 18, 2008 at 5:36 pm

How accurate is this depreciation data? I know that a real estate investor today can depreciate the value of the home over 27.5 years, which to me seems like an aggressive figure. Do these depreciation values accurately reflect the depreciation, or do they over/under-state the actual depreciation, possibly for favorable tax treatment, etc.? Anyone know?

Gary November 18, 2008 at 5:56 pm

George Will's actual statement, which you can
http://www.youtube.com/watch?v=3yAyQV8gOjo” rel=”nofollow”>watch on YouTube, was, "net investment was negative through almost all of the thirties."

Methinks November 18, 2008 at 5:56 pm

Well, geeeeee….

So according to DeLong and Krugman, private Investment was up & government policies were working wonders on the ailing economy. It's just a wonder that people look back on the Depression as a bad time.

Caliban Darklock November 18, 2008 at 6:03 pm

I'm confused.

How could gross investment not be positive?

I can't invest a negative number. I can't invest nothing, either, because that's not an investment.

So isn't positive gross investment just… well, a tautology? What am I missing here?

Methinks November 18, 2008 at 6:19 pm


I think you're confusing net and gross. Net investment was negative through most of the Depression because gross investment did not exceed depreciation. I don't see a claim of negative gross investment anywhere in the post.

Martin Brock November 18, 2008 at 7:18 pm

But it's still unclear what Obama will unleash on the country.

Rahm Emanuel is chief of staff, Hillary Clinton is Secretary of State, John McCain is confidant and advisor, Afghanistan and Pakistan are on the table and nothing is off the table. Even the much ballyhooded withdrawal from Iraq is hardly more than a withdrawal to more defensible positions. Since Obama could hardly be more reckless on the domestic side of the ledger if he tried, I'd say he is about to unleash a lot more of the same.

What did you expect? Change?

Methinks November 18, 2008 at 7:22 pm

What did you expect? Change?


LowcountryJoe November 18, 2008 at 7:25 pm

Will and Krugman are talking past each other. They're both right. Net investment for the 30s was negative. And net investment rose steadily after FDR was elected.

Sure you have the change — the delta — of the net investment but when you're measuring an amount from one year to the next year and then getting a net investment value of a negative amount, it is still a negative amount even though the negative amount is not as bad. Capital is only going to sit idle for so long. And once the tinkering appeared to have stopped and the 'rules of the game' looked consistent enough it was time for the capital to flow into investment again. Maybe the net investment growth happened despite the goverernment's meddling. That's entirely possible.

Martin Brock November 18, 2008 at 7:27 pm

How accurate is this depreciation data?

I also wondered about that. I've always been skeptical of the "25% unemployment" during the thirties too. What percentage of the population starved to death? Call me a Depression denier, but I suppose many people in the 30s returned to the subsistence farming they and their parents had done in the late nineteenth century, before the Fed started monetizing every productive act. A few decades earlier these subsistence farmers weren't "unemployed" simply because they weren't drawing a paycheck from some corporation.

Martin Brock November 18, 2008 at 7:46 pm


My hope for change is changing rapidly.

dg lesvic November 18, 2008 at 7:58 pm

"But it's still unclear what Obama will unleash on the country."

He's told us very clearly that he wants to "spread the wealth around," to take from the rich to give to the poor, in order to reduce income inequality.

So, it's just as clear that we must submit, to the contrary, that, like all intervention in the market, his policy will be counterproductive, bringing about the exact opposite result of what was intended, not reducing but increasing inequality.

Here's a slightly oversimplified way to broach it:

Taking from the rich to give to the poor doesn't just draw money but manpower downward upon the hierarchy of production, and the manpower faster than the money. For manpower doesn't merely follow money but anticipates it. And, with manpower and competition among the poor increasing faster than the redistributed money, they'll be poorer than they would have been without it.

And that is "the bottom line."

Ray G November 18, 2008 at 8:32 pm

Well, during the 1930's, the watchyamacallit index was up and stayed positive. Therefore, FDR was the greatest President in American history, and is due all the worship still accorded to him today.

This index is so positive, and so meaningful, that it completely overrides the fact that the decade was otherwise marked by a severe and lengthy economic depression.

Krugman, Delong, et al are correct. FDR was an economic deity and the depression persisted only because, um. . . ah, um, only because, um, because of George W. Bush of course. What else.

Frank November 18, 2008 at 9:07 pm

Negative net investment is not solely attributable to the Hoover years. Start with 1933 or even 1934 and one sees that net investment was also negative during the St. FDR years.

indiana jim November 18, 2008 at 9:09 pm

In the accounting of national income investment (I) includes inventory, capital equipment, and newly constructed home purchases. Does anyone know offhand whether the natural balance between these components was as screwed up in the Depression as the imbalance that Barnie Frank, Freddie, Fanny, Maxine Waters, ACORN, Obama, etc. have created by way of the housing bubble? Deadweight loss, of course, is created whenever scarce resources are allocated away from highest valuing users because of government regulations, taxation, government sponsored organizations, governmentally created moral hazard, etc.

Fernando Menendez November 18, 2008 at 9:09 pm

Benjamin Anderson (Economics and the Public Welfare, 1949; 1979) gives an accurate depiction of the few years of positive investment during FDR, precipated by a significant legal decision:

"On May 27, 1935, came the sweeping, unanimous decision of the United States Supreme Court outlawing NRA, in the famous Schecter case…. The Act was unconstitutional, null and void. The bureaucrats had no power under the act. NRA was finished" (p. 426).

As a result, the stock market rallied and industrial production both reached new highs. Business, says Anderson,

"felt itself free again after the Supreme Court decision and a great many activities, which business had lacked the courage to undertake while the NRA was in force, were undertaken." Production of durables goods and capital expeditures increased while the gap between durable and nondurable goods practically disappered in the third quarter of 1937 (p. 427).

Regardless, the the rally brought on by renewed investment and production was temporary, insufficnet and did not reach full employment levels. The best year for employment was 1937, when unemployment dropped to six and a quarter million.

To sum up, Anderson points out,

"There remained altogether too many governmental interferences with business. Government financial policy continued to undermine long-run confidence. The course of taxation…continued to paralyze a great deal of venture capital, the undistributed profits tax cut capital expenditures heavily, as did the securities legislation, and unsatifactory conditions in the outside world and in our foreign trade relations and our trade policy continued to retard recovery" (p. 428).

Not much new under the sun.

Mcwop November 18, 2008 at 10:16 pm

It will be kind of ironic if Fannie and Freddie cause Depression II, after all those two institutions were a product of the New Deal.

muirgeo November 18, 2008 at 10:28 pm

He's told us very clearly that he wants to "spread the wealth around," to take from the rich to give to the poor, in order to reduce income inequality.

…. his policy will be counterproductive, bringing about the exact opposite result of what was intended, not reducing but increasing inequality.
Posted by: dg lesvic

Is this a claim based on theory or historical data?

muirgeo November 18, 2008 at 11:01 pm

"But Will is right on what matters. The sum of all investment in the 1930s is NEGATIVE."

"Will is right–the investment climate in the 1930s was lousy."

Russell Roberts

"Shockingly, the capital stock was lower in 1940 than it was in 1930. I think this illustrates better than any other statistic the failure of investment to recover during the Great Depression and New Deal."

And this fact makes it very, very difficult to argue with a straight face that New Deal policies saved Americans from the Great Depression."

Posted by: Don Boudreaux

Listen to the video again. At 2:03 Krugman agrees that Will is right. Net investment was negative. Then between 2:03 and 2:10 he explains why.

At 2:17 to 2:25 he explains why the economy was bad. And that would be a lack of consumer demand.

The salient point here is the sudden desire by free market apologist to suddenly use investment demand over GDP and jobs numbers as the relevant economic indicator.

Oil Shock November 18, 2008 at 11:16 pm

I asked the following question on delong's blog with no response from him or any of the commentors.

Dear Mr. Delong,

Could you explain why Great Depression became great while all th depressions prior to the Great one, were not quite as severe. How did the economy manage to recover from each one of those earlier depressions without much interference from the government? I mean economy recovered even when there was on centralized fiscal or monetary policies, infact when there wasn't even a central bank?

Do you mean to say that after a steep correction, economy wouldn't have recovered on its own, without interference? Is there a way to find out?

Charlie couldn't answer that question either. 1929 was not the first depression. The term recession is a euphemism developed in the 30s. Prior to the 30s, all economic downturns were called depression. It some how gives the impression to the people now, that we don't have depressions any more, all due to the wonderful interference from the government.

After the progressive era of increasing government interference, which lasted till 1920s, the federal budget in late 1920s was 3.8 billion dollars. Assuming that dollar lost 95% of the value since the late 20s, a federal budget of $76 billion would take us back to the same size of federal government of the 20s. Assuming a 99% decline in the value of the USD, a federal budget of 380 billion would take us back to the size of federal government we had back in the 1920s. Even using that high 380 number, it is clear that federal government is 10-50 times bigger in real terms.

I wonder how did the economy recover from all those panics of the 19th century, when government was even smaller than it was in the 1920s, with no fiscal or monetary policy? Anyone here has any Keynesian or Monetarist answers?

muirgeo November 19, 2008 at 12:15 am

period (years) months in recession

1902-1914 (12) 73

1900-1933 (33) 178

1933-1966 (33) 60

1933-2001 (78) 125


Oil Shock November 19, 2008 at 12:38 am

Looks like the monetarist improvement since the early 80s have helped shorten the recessions. LOL.

Jokes apart, any recession data prior to the 1930s are just good guesses. For instance, it is very likely that a recession like the double dipping we had in 1980 and 1982 will be counted as one single recession in earlier days. How about that 13 month recession in 1926-27, right smack in the middle of roaring 20s. I wonder if people felt as miserable as they did here in silicon valley in the statistically mild recession of 2001?

And regarding statitsics, Former British prime minister Benjamin Disraeli had something nice to say about it : "There are lies, damn lies and statistics".

If data says it all, then how did Krugman manage predict 5 of the last 1 recessions?

Here is an interesting article on the "The Problem of Accuracy of Economic Data"

muirgeo November 19, 2008 at 12:59 am

So you don't like data, I understand that, but by what method do you come to your conclusions of the success of the early 20th century economies?

Maybe you should read what the people living in those times thought of the economy.

Populist Party Platform, 1892 (July 4, 1892)

The conditions which surround us best justify our co-operation; we meet in the midst of a nation brought to the verge of moral, political and material ruin. Corruption dominates the ballot-box…. The people are demoralized;… public opinion silenced…. homes covered with mortgages, labor impoverished, and the land concentrating in the hands of capitalists. The urban workman are denied the right to organize for self-protection, imported pauperized labor beats down their wages… and [we] are rapidly degenerating into European conditions. The fruits of the toils of millions are boldly stolen to build up colossal fortunes for a few, unprecedented in the history of mankind…. From the same prolific womb of governmental injustice we breed the two great classes ­ tramps and millionaires.

dg lesvic November 19, 2008 at 1:01 am


Thank you for your interest in my little theory of redistribution.

You asked if it was based on theory or history.

Look at it again, and you tell me.

Oil Shock November 19, 2008 at 1:24 am

Politicians lie…

"Votes are collared in a democracy, not by talking sense but by talking nonsense" – H.L. Mencken

Political platform never ever truly reflects the socio-economic conditions of a period.

More over an agrarian economy of the old, is more likely to fluctuate with the vagaries of weather. A dry spell or a hurricane could have had a devastating effect on the entire economy back then, versus today with ability to tap underground water tables, move water across huge distances, huge international trade and advantage of weather forecasts.

muirgeo November 19, 2008 at 2:46 am

So you don't like data and now you're claiming to know better the issues of the times then the very people who lived and wrote of them? Very well.

Audubon November 19, 2008 at 3:44 am

Come on muirgeo: you quoted from the Populist party's political platform. That's not an objective view of what it was like to live back then.

There's a reason why William Jennings Bryan lost the election soundly.

dg lesvic November 19, 2008 at 3:53 am

It appears that the indefatigable Muirgeo has been defeated by my little theory, and, perhaps, the rest of you as well. Your counterparts at that other blog, who threw me out, because of it, certainly were. So why not test it in real life, against the Left itself?

LowcountryJoe November 19, 2008 at 5:30 am

Maybe you should read what the people living in those times thought of the economy.

Populist Party Platform, 1892 (July 4, 1892)

The conditions which surround us best justify our co-operation; we meet in the midst of a nation brought to the verge of moral, political and material ruin.

The sky was falling back then, too? Going forward, it will be really interesting to see worse numbers yet less dire reports on the economy.

Dr Steal November 19, 2008 at 5:48 am

Too bad for investors (all 5 of them?) during the 30's. For the remainder of the population, including my Grandfather who in 1928, at age 13, was mining coal for 2 cents a ton, Roosevelt saved the country and probably saved his life; so good luck rewriting the legacy of FDR for the working class who were beaten to death by the Coal&Iron Police for striking during the teens and twenties, until FDR granted them human rights. No wonder there was little investment during the 30's as the investors panicked over the impending loss of their slave labor pool.

We're disputing the testimonials of still-living people who experienced those times, and elected him twice, twice!, based on a single metric – investment activity? Investment in what?

Sometimes investment has to take a breather while the ship gets righted.

If anything, I think we can flip the entire argument on its head, and say we've just been offered a proof that investment activity is apparently not always the best metric to gauge the success of a presidency.

I have a Ph.D. in Physics and Mathematics, so you can spare yourself any comments concerning 'data'. Yawn.

And finally, in 2003 my Grandfather told me, and I quote: "Bush is a do-nothing president just like Hoover was and that Republican gang will get us in big trouble just like the depression." He knew the signs.

I then explained to him how that couldn't happen these days since the amount of margin debt was nowhere near to what it was in 1929. Oops.

Gil November 19, 2008 at 6:19 am

Maybe M. Brock has a point – elsewhere the Great Depression is referred to as the period between 1929 and 1932. Which is to say, the Great Depression was over in 1933 and the trough in 1938 in this picture is unrelated:


After all, the complaints of the time talk of "poverty amidst plenty" which would mean a mismatch between supply and demand as opposed to standard poverty which is "poverty amidst scarcity". After all, where did the goods and money come from to supply the bread lines during the Great Depression? Why did many of the wealthy carry on living in opulence in spite of the surrounding poverty? If the same thing happened in 1829 would there be no bread lines, period? Therefore times may have been tough but it was still better than what would have been in earlier times?

Mind you why didn't the 1987 stock market not trigger a 'great depression' even though the crash was worse?

SaulOhio November 19, 2008 at 10:01 am

Dr. Steele's grandfather said:"Bush is a do-nothing president just like Hoover was and that Republican gang will get us in big trouble just like the depression."

There is one truth to what he says. Bush was about as do-nothing as Hoover was, which is to say, not at all. Bush imposed steel tariffs, presided over a vast increase in government spending, provided prescription drug coverage to Medicare patients, and rarely ever vetoed a bill sent to him from Congress, passing all sorts of regulatory legislation.

As for Hoover, Rothbard explodes the myth that Hoover was laissez-faire, do-nothing in his "America's Great Depression" at http://mises.org/rothbard/agd.pdf. Hoover instituted almost every policy of the New Deal. FDR simply expanded on Hoover's interventionism. Any has anyone ever heard of Smoot-Hawley? Anyone? Anyone?

This is what worries me the most, this parallel between today's situation and that of the Great Depression. Both times, nonexistent laissez-faire policies were blamed for economic problems caused by government intervention. Now, as then, those same problems are being used as an excuse for more government intervention.

Josh Taylor November 19, 2008 at 10:27 am

… The first thing Krugman did was shoot down this argument, not by saying that the premise was false, but that the conclusion was. Will said that because investment was negative, that proves that the government was doing a bad job. Krugman explained that of course investment will be negative in a time of economic downturn, especially in light of the massive unemployment rates. This post is true in its premises, but it doesn't mean that Krugman is wrong, only that Will's facts are right.

Oil Shock November 19, 2008 at 10:53 am

David Rosenberg of Merrill Lynch, whom the left constantly quoted during Bush years, has something great to say about Rothbard's work.

"With this in mind, we were fortunate to have a client mail us a book titled America's Great Depression by Murray N. Rothbard. We think it is an absolute must-read, on the scale of Amity Shlaes' The Forgotten Man. In this book, you will learn that the New Deal machinery was established by Herbert Hoover, not FDR, and that the scale of the government incursion into the economy was so farreaching that the multi-year program actually ended up doing more harm than good. What is amazing is the chapter on the Reconstruction Finance Corporation (RFC), which was like the TARP in its efforts to bolster government equity stakes in banks, and therefore, to perpetuate the excess capacity in the system.

link here

Mario Sanchez November 19, 2008 at 11:52 am

I find the trend-charts in investment almost meaningless. The underlying assumption seems to be a false dichotomy between New Deal and downward trend in investments in perpetuity, with never a slowdown or a recovery.

Am I supposed to believe that without the New Deal investment would continue into negative territory forever, without ever slowing down or turning around? That it would go past -75%, then past -150%, then past -1,000%, then past -1,000,000%, etc etc?
That it would continue well past (picture Dr Evil with pinky to corner of mouth) negative billion-zillion-gajillion dollars (insert evil laugh here), and past the point where Nelson Rockerfeller is bartering chickens for firewood & digging his own latrines? No. That's idiotic.

Instead, how about we compare the merits of FDR's New Deal against… oh, I don't know… some alternate policy strategies.

dg lesvic November 19, 2008 at 12:55 pm

Mises, as usual, best summed up the problem.

"Every historical experience is open to various interpretations and is in fact interpreted in different ways…History can neither prove nor disprove any general statement."

We still need history. Mises, again:

"Economics…adopts for the organized prentation of its results a form in which aprioristic theory and the interpretation of historical phenomena are intertwined."

But while we support our theory with history, we must ultimately rely on the theory. For while there are anecdotes on both sides of every argument, there is logic on only one. And while history must be taken on faith, logic is before our very eyes.

spencer November 19, 2008 at 1:19 pm

This is the data series you need to use.

It is from BEA.

Real Net Stock: Private Fixed Nonresidential Assets (Bil.Chn.2000$)


Yes, the real net capital stock was lower in 1940 than in 1929 as George Will said.

But he must have learned how to do economic analysis at George Mason.

Look at the data and you see it fell sharply in the early 1930s and rebounded in the late 1930s. The bottom was in 1935.

But what he has done is compared 1940 to 1929 and very conveniently avoided looking at the data between. Looking at the data this way he can blame FDR and the New Deal for the drop in the real capital stock even though the bulk of the drop actually occurred before FDR took office.

He is doing typical George Mason analysis and crediting Keynesian policy with the ability to impact the economy retroactively several years before the legislation was enacted.

And you guys keep being surprised when no one takes you seriously.

Nick November 19, 2008 at 1:37 pm

Spencer- you're missing the point. No one disputes that the economy was better in 1935 than 1932 (and worse in 1938 than in 1937). The point is that the economy was still performing very badly in 1940, many years after the onset of interventionist policies. In other words, the defenders of interventionism have to explain why, unlike in previous downturns, the economy did not have a normal recovery and instead was mired in sub-par growth for more than a decade.

Current November 19, 2008 at 1:58 pm

I'm suspicious about all of this. The Austrian economists show that the interest rate affects the price attributed to capital.

Cut the interest rate artificially and the paper value of all capital increases. This is what happened in the 1920s when Benjamin Strong at the Fed cut interest rates to low levels during a boom.

So, the investment rate in 1929s cannot be assumed to be related to the amount of investment good produced. In an interest-rate fueled boom fewer investment goods could be created than before, but due to the distorting effects of the boom they could well be valued more highly.

As the Austrians explain it is impossible to accurately "deflate" capital goods and talk about what capital is actually there.

Russ; go down the corridor to talk to Peter Botteke he'll set you right on this.

Anonymous November 19, 2008 at 3:54 pm

"Instead, how about we compare the merits of FDR's New Deal against… oh, I don't know… some alternate policy strategies."

Posted by: Mario Sanchez

I already did that. The evidence shows 170 months of recession the 33 years prior to 1933 and only 60 the 33 years after 19933. Why's that?

Anonymous November 19, 2008 at 4:24 pm

Hey Noname,

That is easy. It is called "Sleight of hand of the statistician"

Mr. econotarian November 19, 2008 at 9:31 pm

"While investment is negative from 1929 to 1936 it changed direction in 1932 and in 1937. What does that correlate with? "

The devaluation of the dollar and banning of "payable in gold" clauses in contracts in 1933. This stopped monetary contraction and allowed the economy to (basically) leave the gold standard.

If FDR had stopped at that (rather than NRA etc.), the US would have been turned around much faster.

I think Hoover didn't think he could legally ban "gold clauses" in contracts, thus he felt he could not leave the gold standard because so many debtors faced gold clauses (but would be paid in devalued dollars).

Charlie November 20, 2008 at 1:14 am


You should probably look up when FDR was elected President. It should dramatically change the way you view the graph and who won the economic debate between the journalist and the nobel prize winner. Unless FDR is responsible for policies "discouraging investment" before he was president.

So now we have a macro debate:

Krugman/Delong vs. Will/Roberts

I wonder which group has more publications in macro.

Jayson Virissimo November 20, 2008 at 5:02 am

"I wonder which group has more publications in macro." -Charlie

You say that like its a good thing ;)

SaulOhio November 20, 2008 at 6:19 am

Charlie: Did you miss the part where I posted the link to Rothbard's book claiming that it was Hoover that instituted all the policies of the New Deal, and Smoot-Hawley, as well? FDR just expanded those policies, and did nothing about Smoot-Hawley. At best you could argue that FDR's policies weren't as bad as Hoover's.

Previous post:

Next post: