The New Deal and Investment Demand

Bryan Caplan starts off by saying James Hamilton and Arnold Kling are making sense when they say that not all of the New Deal policies were necessarily desirable for restoring full employment. As Arnold noted:

A reasonable view is that some New Deal policies helped, and some hurt. In fact, the book Reflections on the Great Depression, which interviews many famous economists, finds James Tobin criticizing some New Deal policies (the cartelization policies that Hamilton decries) and Milton Friedman praising some of them (going off the gold standard, which Hamilton praises).

The Mark Thoma reformulation of what Brad DeLong said is about right:

Most economists would not argue that, on net, the New Deal prolonged the Great Depression.

I’d just like to add two things to this debate. The minor point is to remind folks about what George Will wrote that set Brad and Daniel Gross off:

A federal minimum wage is an idea whose time came in 1938, when public confidence in markets was at a nadir and the federal government’s confidence in itself was at an apogee. This, in spite of the fact that with 19 percent unemployment and the economy contracting by 6.2 percent in 1938, the New Deal’s frenetic attempts had failed to end, and perhaps had prolonged, the Depression. Today, raising the federal minimum wage is a bad idea whose time has come, for two reasons, the first of which is that some Democrats have an evidently incurable disease – New Deal Nostalgia.

Yes, rightwingers are attacking the minimum wage as if it would eliminate all those 7 million jobs that were created only because of the 2003 tax cuts (cough, cough). But also note that Will notes the second recession of the 1930’s. More on that in a second. First, back to Bryan Caplan who just set me off:

On the negatives of the New Deal, though, it’s also worth pointing out how scary Roosevelt’s policies and populist rhetoric were to business. If I were a potential investor in 1933, I’d be thinking about how to protect my assets, not looking for good projects to invest in. I don’t think that Brad DeLong would deny that Mugabe had made people afraid to invest in Zimbabwe. Why should he doubt that – on a smaller scale, of course – Roosevelt made people afraid to invest in the U.S.?

Might we remind Bryan that investment demand (in 2000$) rose from $11.5 billion in 1932 to $91.1 billion in 1937? Now you might wish to remind me of the 1937-38 recession mentioned above and how investment demand fell. Which is why I’m inviting Tyler Cowen to the microphone:

I had thought that bad monetary policy in 1937-8 (arguably not “the New Deal”, though we tread close to semantics) was at fault more than fiscal policy

Update: Brad DeLong offers much more including an edit to a comment over at Brad’s place, which appropriately notes:

Bryan does more than offer no facts: Bryan says that Robert Mugabe is Franklin Roosevelt writ large.

As part of an update to his follow-up post, Brad adds:

And I think that I am safe in classifying somebody who sees Robert Mugabe as Franklin Roosevelt writ large as not entirely normal.

Well said! Caplan was wrong on the facts and doing his best to look like Sean Hannity. Not one of his finer posts.