The Great Depression, Part IV

Q. "Do you feel the New Deal saved our society?"
A. "By and large? (Pause) Yes."

- Alf M. Landon, 1936 Republican candidate for President, to Studs Terkel, Hard Times

As we have already seen, the New Deal succeeded in reversing and dramatically improving all of the objective measures of the economy, and most of them had returned to pre-depression levels by 1937. Since the RW noise machine can't rebut those objective facts, their effort to discredit the New Deal relies on 3 arguments:

1. By 1939, unemployment had only fallen to about 10%

2. Business's uncertainty about changing New Deal enactments led them to invest less

3. The economy of the New Deal failed to measure up to theoretical mathematical economic perfection.

We will examine the RW meme via its three usual sources: "The Forgotten Man" of Amity Schlaes, "Regime Uncertainty" by libertarian think-tanker Robert Higgs; and an economics paper by UCLA Profs. Ohanian and Cole.

1. The polemic The Forgotten Man by Amity Schlaes (what was being regurgitated by George Will when he was schooled by Prof. Paul Krugman in the videoclip from Part 2 of this series) is the leading example of this effort. Ms. Schlaes is neither an economist nor a historian. She holds a a Bachelor's degree in English, first found employment as an Op-ed writer for the Wall Street Journal, and has generally fed at the RW noise machine trough ever since. In other words, her forte is rhetoric and her career is as a RW shill. Now, in terms of credibility, Ms. Schlaes' other sage analyses include the following about Hurricane Katrina:

Still, Iraq has not caused the US to botch Katrina -- either the preparation or response. On the contrary, the fact that the country and President Bush personally were already mobilised for disaster has saved lives.

and this gem from earlier this year:

Gramm said that the country was not in a true recession but a "mental recession." He also said, "We have sort of become a nation of whiners" and "You just hear this constant whining..." Gramm was right about the recession .... A recession is two consecutive quarters in which the economy shrinks, and last quarter it grew. But no matter. Voters feel they are in a recession, and so they are, at least according to Campaign Econ.

So perhaps we should just say that her analysis of the Great Depression is equally cogent and leave it at that. But as her "analysis" of the Great Depression is obviously the designated meme of the RW echo chamber, a detailed rebuttal is in order. Ms. Schlaes gave an summation of her argument in a speech at the American Enterprize Institute, which serves as a convenient foil to respond with, you know, the truth.

Ms. Schlaes judges the New Deal entirely on two factors, charging that:

[FDR] flunked by two other meters that we today know are critically important: the unemployment rate and the Dow Jones Industrial Average. In his first inaugural address, Roosevelt spoke of a primary goal: "to put people to work." Unemployment stood at 20% in 1937, five years into the New Deal. As for the Dow, it did not come back to its 1929 level until the 1950s. International factors and monetary errors cannot entirely account for these abysmal showings.....

Let's look first of all at Ms. Schlaes metrics. Why has she not chosen GDP? Or median household income? Or the foreclosure rate? Or the rate of bank failures? Or industrial output? All of those are good, valid measures of how well parts or all of the population/economy is doing. But our readers by now know why: because by those measures the New Deal was a stunning success.

On the contrary, the Dow Jones Industrial Average has never been considered "critically important" to determine how well the economy is doing (The S&P 500 is a leading indicator, but by no means the most important one), especially in an era like the 1920s and 1930s when only about 3% of the populace owned stock; the simple fact of the matter is, under Roosevelt, the S&P 500 did fantastically well! The inflation level rose 20% from March 1933 to 1937 and ended the decade up 11%. By contrast, in March 1933 when Roosevelt took office, the DJIA was near 60; it rose to 185 in 1937 (a gain of over 200%!) before ending the decade at 150 (a gain of merely 150%!). By 1937 in real terms the DJIA had recovered ~60% of its losses from 1929, and considering the obscene disparities in wealth during the 1920s Guilded Age that gave rise to such corporate values, a 60% rebound is certainly impressive. In fact, in real terms the DJIA was higher than at any point except for 1928 and 1929 stock bubble.

More importantly, Ms. Schlaes' odd use of the "DJIA compared with 1929" as a yardstick to measure the New Deal's effectiveness appears deliberately chosen to mislead. Here is a graph of something called Q (or Tobin's) ratio, which measures stock valuations as a percentage of GDP. This is a measure for how manic vs. pessimistic stock investors are. As you can easily see, in 1929 the DJIA was at its most "bubblicious" in 70 years!

Essentially, Ms. Schlaes claims FDR was a failure because he failed to produce another stock market bubble! To the contrary, the return of stock prices to their more sober norm of about 80% of GDP by the mid 1930s -- a level equivalent to the booming 1960s -- appears from this vantage-point to be a thorough success.

That leaves Ms. Schlaes with exactly one metric one which her entire thesis that the New Deal "failed" must rely: unemployment never recovered to its 1929 level until the cusp of World War 2. That the banking system was stabilized, that Wall Street was regulated to minimize fraud, that millions were put to work in public infrastructure programs, that the elderly were elevated from poverty by Social Security -- none of this matters. The New Deal was a failure, according to Ms. Schlaes, because only 2/3 to 3/4 of the Great 1929-32 Contraction's (depending on how you count) joblessness was remedied as of 1936-37. In other words, because the New Deal did not 100% succeed on each and every front, therefore it was a failure.

Ms. Schlaes has a number of other "doozies" in her book, for example:

* defending her cherry-picking of unemployment data, she refers to the official US Census as "obscurer data" (you know, the very same data relied on by St. Milton Friedman in his "Monetary History of the United States).

* She claims that "the New Deal hurt the economy, and that mattered more. At some points Roosevelt seemed to understand the need to counter deflation. But his method for doing so generated a whole new set of uncertainties....", actually upping the ante from an argument that FDR didn't simply retard recovery, he actually made things worse. As we have discussed at length (ad nauseum?) in this series, by every single measure, including employment, the economy improved dramatically under the New Deal.

* As for the alleged fallacy that "price cutting caused deflation", Ms. Schlaes book, alas, came out only a year before Oil price decreases from $147/barrel to $35/barrel caused the CPI to decline -3.4% over only 4 months!

* that "Herbert Hoover was... an interventionist in spite of himself [who] bullied companies into maintaining high wages and keeping employees on their payrolls when they could ill afford to do so". In addition to bordering on the vile -- if only corporations had cut wages even more, then surely the privations of the American people would have ended -- this charge is also patently false. Despite Hoover's exhortations, the fact is that by the middle of 1930, companies cut wages with wild abandon, contributing to the deflationary death-spiral. Further, as noted by the New York Times' review of her book:

There is very little support for this idea among professional economists. Consult Essays on the Great Depression by Ben S. Bernanke, for example, and you will learn that a majority of macroeconomists have concluded in recent years that prolonged adherence to the gold standard played a dominating role in determining the worldwide monetary contraction of the 1930s. ... In other words, something approaching a consensus exists among economists that poorly-designed institutions and short-sighted policies were at the heart of the Great Depression.... (About this considerable volume of work, Shlaes has very little to say.)

* that "After the 1980s and 1990s we know that markets can do much of the work that Roosevelt believed only government capital could do..... After all, the argument of markets has its own powerful morality. It is immoral to cause unemployment by pretending that a big government policy is morally necessary. When Andrew Mellon and Calvin Coolidge put through their tax cuts in the 1920s, they made the efficiency argument that supply-siders make today: lower rates could yield, they posited, higher revenues." Such supply-side nonsense has been endlessly debunked by nearly every reputable economist there is. Morever, suffice it to say, from the viewpoint of January 2009, a paeon to the deregulatory frenzy that has already ended the investment banking industry and required the commitment of over $1 Trillion of public funds to bail them out, the "argument that markets have their own morality" is ridiculous nonsense.

Ms. Schlaes argues, in support of her conclusion, that

"the intervention, the lack of faith in the marketplace. Government management of the late 1920s and 1930s hurt the economy... Fear froze the economy, but that uncertainty itself might be a cost was something the young experimenters simply did not consider."

because

the cost of uncertainty, as the economic historian Robert Higgs first pointed out[, is] that unknown unknowns are inherently destabilizing. Roosevelt, a man of impulses, changed policies routinely. He moved from supporting big business to attacking it to supporting it again, many times in his presidency.....

..... Policies like this caused the most unnecessary part of the Depression: the Depression within the Depression of the late 1930s.

2. This is the second prong of the argument; that business uncertainty prolonged the Great Depression.

This argument was advanced by Robert Higgs in the paper "Regime Uncertainty; Why the Great Depression Lasted so Long and Why Prosperity Resumed After the War." Let's begin this critique with this chart from the third part of the series.

This is a chart of gross private domestic investment in 2000 chained dollars. It shows that in 1929 total investment was $91.3 billion and in 1937 total investment was $91.1. In other words, according to the BEA total private domestic investment rebounded to 1929 levels in 1937 in chained 2000 dollars.

Here is a chart of GDP in 2000 chained dollars:

Also note that by 1937 GDP had rebounded to 1929 levels.

Also remember the graphs of GDP growth for each year from 1934 to 1937 from the third installment. Total private domestic investment was responsible for 25% of growth in 1934, 50% in 1935, 19% in 1936 and 50% in 1937. So, in chained dollars there was investment and in the growth of real (inflation adjusted) GDP there were two years where investment was responsible for half of all GDP growth. So someone was obviously investing.

Higgs presents this information in two graphs. Here is the first one.

The skinny line represents gross private domestic investment in 1987 dollars. According to this graph gross private domestic investment was higher in 1929 than 1937. With me so far? Good.

Also note the following:

According to Higgs, the columns are GDP, again in 1987 dollars.

Anyone notice something funny?

Look again at the skinny line. This chart is in 1987 constant dollars. It shows GDP rebounding to 1929 levels by 1937 but private investment not rebounding. The BEA's chained dollar chart directly contradicts Higgs' first chart.

Higgs next shows investment as a percent of GDP in the following chart:

According to him, the second chart has investment at 16% of GDP in 1929 and 13% in 1937 -- much more in line with the official BEA data and hardly the dearth of investment that he later claims existed in the Great Depression.

Why did Higgs provide this second chart? The first was in 1987 dollars; in other words it was inflation-adjusted. Higgs admits that the second chart "avoids the distortions potentially affecting data shown in exhibit 1". In other words -- by Higgs' own admission -- the first chart is misleading. If the second chart was more accurate -- if it avoided "distortions" (again his words) -- why include it at all? Wouldn't the second chart -- which by his admission is more accurate -- suffice?

So far we have the following:

1.) Higgs' included two charts, the first of which is (in his own words) "misleading"

2.) The BEA's data directly contradicts Higgs' assertion regarding inflation adjusted gross private domestic investment.

3.) Higgs provides a second chart which is much more in line with the information provided by the BEA.

Higgs than argues that "regime uncertainty" created a lack of investment. He argues that literally every major New Deal Program "substantially attenuated or threatened private property rights" (here is the list)

And then uses polling data that shows business was hostile to the New Deal. This is the cause of "regime uncertainty" which lead to the lack of investment.

Higg's list of New Deal programs that threatened private property rights is, well, delusional. What he's really saying is any law is bad. Period.

But more to the point, Higg's spends a great deal of energy avoiding the most logical conclusion. The country was in a deflationary spiral from 1929-1934. There was no reason for there to be any investment over these years -- as evidenced by the BEA's decreasing chained numbers above. Also remember that by 1934 the country had lost 25% of its total GDP. This is not an environment where business opens their wallet and builds mammoth new projects. Also remember the country grew at strong rates from 1934 - 1937 and gross private domestic investment was responsible for a lot of that growth. Total private domestic investment was responsible for 25% of growth in 1934 when the economy grew 10.8%, 50% in 1935 when the economy grew at 8.9%, 19% in 1936 when the economy grew 13% and 50% in 1937 when the economy grew 5.1%. Bottom line -- the economy was growing as fast as it could (given that it was getting out of the worst economic slump in its history) and gross private domestic investment was responsible for a lot of that growth. Higgs is saying "it could have grown faster" -- but can't prove that with any facts save those lovely Chicago school models which we discuss below.

While consumer demand started to return for the years 1934-1937 unemployment was still above 10% in 1937. In addition, GDP has just at 1929 levels by 1937, so arguing investment should have been higher (especially with 10% unemployment) is a stretch -- at best.

3. Ultimately, Amity Schlaes charges that, had the evil New Dealers not intervened,

" the economy would have quickly equilibrated by itself, with wages and share prices quickly 'marked to market.'

Why didn't it? Because

The most useful economic philosophy for understanding what went on is not Keynesianism. It is the public choice theory of James Buchanan and others, which says that government is a competitor that will annihilate what comes in its path.

Here Ms. Schlaes finally gets to the third prong of New Deal denialism: she is a true free market fundamentalist. As before, alas, her book hit the shelves only a year before the 1980s, 1990s, and 2000s worshiping of free markets without regulaton came home to roost in the biggest Wall Street financial collapse ever, that has economists worried that the next Depression might be just around the corner. And the reference to "public choice theory" is telling. This is the theory by which, in its hard version preferred by RW ideologues, the Let's-Pretend-as-if Fairyland of Econ 101's "perfect competition" is enshrined in "Pareto optimality" meaning that if 1 million starving people can only be saved by causing heartbreak to Paris Hilton due to her inability to get pedicures, then intervention to save the starving is "sub-optimal" and therefore should not be done.

Thus, when overmatched by a credentialed opponent, such as Prof. Krugman, she like all the other New Deal denialists, goes running back to the other academic sourcewater of the third argument, an economic paper by Profs. Ohanian and Cole of UCLA. These papers purport to demonstrate that New Deal policies actually prolonged the recovery from the Great Depression. So, to refute the RW noise, we need to examine Ohanian and Cole's paper.

To summarize, the authors note that wages and prices increased dramatically beginning with the "First New Deal" of 1933 which featured the National Industrial Recovery Act (NIRA) which encouraged collusion among manufacturers and collective bargaining by workers in those industries. When the Supreme Court struck down the NIRA, in the "Second New Deal" collective bargaining was enshrined by the National Labor Relations Act (NLRA) which explicitly permitted unions and collective bargaining, plus de facto encouragement of collusion in industries by declining to enforce the Antitrust acts. Not surprisingly, this led to inflation in prices and wages. Ohanian and Cole posit that workers and employers would seek to become part of this cartelized economy in which wages and prices were higher. Therefore there would be more employment and effort in these industries than would otherwise be the case.

Again, not surprisingly, when compared with an alternative universe in which these things didn't exist, wages and prices are higher than they would otherwise be. The authors posit that, had the New Deal not happened, lower wages and prices would have led to rapid rise in production and output, and faster growth. This faster growth would have returned the economy to its 1929 growth path in 1936, as opposed to a later parity in 1943 for which they claim the New Deal was responsible.

This argument sounds very powerful, until you recall the axiom that "Assumptions make an ass out of u and me." And in this case, that axiom is spot on. Let's look at the actual critical paragraphs of their paper. In the first place

These data [from the 1930s] contrast sharply with neoclassical theory, which predicts a strong recovery from the Great Depression with low real wages, not a weak recovery with high wages.

Ohanian and Cole tell us up front that the "data" (i.e., "reality") from the Great Depression conflicts with neoclassical economic "theory." Now, if a physicist, neurobilologist, or behavioral psychologist were confronted with such a conflict, there would be a focused effort to determine what might be wrong with the theory. Not so RW neoclassical economists. Ohanian and Cole never give a moment's thought to questioning the theory; instead, their entire endeavor is focused on what went wrong with the reality!

And on page 18 of their paper, they cut to the chase.

Our model abstracts from monetary and financial factors, which substantially simplifies our analysis. This abstraction seems reasonable since, as [we] note, the money supply grew substantially after 1933, and banking panics ended shortly after the introduction of deposit insurance. Both of these developments might be expect to foster a rapid recovery, rather than have impeded the recovery.

In other words, the authors are going to say that the New Deal was bad, by starting out with an assumption that the FDIC, a New Deal enactiment, "foster[ed] a rapid recovery"!

Our analysis also abstracts from explaining the downturn of 1929-33, but rather focuses on what happened after New Deal policies were adopted. By abstracting from the downturn of 1929-33, our analysis proceeds by assuming that either the negative shocks that caused the downturn no longer depressed the economy after 1933 -- as argued [previously] ... -- or that if the effects of these shocks did continue, that they did not significantly affect the impact of New Deal policies.

in more simple, layperson's terms, the two bedrock assumptions of their work are:

1. the New Deal is not compared with other historical panics and recoveries, such as those of 1837 and 1873, but rather with the Fairyland of Let's-pretend-as-if Econ 101 perfect competition!

2. In their alternate "reality", the Let's-pretend-as-if Fairy magically sprinkled pixiedust on the economy and it spontaneously started to recover in Spring 1933 with no effort whatsoever. No need to worry about banking panics, debt deflation, starvation and privation, the Let's-pretend-as-if-onomic Fairy gave everybody a clean slate on FDR's first day in office!

It is only under these two explicit assumptions, which at no point in the paper are relaxed, that their results are valid. Nowhere in their paper is there an attempt to compare the actual reality of the 1930s with a comparable period that did not feature government intervention (such as the 19th Century great Panics). At best they make a theoretical comparison to a 1920s which featured some monopolies, and surprise, surprise, even under that limitation they concede that their results are considerably more tepid.

Despite the fact that their entire reasoning rests on economic fairydust, their conclusion pretends as if it is comparing two realities:

Our results suggest that New Deal policies ... reduced consumption and investment about 14 percent relative to their competitive balanced growth path levels. Thus, the model accounts for about half of the continuation of the Great Depression between 1934 and 1939.

New Deal labor and industrial policies did not lift the economy out of the Depression as President Roosevelt and his economic planeers had hoped. Instead, the joint policies of increasing labor's bargaining power, and linking collusion with paying high wages, impeded the recovery by creating an ifefficient insider-outsider friction that raised wages significantly and restricted employment. The recovery would have been stronger if wages in key sectors had been lower.

In fact, all they have proven -- theoretically, not experimentally nor even by real historical comparisons -- is that the New Deal slowed down recovery compared with an imaginary world where there was Econ 101 perfect competition and magical economic pixiedust ended the contraction in spring 1933. Take away the two preposterous assumptions, and Ohanian and Cole have proven nothing except the ability of neoclassical economists to indulge in thoeretical autoeroticism.
(hat tip to Mr. Francesco for the images of the fairygodfriedman)

In short, as Bruce Wilder has said, they "compare and contrast an entirely imaginary, right-wing fantasy economy with the actual economy, and then blame the actual economy for falling short of the imaginary economy," without even bothering to "test the realism of their imaginary economy." To which we can add, under the substantially "lower real wage" rate desired by Ohanian and Cole -- a rate apparently close to 1932-33 wage rates -- there would certainly have been a great deal more privation and death. But no concern to the economist authors. After all, it would have been much more efficient privation and death.

In Conclusion, our series of essays on the Great Depression and the New Deal has shown that:

1. The Republican reaction to the Great Contracition of 1929-32, the first-ever globalized contraction of industrialized economies, was to insist on balanced budgets and to resist virtually all efforts to directly relieve the privation of tens of millions of Americans who suffered even unto starvation.

2. As soon as FDR and the New Deal democrats took office, they immediately passed measures to Relieve the suffering of ordinary people, to promote economic Recovery, and to Reform the system to try to prevent similar meltdowns in the future.

3. The effort was tremendously but not perfectly successful. Faith in the banking system was almost immediately restored, as was confidence in the future. The economy grew in more rapid and sustained fashion through 1937 than in virtually any other period. Millions were relieved of unemployment, and we still are beneficiaries of their legacy of laws and sweat and toil. The most significant shortfall, the Recession of 1938, was in part brought on by Roosevelt's effort to become more conservative, even balancing the budget!

4. The New Deal doubters cannot dispute the numbers and the overwhelming accomplishments, so they focus on the few incomplete successes (persistent unemployment) and compare the New Deal to "let's pretend as if" fairyland economies that never existed.

Financial Times Opinion Piece of Ms. Schales

Comments

[wiseapple]

Thanks for the great series of articles! They've been very interesting and informative and have given me a better understanding of that time of crisis. The charts will provide ammo to rebut those who have bought into this recent right-wing attack on the effectiveness of the New Deal.

[veracity]

Thanks for that, Hale. I've bookmarked for "later study."
I think Thom Hartmann puts it perfectly - and I've been screeching since 1995 that we were heading here, to the Bush-2 Recession, because the MOMENT the New York Times and WashPost jumped on the Republican "get Clinton at all costs, whatever lies and faux-scandals we can throw at them" "WHITEWATER" bandwagon, I knew that the Post, Times, GOP, and their subservient corporate Democrats were GOING TO RE-CREATE the conditions of the BUSH-1 S&L DEBACLE, BUSh-1 DEFICITS, and Bush-1 RECESSION.­... BEFORE Clinton & co. had even pulled us out of the first (Bush-1) debacle!
Anyways, Hartmann says "This is a CLASSIC TAX-CUTS for WEALTHY > Short Term BOOM > Credit BUBBLE > credit BUST > Recession" cycle.

Only this time around is far worse than the Bush-1 Deficits & Bush-1 Recession, because instead of "WINNING the Cold War" and WINNING and EXITING Iraq, we know have EXPANDING quagmire wars in Afghanistan, Pakistan, Iraq, and now Gaza,

and if the above weren't enough, Bush is blatantly CROWNING the PREVIOUS 8 YEARS of GRAFT, KICKBACKS, and SLUSH-FUND CORRUPTIONS, with BILLIONS upon BILLIONS upon BILLIONS of CASH HANDOUTS, with not even a PRETENSE of no-bid contracts this time!

Here's Bloomberg finally shedding a SLIVER of light on the $10 BILLION in taxpayer BAILOUTS Treasury Sec. Paulson just handed to his "former" company, Goldman-Sachs:
http://www.bloomberg.com/apps/news?pid=20601087&sid=aAvhtiFdLyaQ&refer=home

[realpolitic]

The fact is is that conservatives like privation and hardship as long as it is seen by the masses. They continually argue for low wages and ways to decrease the bargaining power of labor, as if low wages were the key to an economic panacea. In fact, under George W. Bush real wages declined for the first time in an economic expansion. The loosening of long-standing regulations caused the economy to implode.

I think Bonddad has shown how the New Deal worked to really lessen the suffering of almost the entire nation. Social security, unemployment insurance, and the hiring done by the government gave the people less anxiety about falling victim to such a predatory capitalistic system. Other measures like the elimination of the gold standard was critical for allowing government to respond to crisis by increasing or decreasing the monetary supply.

Tellingly, depositary insurance, which eliminated runs on banks, was just increased in our recent financial panic. Investment banks today are seeking the protections offered them as depositary banks under the Glass-Seagal Act of 1935. "Goldman Sachs and Morgan Stanley, the last big independent investment banks on Wall Street, will transform themselves into bank holding companies subject to far greater regulation. It was a blunt acknowledgment that their model of finance and investing had become too risky.....­"

I guess when Fox News says historians "pretty much agree" that New Deal policies prolonged the Great depression, they are speaking of Schlaes, Figgs, and Profs. Ohanian and Cole .

[Desmo]

"The most useful economic philosophy for understanding what went on is not Keynesianism. It is the public choice theory of James Buchanan and others, which says that government is a competitor that will annihilate what comes in its path."

Are you also trying to discredit James Buchanan as a right wing fanatic who is simply pedaling propaganda? Buchanan is probably the brightest economist of our era, and his work on public choice is spot on. As I see you also failed to mention that he is a Nobel laureate.

[Chavez08]

You're right. And Friedman was a Nobel winner.

Keynes worked well for 60 years and was removed under the umbrella of Leo Strauss (Conservatives embraced his views on deception and empire) out of the radar of public debate.

That begs the question: If "Free Market"/Ne­oliberalis­m is so great, why did the ruling Republican politicians sneak it in under the radar as opposed to publicly announcing the change in the economic system like Obama is doing right now?

Repeating the rhetoric that "Free Markets" work and Bottom-up/­Keynesiani­sm doesn't (again, per Strauss and his desciples in the Right Wing media) doesn't cloak the all the damage to the country that can be seen in every subdivision, downtown, industrial park in the U.S. and the news dominating the media every waking moment. By defending Friedman, Rand, Mises, - you "Free Marketers" are still digging through Capone's vault and you're looking like Geraldo now.

You are not debating, you are through and through lying. Either you are a robber-baron benefiting from this failed economic system or you are brainwashed in need of serious help.

[mattjs85]

Yeah, those free-market Republicans. It all started in '81 when Ronnie signed the law abolishing the Federal Reserve, all down hill from there.

What politicians say and what they actually do are two different things, like Harry Browne said "Republicans campaign like Libertarians and govern like Democrats.­"

George W. Bush would've made a heck of a Democrat.

Aren't neocons just liberals who don't like donkeys?

[mattjs85]

He only chooses the nobel prize winners that he likes. If you look at the comments in section II, he states he agrees with Paul Krugman BECAUSE he won a nobel prize.

I trace this article's anti-neoclassical bias to his co-author, "New Deal Democrat" who stated in a previous writing that:

"Neoclassical economics can be summarized as the school of thought that assumes that individuals are armed with perfect knowledge and engage in perfectly rational behavior to maximize 'utility'"

Stiglitz and Spence won the prize in '01 for their work on asymmetrical information, which is based upon the fact that people DON'T have perfect information. In fact, no "free market" economist I read has ever stated that people are armed with perfect knowledge, which explains why there are profits & losses, not just profits.

They set up a straw man.

[realpolitic]

This article is much more of a critique of the latest conservative historical revisionism that the New Deal either failed or prolonged the Great Depression than a critiques of neoclassical theory. It is you who are setting up a straw man.

[SisterAnn]

I am not an economist but I would like to comment on the theory "Government is a competitor that will annihilate what comes in its path."

Nothing is totally good or totally bad and no theory is totally wrong or totally right.

It is the people who are in control of the situation that makes any decent theory good or bad.

When the free market pays low wages and charges high prices for necessities like gasoline, health insurance, housing, utilities and health care, plus hires workers overseas and don't pay enough taxes, that is exploitation.

There is no reason why many people have to live a grim life, because others are expoiting them.

There is no reason that the markets weren't regulated enough to keep the housing bubble from happening and no reason for the derivative dishonesty to have happened. That is bad governance. If the government had competed with them at least we would have some money out of the Bush years, but we are saddled with debts from their deregulation and malfeasance. There is no way the brightest financial minds in the world didn't know what the derivitives would do at the end. They didn't care because they were making too much money and funneling it into overseas accounts.

[mattjs85]

"When the free market pays low wages and charges high prices for necessities like gasoline, health insurance, housing, utilities and health care, plus hires workers overseas and don't pay enough taxes, that is exploitati­on."

Are you sure that it is the free market that causes those high prices, rather than government intervention?

[realpolitic]

Actually, governments that have an industrial policies that help businesses actually do very well. For example, "Japan is sometimes regarded as a model: an example of a country that has derived great benefits from increasing integration with the international economy, without surrendering national autonomy in the economic or cultural spheres, by pursuing industrial policy – defined as the implementation of sectorally nonneutral policies to promote specific industries, products, or activities – and thereby providing a concrete alternative to the “Washington Consensus.­”

http://www.unescochair.ns.ac.yu/sr/docs/noland2007Japan.pdf

[Rule Of Law]

Hale, this one pulled out all the stops. Congrats!

As hindsight goes, it provides the rationale we need to hope that Obama is as much a student of economic history as you are.

My only request is that you take it one step further. In your focused forensic examination of the results of the Great Depression and the fixes FDR installed, I think you glossed over the causes of the Depression and how, next time, they might be avoided.

You brought up deregulation and overleveraging, and how those same things apply to our current crisis. And you talked about the FED's role as well. But from my personal non-economist perspective what I take away from that is, "Well, something happened, were not quite sure what, but isn't it great that FDR was able to fix it!" And you use your data and graphs admirably to build an airtight case for his policies as having been correct, but those same graphs do not lead us back to the people who were at the center of the corruption and manipulation that brought on that worst of all times.

Then, as today, the crisis was anything but accidental or the result of simple unbridled greed, incompetence, or the accretion of numerous minor acts of larceny the combination of which spun the markets out of control. It was deliberate, well conceived and carefully implemented--then and now. Go the next step and tell us how those forces conspired to rip off America.

[rlert]

I am not sure it was planned so much as we forget the real lesson of all financial crises; that banking is an inherently risky and cyclical business which seems more profitable in good times the more levered the banking entity is (incentivizing high leverage) and then when markets hit inflection points the leverage unravels institutions quickly. Hence, the reason banks are regulated; and note that most commercial banks are relative winners in the current crisis because they couldn't lever up the way the investment banks and other participants did. The primary policy error is continuing to let clever people think of ways to dis-intermediate banks when times are good and allowing the resulting catastrophe when times aren't so good. We have many shadow banks in this economy and we need to get rid of them and keep banking activity, which is itself valuable, properly regulated in return for the government to be available as the lender of last resort. I don't understand why we keep forgetting this but it is very costly when we do.

[ApolloSpeaks]

Obama, so it appears, is a poor student of economic history. In yesterday's speech, contradicting Ronald Reagan's well founded view that "government is the problem" Obama said that government was the answer to the current economic crisis. Then forgetting about the government caused stagflation malaise of the Carter years Obama said "manufacturing was at a 28 year low,"-also forgetting that it was Reagonomics (massive supply-side tax cuts, not government intervention and spending), that revived the economy and manufacturing sector.

[realpolitic]

The manufacturing sector has been revived, you say. All the manudfacturing areas of the country are rusting away, especially automobile makers. Government is not the problem. George W. Bush shared this philosophy and his administration failed. All Reaganics did was create deficits as far as the eye could see and significantly increase the income gap in society. Even H.W. Bush called it voodoo economics.

[kstuff]

Alas, we realize, the "free market" isn't really free.

[metfan5567]

It never was, and if the same fairydust imaginings were actual current policy, we would be facing an even worse depression that happened in the 20s and 30s.

[kstuff]

Meanwhile, the ship is sinking.

[JohnJay60]

The proof of free market success is easy to find. Try Somalia - no taxes, no gun control (a bonus), a strongly religious population (a bonus). It sounds like a Republican nirvana. Compare that with stupid government­-regulated western europe, US, and Canada. What smart-thinking conservative wouldn't take Somalia as a free market winner?

[erinaceus]

Good point, nicely stated, concise and perfectly on target. Thank you.

[joebaggadonuts]

Libertarianism is the fig leaf for social irresponsibility, and ultimately, for criminal and gang rule.

[Chavez08]

Libertarians are funny in that they no less than nothing about history (or completely ignore it) and even less about human nature and they live their life by fairy tales written by Mises or his desciples.

[davedave]

these people would roll their eyes at the potato famine w children dying w green teeth from trying to live on grass.

conservatism is selfishism. there are finite resources and i'll keep the ones i can defend. oh and by the way, no condoms.

these corrections just happen now and again....

d

[marijam]

RE: that "Herbert Hoover was... an interventionist in spite of himself [who] bullied companies into maintaining high wages and keeping employees on their payrolls when they could ill afford to do so". In addition to bordering on the vile -- if only corporations had cut wages even more, then surely the privations of the American people would have ended

Well, of course, if 1 person is making $20 per hour, if wages were reduced to $1 per hour, then 20 people could be employed. Don't bother to ask how this would work out, we already know that.

[twofish]

You mean aside from the $1 workers' families starving. Plus the companies don't employ the other 19 people. They pocket the $19 and pat themselves on the back for how clever they are and how God favors them. Nowadays they probably also lay off 10% of the work force and make the remaining workers bust their b utts for that $1.

[schatsie]

that's what is called smart business by republican­s..

It is outsourcing when we send the work over seas and insourcing when we import the workers to keep the wages down....

[realpolitic]

Marijam, good point!

[cylindar]

Please keep up the excellent work you do. You are needed. And your efforts are appreciated. Thank you for your time and effort.

[mattjs85]

Like I stated in a previous comment, your whole argument has been based upon a logical fallacy. Your reasoning goes: The market crashed, Hoover did nothing, Roosevelt was elected, the new deal was enacted, the depression ended, therefore, Roosevelt ended the depression.

This is like me saying that I was out walking in the woods one day, came upon a barn fire, started blowing on it, eventually the fire went out, therefore, I put out the fire. Even if I was the big bad wolf, you may doubt my claim.

As I also stated in a previous comment, your series does not contain any theory whatsoever. It doesn't surprise me that you chide neoclassical economics for engaging in "theoretical autoeroticism" while you have demonstrated a chronic case of theoretical impotence. You also say the neoclassicals don't compare any historical panics and recoveries, where are your comparisons?

It is methodologically insufficient.

[DIdaho]

The whole point of the article, since either you didn't read it or can't comprehend it, is that one shouldn't equate theory with facts. If you don't know the theory behind the New Deal (from Keynes to Galbraith) that does not make the article methodologically insufficient.

That appears to be the order of the day with many of these posts. That if only the magic market were "allowed" to work everything would always be better. Yet the history, and the facts, show that every time the magic market is allowed to work, everybody's lunch ends up on very few plates, who, since they're not hungry, just throw it away.

[peterg76]

The free market theology depends on the idea that economic cycles will balance out, but that ignores the reality of market fluctuations. The fluctuations are scale invariant - without intervention, sooner or later a crash of arbitrary size and duration will happen. Plus the government's responsibility is the material well-being of the whole population, not some arbitrarily chosen metrics.

[mattjs85]

Without intervention a crash will happen? That is a very interesting hypothesis, perhaps you could explain more.

The government is responsible for the material well-being of the whole population? This is another wild claim, I thought the government's sole responsibility is to protect the property of the populace. I guess my political philosophy needs adjusting and I ought to warm up to big brother.

[LCDTV]

I seriously doubt that you read the whole series, all four parts. I thought this was a very well written series and his arguments are valid and actually all his premises are true, then we can say it is a sound argument. Bonddad has not stated any false premises. All his facts are true. You state his argument is a fallacy, which you are trying to say his premises for the conclusion do not provide the needed degree of support. At the very least you can say it is a "deductive fallacy", an argument that is invalid such that all his premises are true but his conclusion is false. He does not need any stinking theories. He made a claim that FDR and the New Deal was good for the country. He backed his claim with metrics, charts, and history. He actually made four claims. Very well done Bonddad!!!!

[mattjs85]

I was going to write a proper response but your cookie cutter "you didn't read it" mentality, doesn't warrant my time.

[JohnJay60]

The author is not making a causative argument - please pay attention. There is a correlation between the actions taken and the result of the actions. By your logic, the firefighter who sprays water on the barn fire is responsible for wasting water because it would have gone out .... eventually.

[DuganS1]

Bonddad apparently overlooks that fact that Hoover did quit a lot. Hoover was widely criticized by FDR for deficit spending during the 1932 campaign.

[mattjs85]

Yes he was, in fact, if you read the 1932 Democratic party platform, which FDR said he supported "100 percent" it stated:

We advocate an immediate and drastic reduction of governmental expenditures by abolishing useless commissions and offices, consolidating departments and bureaus, and eliminating extravagance to accomplish a saving of not less than twenty-five per cent in the cost of the Federal Government.
.

We favor maintenance of the national credit by a federal budget annually balanced on the basis of accurate executive estimates within revenues, raised by a system of taxation levied on the principle of ability to pay.
.

The removal of government from all fields of private enterprise except where necessary to develop public works and natural resources in the common interest.
.

He also forgot to mention that in Hoover's effort to balance the budget, he made another terrible move, he raised taxes. People often conflate the rhetoric of Hoover i.e. "rugged individualism" with the reality of what happened.

[WASanford]

Courage is 99% of genius. Hoover may have done a lot but none of it was effective enough to solve the problem. That's because he was trapped by his own ideology. Ideology is always a trap and it takes courage to step outside of it's bounds.

Roosevelt had the courage to think outside of the box created by his party's platform and thus solve the problem. That's the big difference between Roosevelt and Hoover. Roosevelt freed himself to try things and if they didn't have the desired result, try something else.

You can play tennis vigorously all day and night, but you'll never score a touchdown!.

[joebaggadonuts]

Hale, thanks for holding her accountable for the record of crap she has been slinging.

Here's some more on amity shlaes.
http://angrybear.blogspot.com/2008/12/amity-shlaes-sarah-palin-with-puffed-up.html

[Erdgeist]

Great article -- do more like it! It almost goes without saying, but the Great Depression was in two phases. The first was from 1929 to 1933 and then 1937 to 1938. With regard to the last figure, regrettably, FDR took the advice of conservative economists. Seeing his mistake he went back to throwing money, wisely, at the problem to the great benefit of the American people.

[DuganS1]

There were two phases of the Great Depression that saw the worst of it. But the Great Depression lasted the entire decade of the 1930s. Non-temporarily relief employment remained from 15-25% for the entire decade, which is disastrous.

[DIdaho]

There you go again, faking facts. "Non-temporary" employment? Why? Because it was government employment? Are teachers temporary? Police? the Military? Anybody who works for the Social Security Administration, the SEC, the Treasury? Unemployment dropped nearly to single digits - that is the fact. If you want to spin fantasies, let me suggest this - that without the New Deal unemployment would have gone past 50%, just before the country collapsed in civil war.

[realpolitic]

Dugan, you are still using averages and speaking of government employment as non-employment. Then you can say the food and clothes bought with the government paychecks was not real food and shelter, I suppose. You argument is ideological and countered by the facts. The few conservative theorists you base your arguments on have been discredited. Schlaes is an English major and using phony employment statistics and a phony measure of prosperity- the Dow. Figgs contradicts his own assertions about private employment and the two professors have made an entirely theoritical argument of what should or would have been. Why is your ideology so severe that can not admit to no other reality or evidence?

[BillZBubb]

Bonddad, great article! Too bad no Republican will be able to understand it.

[Chavez08]

They understand it. - They're just scared to death because their "Free Market" gig is up and the system is going to radically change in12 days.

Hopefully, - our "heavy-petting" with slavery is over.

[schatsie]

Yep, the FREE MARKET, and Trickle down was just a fairy tale... think about it, not only have we coughed up a chunk of change for the Wall STREET pampered and privileged in our hard earned and taxed dollars... AND then to put the frosting on the cake, the 401K mutual funds have totally crapped out....Dou­bly screwed...­can't afford to retire and dumping the deficit on our children..­.