FDR revisionist myths

[IcarusAngel]

http://edgeofthewest.files.wordpress.com/2010/01/newdealfordissent.pdf

Kind of interesting how big government interference in the market is the only time we had a long period of stability, as predicted by many real economists. That is the real "law of economics" - democratic intervention prevents markets from destroying themselves.

[RGacky3]

Its funny you say that, because when they deregulated then everything went to hell, but somehow it was regulation that caused it, and countries that REALLY deregulated went deeper into hell because of the sliver of regulation that was left over.

Its interesting that the more you deregulate, the more damage the leftover little amount of reglation actually does, but when you regulate a ton, it actually does'nt do damage. Its almost like the cure to cancer IS MORE CANCER.

(just to be clear I'm being sarcastic, teasing hayenmill).

[inyourhouse]

Kind of interesting how big government interference in the market is the only time we had a long period of stability, as predicted by many real economists. That is the real "law of economics" - democratic intervention prevents markets from destroying themselves.

I have two major problems with that article. The most obvious and indefensible is that it has no citations or references. How am I supposed to interpret the Romer quote on the first page if I can't look at the original article in which it was written? Fortunately, I was able to find the original article[1], and it is evident that Romer is misinterpreted by the author.

The point of Romer's article is that monetary policy (rather than fiscal policy) was the cause of the sharp recovery. Page 767 shows Romer's estimates of output with actual fiscal policy (expansionary) and "normal" fiscal policy, and finds that "fiscal policy contributed almost nothing to the recovery from the Great Depression". From the accompanying figure[2], you can see that without expansionary fiscal policy, real GNP would have been slightly higher from 1937 to 1940, but slightly lower from 1941 to 1942.

Page 769 shows Romer's estimates of output with actual monetary policy (expansionary) and "normal" monetary policy. Her conclusion is that "the paths for actual GNP and GNP under normal monetary policy are tremendously different". The accompanying figure[3] shows this very clearly. From 1933-1934, real GNP would have been higher under normal monetary policy, but after that, it is clear that expansionary monetary policy provided a massive boost to output.

Given this, it seems very dishonest for the author to quote Romer in the way that he does. He could argue that he was merely citing her for the fact that the recovery was very strong, rather than what caused it, but any academic knows that this is bad practice. Reading what he had written, most people would have assumed that Romer had found that fiscal policy was responsible for the sharp recovery.

That's one of my problems with this article. The other is that there is no attempt at a formal econometric analysis, nor overviews of any. It seems that the author merely makes a point, then just uses a piece of data as an illustration. For example, he writes that those who criticize the New Deal think that growth would have been faster without it. He then quotes Romer saying that this was a remarkably fast recovery, and thus concludes that those against the New Deal are being unreasonable. What kind of analysis is that?

[1] papers.ssrn.com/sol3/papers.cfm?abstract_id=226730
[2] img17.imageshack.us/img17/7274/fiscalg.png
[3] img43.imageshack.us/img43/8517/monetary.png

[IcarusAngel]

Romer also attributes to the growth to aggregate demand which was stimulated by new deal policies. Nowhere in the article did I see her state that the New Deal itself caused a slow recovery. The author was obviously critiquing the Libertarian belief that the New Deal actually weakened the economy but as shown by Romer the economy was soaring.

Even if it was monetary policy that would not support your own Libertarian economics. For example, Romer attributes the growth rates of the 50s to wise decisions made by the Federal Reserve. Historians have to look at empirical evidence, and the fact is there is not a case in history where Libertarian economics have pulled economies out of recessions as fast as the growth rate was under the New Deal.

There is no evidence because such a case doesn't exist, but there is evidence that Libertarian economics has been disasterous in many parts of the world, including in the US.

[inyourhouse]

Romer also attributes to the growth to aggregate demand which was stimulated by new deal policies. Nowhere in the article did I see her state that the New Deal itself caused a slow recovery. The author was obviously critiquing the Libertarian belief that the New Deal actually weakened the economy but as shown by Romer the economy was soaring.

There is a point I'd like to make here: the New Deal and fiscal policy overlap, but they are not the same thing. Fiscal policy is government spending (a slightly simplistic definition, but it will suffice), while the New Deal includes legislative measures like bank regulation too. It's perfectly reasonable for somebody to believe that FDR's fiscal policy did little or nothing to output, but that other parts of the New Deal had an overall negative effect on output. Romer doesn't analyze the other parts of the New Deal, so it's not surprising that she doesn't state the overall effects of the New Deal on the recovery. That only makes it more improper for the author to quote her while attempting to justify the whole New Deal.

As for Romer's actual conclusions, she attributes a minor amount of growth during the early 1940s to fiscal policy, yes. Her overall conclusion, though, is that "fiscal policy contributed almost nothing to the recovery from the Great Depression". This is in direct contradiction to the author of the article, who sees the New Deal (particularly fiscal policy, based on his references to Keynes and the 1937 recession) as the reason for the strong recovery. I maintain that it was dishonest of the author to quote Romer as he did.

Also, your argument against the "Libertarian belief" that the New Deal made things worse is poor. As the author of the article in the first post even makes clear, it isn't that they believe that the New Deal actually decreased output. Rather, "[a]ny assessment of the New Deal as a failure at promoting recovery assumes that this improvement could and should have happened faster". In other words, the argument is that the New Deal hampered the recovery, not that it choked it off entirely. High growth rates alone don't disprove this theory; a full econometric analysis with all growth-contributing variables is necessary.


Even if it was monetary policy that would not support your own Libertarian economics. For example, Romer attributes the growth rates of the 50s to wise decisions made by the Federal Reserve.

What are you talking about? How does the efficacy of monetary policy during the Great Depression not support my "Libertarian economics" (I don't even know what this means)? I think it supports my economic views very well, and I think it can be illustrated with the equation of exchange: M*V = P*Y. A rise in M (the money supply) must cause a rise in P (the price level) and/or Y (real expenditure). As money is non-neutral, there must be some effect on Y. I don't see how Romer's conclusions don't support my views.


Historians have to look at empirical evidence, and the fact is there is not a case in history where Libertarian economics have pulled economies out of recessions as fast as the growth rate was under the New Deal.

What are "Libertarian economics"? I can't respond to this argument unless I know exactly what it is that you're referring too. Libertarians are a diverse group, and although I consider myself a libertarian (lower case "l"), I'm sure I'd find disagreements with others. Above you seem to suggest that the efficacy of monetary policy doesn't support "Libertarian economics", but as far as I know, all libertarians think that monetary policy affects output. Please elaborate.


There is no evidence because such a case doesn't exist, but there is evidence that Libertarian economics has been disasterous in many parts of the world, including in the US.

Perhaps what you mean by "Libertarian economics" would become more clear if you elaborate on its applications in other countries and time periods.

[Zanthorus]

What are "Libertarian economics"? I can't respond to this argument unless I know exactly what it is that you're referring too. Libertarians are a diverse group, and although I consider myself a libertarian (lower case "l"), I'm sure I'd find disagreements with others. Above you seem to suggest that the efficacy of monetary policy doesn't support "Libertarian economics", but as far as I know, all libertarians think that monetary policy affects output. Please elaborate.

Perhaps what you mean by "Libertarian economics" would become more clear if you elaborate on its applications in other countries and time periods.

I'm pretty sure he meant totally free-market economics (Like the austrian school).

[inyourhouse]

I'm pretty sure he meant totally free-market economics (Like the austrian school).

In that case, I don't know why he said the idea that an expansionary monetary policy increases output is not supported by "[my] Libertarian economics". For starters, all Austrians agree that an expansionary monetary policy increases output; indeed, it's the whole basis of the Austrian theory of the business cycle. Whether an Austrian would recommend such a policy is another matter. I believe that an expansionary monetary policy will only induce a business cycle if the increase in the money supply is greater than the decrease in velocity plus trend real growth[1]. I consider myself more of an Austrian-Chicago-neoclassical hybrid, though, so other Austrians may disagree.

I think this highlights the problem of talking about some vague set of theories grouped together as "Libertarian economics". A debate can only be meaningful if we talk about specific theories, so that we can analyze cause and effects, as well as isolate variables for an empirical analysis. I have the same objection to talking about the New Deal, in a general sense. Some New Deal policies had a positive effect on growth (e.g. freely floating exchange rates for the dollar, although sadly for only a year), while some had a negative effect (e.g. the monopolization of industry through the National Industrial Recovery Act). A verdict on the New Deal as a whole can only be made by looking at its constituent parts.

[1] In other words, I think optimal monetary policy is where %M = -%V + %Y(trend), so where V is constant (as it usually is outside of recession), %M = %Y(trend). Another way of looking at it is %NGDP = %RGDP.

[Skooma Addict]

Good points Inyourhouse. There is one thing I am curious about though.


I consider myself more of an Austrian-Chicago-neoclassical hybrid, though, so other Austrians may disagree.

I have seen self proclaimed Austro-Keynesians and Austro-neoclassicals, but I have never seen an Austro-Chicago-neoclassical. It kind of reminds me of the way that Frank Knight approached economics.