How Keynesian Policy Led Economic Growth In the New Deal Era: Three Simple Graphs
by Mike Kimel
In this post, I will show that during the New Deal era, changes in the real economic growth rate can be explained almost entirely by the earlier changes in federal government’s non-defense spending. There are going to be a lot of words at first – but if you’re the impatient type, feel free to jump ahead to the graphs. There are three of them.
The story I’m going to tell is a very Keynesian story. In broad strokes, when the Great Depression began in 1929, aggregate demand dropped a lot. People stopped buying things leading companies to reduce production and stop hiring, which in turn reduced how much people could buy and so on and so forth in a vicious cycle. Keynes’ approach, and one that FDR bought into, was that somebody had to step in and start buying stuff, and if nobody else would do it, the government would.
So an increase in this federal government spending would lead to an increase in economic growth. Even a relatively small boost in government spending, in theory, could have a big consequences through the multiplier effect – the government hires some construction companies to build a road, those companies in turn purchase material from third parties and hire people, and in the end, if the government spent X, that could lead to an effect on the economy exceeding X.
This increased spending by the Federal government typically came in the form of roads and dams, the CCC and the WPA and the Tennessee Valley Authority, in the Bureau of Economic Analysis’ National Income and Product Accounts (NIPA) tables it falls under the category of nondefense federal spending.
Now, in a time and place like the US in the early 1930s, it could take a while for such nondefense spending by the federal government to work its way through the economy. Commerce moved more slowly back in the day. It was more difficult to spend money at the time than it is now, particularly if you were employed on building a road or a dam out in the boondocks. You might be able to spend some of your earnings at a company store, but presumably the bulk of what you made wouldn’t get spent until you get somewhere close to civilization again.
So let’s make a simple assumption – let’s say that according to this Keynesian theory we’re looking at, growth in any given year a function of nondefense spending in that year and the year before. Let’s keep it very simple and say the effect of nondefense spending in the current year is exactly twice the effect of nondefense spending in the previous year. Thus, restated,
(1) change in economic growth, t =
f[(2/3)*change in nondefense spending t,
(1/3)*change in nondefense spending t-1]
For the change in economic growth, we can simply use Growth Rate of Real GDP at time t less Growth Rate of Real GDP at time t-1. The growth rate of real GDP is provided by the BEA in an easy to use spreadsheet here.
Now, it would seem to make sense that nondefense spending could simply be adjusted for inflation as well. But it isn’t that simple. Our little Keynesian story assumes a multiplier, but we’re not going to estimate that multiplier or this is going to get too complicated very quickly, particularly given the large swing from deflation to inflation that occurred in the period. What we can say is that from the point of view of companies that have gotten a federal contract, or the point of view of people hired to work on that contract who saved what they didn’t spend in their workboots, or storekeepers serving those people, they would have spent more of their discretionary income if they felt richer and would have spent less if they felt poorer.
And an extra 100 million in nondefense spending (i.e., contracts coming down the pike) will seem like more money if its a larger percentage of the most recently observed GDP than if its a smaller percentage of the most recently observed GDP. Put another way, context for nondefense spending in a period of rapid swings in deflation and inflation can be provided by comparing it to last year’s GDP.
So let’s rewrite equation (1) as follows:
(2) Growth in Real GDP t – Growth in Real GDP t-1
f[(2/3)*change in {nondefense spending t / GDP t-1},
(1/3)*change in {nondefense spending t-1 / GDP t-2}]
Put another way… this simple story assumes that changes in the Growth Rate in Real GDP (i.e., the degree to which the growth rate accelerated or decelerated) can be explained by the rate at which nondefense spending as a perceived share of the economy accelerated or decelerated. Thus, when the government increased nondefense spending (as a percent of how big the people viewed the economy) quickly, that translated a rapid increase in real GDP growth rates. Conversely, when the government slowed down or shrunk nondefense spending, real GDP growth rates slowed down or even went negative.
Note that GDP and nondefense spending figures are “midyear” figures. Note also that at the time, the fiscal year ran from July to June… so the amount of nondefense spending that showed up in any given calendar year would have been almost completely determined through the budget process a year earlier.
As an example… nondefense spending figures for 1935 were made up of nondefense spending through the first half of the year, which in turn were determined by the budget which had been drawn up in the first half of 1934. In other words, equation (2) explains changes in real GDP growth rates based on spending determined one and two years earlier. If there is any causality, it isn’t that growth rates in real GDP are moving the budget.
Since there stories are cheap, the question of relevance is this: how well does equation (2) fit the data? Well, I’ll start with a couple graphs. And then I’ll ramp things up a notch (below the fold).
Figure 1 below shows the right hand side of equation (2) on the left axis, and the left hand side of equation (2) on the right axis. (Sorry for reversing axes, but since the right hand side of the equation (2) leads it made sense to put it on the primary axis.)
Notice that the changes in nondefense spending growth and the changes in the rate of real GDP growth correlate very strongly, despite the fact that the former is essentially determined a year and two years in advance of the latter.
Here’s the same information with a scatterplot:
So far, it would seem that either the government’s changes to nondefense spending growth were a big determinant of real economic growth, or there’s one heck of a coincidence, particularly since I didn’t exactly “fit” the nondefense function.
But as I noted earlier in this post, after the first two graphs, I would step things up a notch. That means I’m going to show that the fit is even tighter than it looks based on the two graphs above. And I’m going to do so with a comment and a third graph.
Here’s the comment: 1933 figures do not provide information about how the New Deal programs worked. After all, the figures are midyear – so the real GDP growth would be growth from midyear 1932 to midyear 1933. But FDR didn’t become President until March of 1933.
So… here’s Figure 2 redrawn, to include only data from 1934 to 1938.
While I’m a firm believer in the importance of monetary policy, for a number of reasons I don’t believe it made much of a difference in the New Deal era. As Figure 3 shows, changes in nondefense spending – hiring people to build roads, dams, and the like, explain subsequent changes in real GDP growth rates exceptionally well from 1934 to 1938. This simple model explains more than 90% of the change in real GDP growth rates over that period.
Of course, after 1938, the relationship breaks down… but by then the economy was on the mend (despite the big downturn in 1938). More importantly (I believe – haven’t checked this yet!), defense spending began to become increasingly important. People who might have been employed building roads in 1935 might have found employment refurbishing ships going to the Great Britain in 1939.
—
As always, if you want my spreadsheet, drop me a line. I’m at my first name (mike) period my last name (kimel – note only one “m”) at gmail.com.
Stimulus = sugar
Investment = gravy
Sounds strange, but. . . . Sweet and sour pork, anyone?
Buggy Prof –
I’ve only skimmed your posts. You sent me off in search of data. Any time anyone cites Cato as a source my skepticim goes into overdrive.
From table 1.1 at http://www.gpoaccess.gov/usbudget/fy10/hist.html we get revenous/outlays and surpus or deficit for every year back to 1901.
Outlays for CT 1929 were $3127 million, for CY 1933 they were $4598 million, an increase of 47.04% in 4 years. I probably should have used 1930 instead of 29. But the numbers for those two years are ball park similar.
Reciepts over the same period decreased by 49.29%. Increased spending and reduced reciepts contributed about equally to deficits. Note there were surpluses in ’29 and 30.
Under FDR, from CY 1933 to CY 1936, outlays increased by 78.95% in three years. Meanwhile, as the economy recovered reciepts increased by 96.44%.
This is a very different story than what you get from the rabid right wing ideologs atCato or the Daylt Reckoning. Now wht would they present dollar data “in per capita income terms?”
Simple – to introduce a denominator effectto skew the numbers in a way that is favorable to their narrative. What happened to percapita income from 29 to 33, when unemplyment went over 20%? It fell like a rock. What happened to it when the economy stated to recover. It grew. You can see how this carefully chosen and not intuitively obvious denominator effects the results – and in a way that obscures reality. Which, of course, is what Cato is after.
In all seriousness – if you want to draw valid conclusions you need reliable data from a reputable source – like gpoaccess, not cooked numbers like you get from the lying hacks at Cato. Their whole story is bull shit.
Cheers!
JzB
Here are the numbers from gpoacess table 1.1 Link in my earlier post.
I put them there. Really, I did.
Yr Rcpts Outlays S or D
1926 3,795 2,930 865
1927 4,013 2,857 1,155
1928 3,900 2,961 939
1929 3,862 3,127 734
1930 4,058 3,320 738
1931 3,116 3,577 -462
1932 1,924 4,659 -2,735
1933 1,997 4,598 -2,602
1934 2,955 6,541 -3,586
1935 3,609 6,412 -2,803
1936 3,923 8,228 -4,304
1937 5,387 7,580 -2,193
1938 6,751 6,840 -89
1939 6,295 9,141 -2,846
1940 6,548 9,468 -2,920
1941 8,712 13,653 -4,941
1942 14,634 35,137 -20,503
poppies: “Counterfactuals are difficult to prove,”
Indeed, they are. But it is three years since the crisis now, and the private sector, even with the recovery of Big Finance and Big Business, has not produced jobs, has not repaired infrastructure, has not provided education, has not produced recovery for Main Street, despite sitting on mounds of cash and reserves. That’s long enough to wait. We bailed out Big Finance. What have they done for us?
Time for gov’t to act, and to act decisively.
Overwhelmingly, by contrast, the rise in those four years of the federal deficit resulted from a increase in government spending from 3.4% of GDP in FY 1930 (compared to FY 1929) to 8.0% in FY 1933.
And what happened to GDP from 29 to 33? Fell like a rock. Whant happenend from 33 to 36? Biggest piecetime growth EVER. This give a HUGE denominator effect, and skews the story far, far away from reality.
I harp repeatedly on denominator effects. People tend look at the numerator (deficit) and ignore the denominator.
It’s a really great way to dupe the unwary.
Be wary. Be very, very wary.
Cheers!
JzB
Mike regarding your thought about defense spending at the end of the 1930s, the answer is that our defense spending first shot up in 1940. FDR first submitted the request for a massive defense budget increase in 1939. As for arms exports, the Neutrality Acts severely restricted sales until the act of November 1939. Also, ships were refurbished for the Brits in the destroyers for bases deal, which wasn’t struck until late-1940.
@joel, I’m someone with an argument, care to engage it?
@Min, the experiences of the last few years certainly can’t be used as an example of private enterprise. Crony capitalism does not laissez faire make.
poppies,
Decisions made during the New Deal era electrified the South. A good part of the wealth and income generated in a large piece of the country today would not have happened without those decisions. The private sector could have made those decisions. It didn’t. Call that whatever you want, I call that creating wealth.
Michael Gordon,
Dan is the owner and administrator of the site. That said, the post previous to this one that he put up indicates that there are problems with the comment section right now. I know he’s working on the problem.
You might save the comment and try again later. However, if you feel there is a substantive error in what I’ve done, why not dress it up slightly and submit it to Dan as a guest post? Based on past experience, I can almost guarantee Dan would put it up. You can send it to me (my gmail address is at the bottom of the post) and I can forward it to him if you’d prefer to go that way. Up to you.
Michael gordon,
I would have tto go through your comments with a bit more care (I’m rushed at the moment) but with respect I think your comments missed my point a bit.
What follows is from NIPA table 1.1.5.
Total gov’t spending and investment dropped while Hoover was in office. Federal nondefense spending stayed constant. Now see the paragraph that begins “”And an extra…” for how that would lead the private sector to see that as further evidence that as a further discouraging factor in their choices to spend money.
PJR,
Defense was only part of the explanation. I noted the economy was on the mend.
In 1929, Private Consumption / GDP was 74% and change. It rose dramatically through 1932. What was missing was private investment.
By 1936, it was back down to 74% and change… but then there was the brief and severe recession as the gov’t cut back too much. In 1938, C / GGDP was back to normal. Private investment was coming back (wasn’t back yet) but growth was rapid and the balance has mostly been restored.
“@joel, I’m someone with an argument, care to engage it? “
Yours is essentially an argument from authority, not an argument from evidence. Thus, my comment effectively engages the central core of your argument.
JzB,
I wrote a post about this and sent it in to Dan and Ken. I imagine it will get posted today or tomorrow.
I guess I got a bit bitter toward the end of the post, so I’m curious how it will go over.
As noted upthread, I wrote a post and sent it in to Dan and Ken. I imagine it will go up today or tomorrow.
In the mid and late 30’s the US was selling raw materials to Japan for their little adventures in China. Got some of the scrap back on 7 Dec 41 in the form of Giant Lance torpedoes, and such skimming around Ford Island, and the Phillipines.
War on some one elses dime is stimulating, even if the Brits were sending IOU’s.
Not so stimulating if the US is borrowing from the safety net for Chinese (national) security.
poppies
no. you don’t have an argument. you have a religion. and there is no arguing with that.
jazz
i studied statistics. in fact they let me teach it to undergraduates. still, when i got a real job where my predecessor had relied on statistics to minimize his error, i threw out the damn statistics book and studied the errors themselves. made a real difference.
Ned
you forgot to mention those 40% who don’t pay any taxes. aside from General Electric that means those are the people who don’t quite make enough to eat and pay the rent.
using “statistics”… yours or even Mike’s… to design or justify tax policy is … ah… failing to study the errors.
at least Mike’s show us something interesting we can keep in mind; yours are just a way for the very very rich to complain “poor me. don’t tax me. look at how much more i pay than you.”
and it’s true. your boat cost way more than mine.
Mike Sax
i’m fine with that except for the “should.” we have no particular business, as a government, trying to raise as much money as possible for other purposes.” there are other ways to deal with poverty than either “taxing the rich to the max” or pushing “growth” at cancerous levels.
what Mike has shown, and the lesson i am willing to take, is that raising taxes from their present level doesn’t look like it will hurt any reasonable economic growth. i was already sure it wasn’t going to hurt the rich in any reasonable way.
but it makes a great deal of difference how the money is spent.
jazz
thanks, i don’t have the time or the expertise to refute all the misleading statistics that people come up with. but playing games with the denominator is certainly one of their favorite tricks.
Here’s Rodger M Mitchell telling the same story:-
http://rodgermmitchell.wordpress.com/2011/11/13/want-to-stimulate-the-economy-then-increase-federal-debt-here%e2%80%99s-the-evidence/
Personally I see money as embedding commands over resources. Prior to the invention of money commands to manipulate resources were either issued coercively or by agreement. When stored in money the commands can either remain stored (de-activated) or activated. There are two sources for creating those commands government and private banks. Borrowing money from private banks forces activation because of the interest repayments imposed. Government spending is usually active because of the desire to achieve particular social objectives. In the end what matters is the volume of commands (money) being issued in an economy and that the commands are being used to benefit all rather than a minority manipulating the money use to impose a tithe, or tax, on the majority (asset bubble inflation by private banks ) to create debt peonage.
” . . . the stimulus failed so Keynes has been proven wrong and besides it is tax cuts that fuel growth in GDP and the only way we can afford more tax cuts is to cut government spending. . . “
The stimulus, though too little and too late, did prevent a depression. Federal deficits are the government’s method for adding money to the economy. Without sufficient money growth we have recessions and depressions.
The government, being Monetarily Sovereign, can afford to cut taxes without spending cuts. Those who do not understand Monetary Sovereignty (http://rodgermmitchell.wordpress.com/2010/08/13/monetarily-sovereign-the-key-to-understanding-economics/) do not understand economics.
Rodger Malcolm Mitchell
The federal government, being Monetarily Sovereign, does not use tax revenues to support spending. If taxes fell to $0 or rose to $100 trillion, neither event would affect the federal government’s ability to spend by even $1.
Those who do not understand Monetary Sovereignty (http://rodgermmitchell.wordpress.com/2010/08/13/monetarily-sovereign-the-key-to-understanding-economics/) do not understand economics.
In a Monetarily Sovereign nation, taxpayers do not pay for federal spending.
Those who do not understand Monetary Sovereignty (http://rodgermmitchell.wordpress.com/2010/08/13/monetarily-sovereign-the-key-to-understanding-economics/) do not understand economics.
@joel, I suggest reading the part after “…but since…”
poppies: “Crony capitalism does not laissez faire make.”
No, but laissez faire makes crony capitalism. As we learned in the 19th century.
Mike, in all seriousness, I do respect your efforts here, but you’re not engaging the argument. You’re effectively saying you have authoritative knowledge regarding the subjective preferences of individual New Deal-era Southerners, and I’d like to know how you can justify such a stance. If the government dedicated all those funds to creating a massive, popular waterpark in the South, I don’t doubt that the park would significantly contribute to the wealth and income of the region today, but we surely could agree that wouldn’t be the best use of those funds.
Now, you can argue from there that TVA electric projects were indeed the best use, or even simply a relatively good use of the funds, but that would be elevating your own subjective valuation over the valuations of the people actually involved. It’s entirely possible that the flooded farmlands, some of the best in the region, could have yielded even more long-term wealth, especially since at the time that was how they were being used (they hadn’t been bid away from farmers by utilities). Further, most of the areas affected by the TVA had electricity already, but the New Deal projects simply took over those assets by force. We’ll never know how much wealth was destroyed.
coberly, despite kharris’ assertions to the contrary, you seem like a reasonable person, so please, show me where I’m off here. I assure you I’m open to refutation, and I even welcome it. I need a little more than “you’re dogmatic,” “you’re a cultist,” etc.
Thanks for the analysis Jazzbuma. It has inspired a post so I am doubly grateful!
http://diaryofarepublicanhater.blogspot.com/2011/11/danger-of-misleading-economic-arguments.html
@poppies, I did. Your point?
poppies,
The fact of the matter is that prior to the New Deal there was an era of falling taxes and deregulation, supposedly ideal for the private sector. The private sector didn’t decide to electrify the south then.
Heck, the TVA is still around now. If the private sector was willing to build Browns Ferry or Watts Barr in the last few years, maybe the TVA wouldn’t have to be around.
Based on your response, Mike, I think I now see clearly where we’re diverging. You seem to be thinking of choices as rigorously measurable in an objective cardinal sense, and thus amenable to interpersonal analysis. I think of choices as only rankable in an individual ordinal sense, and not interpersonally comparable. Accordingly, to me, it’s as if you’re saying “prior to the New Deal there was an era of falling chocolate ice cream taxes, and the private sector didn’t buy chocolate ice cream then. They stuck with their vanilla ice cream preference. I like chocolate, therefore it was right to usurp their stores of vanilla and give them chocolate.”
How far would you take your analysis? Can real GDP growth justify basically any override of an individual’s preferences in your mind, even their preference for living? I can’t imagine you would think that, but I also don’t see where the logical stopping point would be.
Please know this is all in good faith, I really do want to understand your thinking here more clearly.
jazzbumpa said:
“Overwhelmingly, by contrast, the rise in those four years of the federal deficit resulted from a increase in government spending from 3.4% of GDP in FY 1930 (compared to FY 1929) to 8.0% in FY 1933.
And what happened to GDP from 29 to 33? Fell like a rock. Whant happenend from 33 to 36? Biggest piecetime growth EVER. This give a HUGE denominator effect, and skews the story far, far away from reality.
I harp repeatedly on denominator effects. People tend look at the numerator (deficit) and ignore the denominator.
It’s a really great way to dupe the unwary.
Be wary. Be very, very wary. “
“Cheers!
JzB”{
1) That’s precisely my point, JzB — Hoover’s fiscal stimuli (above and beyond the fall in tax revenues in the federal budget) was much higher in per capita income terms than FDR’s stimuli over 7 years, and yet GDP continued to fall. Why then did fiscal stimuli not work in the Hoover era,but did so — as Mike argues — in the FDR era.
2) You wonder about the denominator for Hoover’s and FDR’s fiscal stimuli. As my post showed, it’s “per capita income.” You can check this out, if you wants, at the Bureau of Economic Research’s national income data.
3) To repeat: the problem that Mike and others encounter who seek to pin down the fiscal expansion of the FDR era is that in four years of Hooverism, discretionary fiscal stimuli rose at an annual average rate of 22% (measured in per capita income terms), whereas in the FDR era they rose at half that rate over 7 years.
That FDR’s fiscal stimuli correlated, clearly, with a big rise in GDP, wheras Hoover’s much higher rate of such stimuli didn’t, creates a modeling problem.
4) And that problem almost certainly is in the simplicity of Mike’s otherwise stimulating model, which entails in my view important omitted variables like the big increase early on in 1933 of the US money supply (thanks to FDR taking the $US off the gold standard), banking changes, possibly better targeting of FDR’ stimuli, and eventually the huge inflow into the US economy of foreign currency and gold from 1936 on from Europe and elsewhere ,
5) So I don’t deny that FDR’s fiscal stimuli were more effective. The question is HOW and WHY they were more effective than Hoover’s far greater stimuli, measured (remember) in per capita income terms. There is a need for auxilliary variables, it seems, in any model of the fiscal stimuli to fill out the context of the FDR era down to 1937 here.
6) And yes, FDR had openly criticized Hoover’s fiscal programs during the 1932 presidential campaign. What’s more, he appointed noticeablely fiscal conservatives to his initial administration for budget oversight (Lewis Douglas, who resigned in 1934 to protest deficit spending) and as his Secretary of Treasury, Henry Morgenthau — who stayed on to 1945. And Douglas managed in early 1933 to cut back government spending in the first 100 days by $500 million (the policy was called the Economic Act of 1933. Other FDR advisers, especially Hopkins and Ickes, pushed the president to provide relief anyway. When the government ran out of money and had to borrow to finance the policies, Douglas resigned the next year.
Morgenthau, nonetheless, continued to push for conventional fiscal “responsibility.” And eventually, for instance, he prevailed on FDR in 1935-36 to omit farm workers and domestic servants from the new Social Security system — they wouldn’t, Morgenthau claimed, be able to pay for the […]
Mike,
I’m very late to this post, but let me add my two cents worth.
Your empirical approach is always a breath of fresh air and the case you make is compelling but you should also know there is a good deal of published research that reaches a very different conclusion. And since I’m a self professed New Deal Democrat I know you’ll know this is purely in the pursuit of the truth and not because I am opposed to fiscal stimulus under current conditions (persistently large output gap under ZIRP).
In particular let me call your attention to the following paper by Christina Romer (hardly an opponent of fiscal stimulus either).
http://elsa.berkeley.edu/~cromer/What%20Ended%20the%20Great%20Depression.pdf
From the abstract:
“This paper examines the role of aggregate-demands timulus in ending the Great
Depression. Plausible estimates of the effects of fiscal and monetary changes
indicate that nearly all the observed recovery of the U.S. economy prior to 1942
was due to monetary expansion. A huge gold inflow in the mid- and late 1930s
swelled the money stock and stimulated the economy by lowering real interest
rates and encouraging investment spending and purchases of durable goods. That
monetary developments were crucial to the recovery implies that self-correction
played little role in the growth of real output between 1933 and 1942.”
She estimates the monetary multiplier to be just above 0.8 (about expected) and the fiscal multiplier to be a little over 0.2 (tiny).
Temin and Eichengreen reached similar conclusions when they looked at several large economies during the Great Depression (pages 233-234):
“Thus the recent literature, by emphasizing the contribution of domestic and international monetary initiatives to economic recovery in the 1930s, has inverted the previous tendency to dismiss monetary policy as ineffectual and to regard fiscal policy as the critical policy variable. Upon reflection, this is not surprising. In the US, the most important fiscal change of the period, in 1932, was a tax increase, not a reduction. Observed budget deficits were small. Cyclically corrected budget deficits were smaller still. Even in the presence of large fiscal multipliers, the increase to aggregate demand remained modest until rearmament spending got under way in the second half of the 1930s. In contrast, in countries like the US (and to a lesser extent the UK), the expansion of currency and bank deposits was enourmous. The one significant interruption to monetary expansion in the US, in 1937, revealingly coincided with the one significant interruption to the economic recovery. Nor is there evidence for Britain of a liquidity trap that would have rendered monetary policy ineffectual. Even in Sweden, renowned for having developed Keynesian fiscal policy before Keynes, monetary policy did most of the work. Clearly, the tendency to dismiss monetary policy in the 1930s on the grounds that one ‘cannot push on a string’ has been pushed too far.”
http://delong.typepad.com/egregious_moderation/2009/03/eichengreen-origins-and-nature-of-the-great-slump.html
Here is a graph from the same paper but with some color added by DeLong to make the point easier to see:
http://delong.typepad.com/sdj/2009/03/the-earlier-you-abandon-the-gold-standard-and-start-your-new-deal-the-better.html
As Temin and Eichengreen note, a favorite of Keynesians is Sweden during the Great Depression. But this too has been largely debunked. From the […]
Michael Gordon,
To quote myself: What follows is from NIPA table 1.1.5.
Total gov’t spending and investment dropped while Hoover was in office. Federal nondefense spending stayed constant. Now see the paragraph that begins “”And an extra…” for how that would lead the private sector to see that as further evidence that as a further discouraging factor in their choices to spend money.
PS. I went to UCSB as an undergrad.
Mark A. Sadowski,
I can’t speak for what happened in other countries. What familiarity I have with data extends to the US.
Beyond that, I am not an economic historian and I don’t have complete familiarity with some of the papers you cite. That said, I like to think I have a finely tuned bs detector.
With that, let’s begin with Romer. (Having gone though a few of her papers – yes, I know its heresy to say it, but her name, along with Mankiw, Barro and Hubbard among the big name folks, sets off my BS detector even before proceeding further.)
In the intro, she starts off with the classic E Cary Brown statement about fiscal policy not having been tried in the 1930s. Now, as I noted in the post, Keynes defined a fiscal response to a disaster like the Great Depression as: the government must step in and take the place of the disappearing private sector aggregate demand. The weakest spot was the labor market, adn its fairly evident that if the government did anything, it hired a lot of people. The WPA and the CCC had millions of people on payroll in some years. As I recall, the two programs together peaked at about 3.5 million workers. Perhaps not enough people, but when the totlal population of the country was about 125 million, saying fiscal policy wasn’t tried doesn’t make sense. And that’s her starting assumption – well, something boosted aggregate demand, and it wasn’t fiscal policy… which leaves monetary policy.
From there it goes downhill. She notes that there is no official data for the period prior to 1929 so she usses estimates. OK. But then she uses Lebergott’s data for employment? I’ve had a post on this – Lebergott considered a few million people employed building roads and dams and bridges to be unemployed.
continued…
Then Romer really gets going. Her measure of fiscal policy (page 762) is the federal surplus / GNP. This is a very crude way to get at fiscal policy: any federal government spending whatsoever can constitute an attempt at fiscal stimululs. I thought my measure was crude, but it was as narrow as the data allowed.
She goes on to explain how fiscal policy couldn’t predict the 1938 downturn. Here measure, probably not. My measure, well, see Figure 1 again. And remember… the decisions on spending predated the GDP by one and two years in Figure 1.
My point is, she starts off with a certain view of what constitutes fiscal policy, and that it cannot work. But a better defined view of what constitutes fiscal policy shows something different.
As to the graph posted by Delong about when countries abandoned the Gold Standard… Brad was using data from elsewhere. I could tell at first glance it wasn’t right for the US. I also think (as the first commenter in DeLong’s post notes) that Japan didn’t quit the gold standard until Dec of 1931, that is, after Great Britain, not before.
Finally, I note that the Eichengreen chart on page 222 of the doc you linked to looks an awful lot like my figure 1. But as I keep pointing out, fiscal policy at t in my figure 1 is based on spending decisions made in year t-1 and year t-2. If something leads, would you guess its fiscal policy determined in year t-1 and year t-2, or monetary policy determined in year t?
Great article! Very informational and insightful analysis. Government creating wealth sounds promising. I hope this theory can be applied to banking, too, particularly on savings rates.
Great article! Very informational and insightful analysis. Government creating wealth sounds promising. I hope this theory can be applied to banking, too, particularly on savings rate.