Megan McArdle says (correctly) that no one knows, and anyone who tells you that they do is lying or fooling themselves, but that what you were taught in school is almost certainly wrong. She also notes (again correctly) that there was a lot more to the New Deal than simply government spending (which likely didn’t have much stimulative effect), some of it good, much of it disastrous (particularly the artificial propping up of wages and prices by fiat).
One can’t run controlled experiments in economics, so we can never know for sure, but I’m inclined to at least go with economic theories that make sense and for which there is useful empirical evidence. Someone has to tell me what Hayek and von Mises got wrong to persuade me that Keynes is right. And most people who think that Keynes is right haven’t even read them.
[Update a few minutes later]
“Mr. Obama, give back my wallet.”
[Update a while later]
OK, so I’m not as impressed with David Brooks as the intelligentsia want me to be, but he does have some good thoughts occasionally:
The correct position is the one held by self-loathing intellectuals, like Isaiah Berlin, Edmund Burke, James Madison, Michael Oakeshott and others. These were pointy heads who understood the limits of what pointy heads can know. The phrase for this outlook is epistemological modesty, which would make a fine vanity license plate.
The idea is that the world is too complex for us to know, and therefore policies should be designed that take account of our ignorance.
What the world needs now is not love sweet love, but epistemological modesty. Particularly inside the Beltway. Unfortunately, the perverse nature of humanity is that often the less one knows about something, the more certain one is in his knowledge. They have never learned from the ancient Greeks that to admit the limits of your knowledge is the beginning of wisdom.
[Via Manzi, who reads David Brooks so I don’t have to]
[Late morning update]
Are we going to emulate Japan’s lost decade? It seems to be what they want to do, unfortunately.
[Bumped]
[Update a couple minutes later]
Renters are angry. They should be. They’ll probably join the tea party, too.
And here’s a novel concept: let housing prices find their clearing price. Can’t do that — it makes too much sense.
I’d say that the two Koreas (or the two Germanys) represents a pretty good controlled experiment in economics.
It’s interesting how some of the commentators demonstrate the overconfidence discussed in these stories. For example, “RW” writes (in the “A tale of two theories” article):
My impression is that a lot of the disagreement over the causes of the Great Depression have to do with conflicting interests today. That is, if a particular diagnosis for the Great Depression’s ills carries the day, then it’ll have big real money implications today. For example, there are incentives to claim FDR financial policy saved the day in the 30’s, if you would happen to benefit greatly from a similar policy today.
As for my take on the Great Depression, I think the most harm (aside from the original stock market bubble) came from laws and policies that greatly reduced competitiveness in the economy. For example, the tariffs (and resulting trade wars) of the Smoot-Hawley act, the National Industrial Recovery Act which legalized the creation of a bunch of cartels, or the laws which greatly strengthened the labor unions.
On the other hand, the GI Bill, even though it was (as I understand it) implemented either near the end of the Second World War or later, should be considered as a significant factor in reducing the harm of the Great Depression.
As for what ended the Great Depression, it is worth noting that it would have ended eventually, if the government had done nothing and if US society didn’t fall apart. Even if deflation had been allowed to rage unchecked. There are various suicidal measures, like adopting Communism that would have extended the Great Depression indefinitely. So when one asks why the Great Depression ended, they’re really asking why it ended when it did. I think that one needs to look at more than stimulus to explain this.
One of the many mysteries here is why didn’t the Great Depression return after the end of the Second World War? After all, you have massive drops in military spending by all governments (and since they were all borrowing, a corresponding drop in economic stimulus). Many countries were completely devastated by the war. R Collectively there wasn’t much money to go around to stimulate all these weakened economies.
There wasn’t a lot of money post war, but there was a lot of work to do. It isn’t hard to boost GDP after it has gone rock bottom. I dunno why FDR gets such a bum rap here anyway. His governments were big proponents of automation of processes for e.g. IBM got a lot of money from the government to automate Social Security (which I’m sure you dread).
His governments were big proponents of automation of processes
They were also big proponents of controlling all aspects of the economy from Washington. That was the worst part of the New Deal.
> One of the many mysteries here is why didn’t the Great Depression return after the end of the Second World War? After all, you have massive drops in military spending by all governments (and since they were all borrowing, a corresponding drop in economic stimulus).
It’s no mystery at all. The thing that changed at the start of WWII, when the depression finally ended, was that FDR stopped his war on production. That war wasn’t restarted when WWII ended, so the great depression didn’t return.
In response to a crash, Hoover started massive stimulus and a mild war on production and the crash persisted. FDR continued and expanded those policies, and the crash continued. WWII came along and FDR stopped the war on production, continued the stimulus, and the depression ended. WWII ended and the stimulus stopped, but the war on production wasn’t restarted, and the depression didn’t restart.