Higgs on the Great Depression

Muriego, BTW, Caplan's main point was that people who did read some economics have different opinion then people who did not - therefore it follows, that the average voter cannot be expected to be "unbiased", therefore democracy will not choose rational policies.

Muriego, read "The Roosevelt Myth" from John T. Flynn (1945). Very I think it will answer your question. FDR was pretty good manipulator.

spencer,

I appreciate your vigilance in upholding the quality of the degrees issued by the University of Chicago, but we didn't actually get around to discussing the yield data in the podcast. Do you have that yield data? It would be useful to see if the premium and not just the ratio increased.

So then consumer welfare might be better measured by consumption and other measures.

This is paramount to Austrian economics. People do not exist to serve government, though many seem to think otherwise, especially via the construction that the government is "us".

Govt contract prices may not be perfect, but I don't consider them arbitrary. I don't know the details of how government awarded contracts, but price signals and cost still played a role. Also, I agree that normally, governments do not always produce what people really need, but regardless, it was still production, and GDP is supposed to measure what we produce, no matter if its needed or not.

Now, should we then use this GDP figure to claim we know how consumers are doing? Probably not, especially in wartime as government relationships are changing, and especially if we believe that we are producing a lot of worthless crap. So then consumer welfare might be better measured by consumption and other measures. So perhaps this is what Higgs was meaning to say, and I misunderstood it.

There are numerous reasons to throw out government contracts when calculating GDP. The data is suspect. The prices are arbitrary, the produced goods might not be in demand, etc.

When I look at an economic analysis of the Great Depression and WWII, I could care less how well the government is doing, I care about how well the average person is doing. Government contracts won't tell me this.

I do not understand the claim that government contracts should not be added into the GDP during the war period. If government puts out contracts, and they work out a price with private industry, then it seems to me that the value of the contract ought to be included. If instead the claim is that these were no-bid contracts, I think we still have to assume that they paid more or less what the services desired were worth. So why the claim that these numbers are utterly worthless?

Higgs' analysis that yield spreads reflected capitalist fears of FDR is fundamentally flawed and when done correctly his evidence and/or argument disappears.

Higgs divides long term yields by short term yields to create a maturity spreads showing spreads rising in the late 1930s. He claims this reflects business and capitalist fears of FDR. But you do not measure yield spreads by dividing because dividing creates serious distortions. You measure yields spreads by subtracting.

The reason Higg's works shows yields spread rising in the late 1930s is because the short term yields falls from 0.6% to 0.4%. So when you divide a long term yields by 0.4% rather than 0.6% the spread widens. But if you do it correctly and calculate the yield curve by subtracting it shows the yield curve falling in the late 1930s and the spread that Higgs claims reflects fears of FDR disappears.

So Higgs evidence that business and/or capital did not invest because of fears of FDR is strictly a function of Higgs failure to correctly construct yields curves. Any junior bond trader could have told you that Higg's work was fundamentally flawed by this incorrect calculation, let alone any finance professor.

Roberts, that PhD after your name is suppose to signal that you have been taught better than to fall for shoddy research like this. But I guess you believe that making your ideological point is more important to you than your reputation as a PhD economist.

I don't imagine the 30's or the WW2 period were the best of times but I suspect the people actually living the times and re-electing FDR and Truman to office says a lot more about FDR's success then an economic analyisis written 60 years later.

This is the depth of both your political and economic analysis. Something happens at the same time something else happens, and you assume one caused the other.

That's why you like to focus on which party holds the presidency during the good times rather than which party dominates the congress.

This seems to be typical of progressive economics in general. If an interpretation suits their purpose, why then that's the one they're sticking with.

Muirgeo,

If you won't hear it from Bryan Caplan, will you hear it from Larry Bartels? Here is Bartels in a recent piece called "The Irrational Electorate":

The 1936 election has become the most celebrated textbook case of ideological realignment in American history. However, a careful look at state-by-state voting patterns suggests that this resounding ratification of Roosevelt’s policies was strongly concentrated in the states that happened to enjoy robust income growth in the months leading up to the vote. Indeed, the apparent impact of short-term economic conditions was so powerful that, if the recession of 1938 had occurred in 1936, Roosevelt probably would have been a one-term president.

It’s not only in the United States that the Depression-era tendency to “throw the bums out” looks like something less than a

rational policy judgment. In the United States, voters replaced Republicans with Democrats in 1932 and the economy improved. In Britain and Australia, voters replaced Labor governments with conservatives and the economy improved. In Sweden, voters replaced Conservatives with Liberals, then with Social Democrats, and the economy improved. In the Canadian agricultural province of Saskatchewan, voters replaced Conservatives with Socialists and the economy improved. In the adjacent agricultural province of Alberta, voters replaced a socialist party with a right-leaning party created from scratch by a charismatic radio preacher peddling a flighty share-the-wealth scheme, and the economy improved. In Weimar Germany, where economic distress was deeper and longer lasting, voters rejected all of the mainstream parties, the Nazis seized power, and the economy improved. In every case, the party that happened to be in power when the Depression eased went on to dominate politics for a decade or more thereafter. It seems far-fetched to imagine that all these contradictory shifts represented well-considered ideological conversions. A more parsimonious interpretation is that voters simply—and simple-mindedly—rewarded whoever happened to be in power when things got better.

There is no mystery about how and why Roosevelt got re-elected even as his policies kept the nation in the grips of a depression: he bought the elections through a careful use of federal money and patronage.

This is detailed extensively in Burton Folsom's book, "New Deal or Raw Deal".

As usual, Higgs is correct. As we enter the era of perpetual revolution, some of the majority will get smart, but too late. We've lived so long without conscription, we don't understand it. But it's not the good life nor prosperity, no matter what the GDP and unemployment stats indicate. It's more Rousseau's "forced to be free" dug in at Guadalcanal trying to save themselves and their buddies from an imminent horrible death.

His thesis about uncertainty in the quintessence is applicable today. Today's market, I suspect, has lost a generation of "buy and holders", because terms like contract and property rights are in great flux, ephemeral meanings. (A T-Bill at practical negative interest rate.) Viva Wodehouse. Pass the coffee, please.

As to FDR's longevity, democracy produces arithmetical results, not wisdom.---Once upon a time, there was a polis known as Athens.

Oil Shock,

As for FDR running for a fourth term while in ill health, don't you suppose that he was more concerned with seeing the end of WWII after putting all his energies into winning the war and dividing up the spoils? He might have been in bad health, but that, like his crippling polio never kept him down, though it might have kept a lesser man down. He was familiar with fighting and beating the odds.

I am not an FDR apologist. Far from it. But as for personal grit, I believe he had it.

On the other hand, muirgo, you should read "Country Squire in the White House" by John Flynn, written in 1940. Flynn was a liberal columnist and this book is very critical of FDR and his policies. Also, there were lots of people who hated FDR, but he was an eloquent speaker and made people feel like there was "hope" even if that hope was nonexistent. In other words, he duped the populace, and the populace suffered needlessly because they believed in FDR.

I have a book for you The Myth of the Rational Voter: Why Democracies Choose Bad Policies by Bryan Caplan.

Posted by: Babinich |

Already read it... unimpressed. Basically it's Bryan Caplan explaining why people don't vote like economist... especially ones that think like he does.

But Bryan forgets that as an economist he knows the price of everything and the value of nothing.

War is the insane solution to unemployment.

Democracy is the rule of those who control the propaganda.

muirgeo @ Dec 15, 2008 9:03:03 PM:

"I don't imagine the 30's or the WW2 period were the best of times but I suspect the people actually living the times and re-electing FDR and Truman to office says a lot more about FDR's success then an economic analyisis written 60 years later."

I have a book for you The Myth of the Rational Voter: Why Democracies Choose Bad Policies by Bryan Caplan.

I read Cafe Hayek in bed, after the wife is asleep. Must do it with the sound off, so audio and video content doesn't exist for me. Just FYI.

Hitler was adored by the Germans.

FDR, knowing very well that his health was disintegrating, still ran for office in 1944. He must have derived some sort of devilish pleasure from running the lives of other people. So much so, a 22nd amendment to the constitution was passed not much long after he passed.

The most successful con men are greatly beloved.

I don't imagine the 30's or the WW2 period were the best of times but I suspect the people actually living the times and re-electing FDR and Truman to office says a lot more about FDR's success then an economic analyisis written 60 years later.

Of course WWII ended the depression! There was no unemployment because we drafted all the bums! Labor was in such high demand that grandma had to work double shift at the tank factory! Our economy was going so well during the war we needed ration books to keep our abundance organized!