Bob Cropf

Did the New Deal end the Great Depression?

In economics, public finance, stimulus on February 10, 2009 at 2:33 PM

Two posts ago, I mentioned that Milton Friedman declared that the Great Depression was the result of federal government mismanagement, a claim that Paul Krugman disputes. On the subject of whether government programs helped pull the country out of Depression, there has been considerable controversy. A book by Amity Shlaes called The Forgotten Man, provides a skeptical account of the Keynesian viewpoint that government spending lifted the economy out of the dumps. This blog, The Edge of the American West, makes a persuasive case, based on the data, that the New Deal improved the country’s economic condition considerably. The article also makes a very compelling case for reading carefully between the lines and paying close attention to footnotes, something every self-respecting scholar should know.

  1. I didn’t think that Krugman so much disagreed with Friedman’s assertion that the GD was a result of Federal government mismanagement as (1) he disagreed with Friedman’s assessment of HOW the Federal government mismanaged it prior to the New Deal and (2) pointed at the conflict between Friedman’s advocacy of laissez-fair economics with the claim that the central bank was not active enough in smoothing out the money supply among other things.

    I find it fascinating (and a bit frustrating) the disagreement whether the New Deal helped or not. I can see an argument to be made (not a whole lot of data to support it however) that the New Deal slowed the recovery. But if you were one of the millions who managed to keeping a home or farm or get a job because of the New Deal, I don’t think the idea that the GD would have ended a couple of years sooner would have been very persuasive – this is a case of the short term gains were much more important that the long term sacrifice (if there was one) in efficiency.

    That is where we are now: we’ve been sacrificing long term efficiency in terms of not investing in some social goods even Adam Smith would have signed off on for short term gains in consumer spending (low interest rates and taxes) – all well and good for the free marketers; however, we now need to sacrifice (some) long term efficiency (service payments on high debt –> higher taxes and interest rates) for the short term gain of increased productivity and (hopefully) equity – not good according the free marketers… I’d rather have a low unemployment (and have a job myself) than the ability to get 4.9 APR on a credit card, if you have a job that is, and have 10+% unemployment. But is that really the trade off?

    On a side note: I heard some of the things like executive pay caps, lending requirements, etc. on the second round of the bailout posed as “Revolution Insurance” that the bankers should jump at — Marxism is alive and well.

  2. You are right about both points with respect to Krugman’s assessment of Friedman. I was rushing through to make my points and lost some of the nuance on the first one. It was a combination of under-managing (Shlaes does make the correct point that Hoover engaged in more fiscal management than did his predecessors) and poor management.

    There is no doubt that the New Deal helped many in the short term. That is the point of the blog data and the assertion of many economists including Krugman, Galbraith and others. I also agree with your point that we have sacrificed long-term growth to short-term gains in consumer spending. This is the patent absurdity behind the GOP’s fixation on tax cuts. It has not been shown that the tax cuts have done anything more than fed short term consumer spending. Perhaps you have better data than me though.

    Marx might have been incorrect in his deterministic belief of the inevitability of socialist revolution but there are many capitalists who respect his ability to diagnose the ills of the capitalist system.

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