Capital Spending in the Depression
Brad DeLong said that Krugman eviscerated George F. Will on the level of capital spending during the Great Depression.
Delong said:I have never been able to make any sense at all of the right-wing claim that the New Deal prolonged the Great Depression by creating a “crisis of confidence” that crippled private investment as American businessmen feared and hated “that Communist Roosevelt.” The crisis of confidence was created by the stock market crash, the deflation, and the bank failures of 1929-1933. Private investment recovered in a very healthy fashion as Roosevelt’s New Deal policies took effect.
I have posted on this before, but I would just remind everyone that business fixed investment is essentially a function of three things.
1. Corporate profits.
2. Capacity utilization or the GDP gap.
3. Cost of capital and the stock market is a good proxy for that.
This is just as true today as it was in the 1930s and major econometric model use these three variables regularly.
But if you apply this analysis to the 1930s these three variables do a great job of explaining both the plunge in capital spending in from 1929 to 1932 and the recovery under the New Deal including the 1938 reversal. As this charts shows these variables explain the depression and leave absolutely no room for the right wing thesis that FDR caused a crises of confidence that destroyed business spending in the 1930s.
I’m still waiting for the proponents of this thesis to improve on my model.
P.S. corrected chart tittle.