Monday, December 1, 2008

What the Great Depression can teach us about fixing today's economy

George Mason University economist Tyler Cowen gives us lessons from the New Deal for today's economic problems:
MANY people are looking back to the Great Depression and the New Deal for answers to our problems. ... If I were preparing a “New Deal crib sheet,” I would start with the following lessons:

MONETARY POLICY IS KEY As Milton Friedman and Anna Jacobson Schwartz argued in a classic book, “A Monetary History of the United States,” the single biggest cause of the Great Depression was that the Federal Reserve let the money supply fall by one-third, causing deflation. Furthermore, banks were allowed to fail, causing a credit crisis. Roosevelt’s best policies were those designed to increase the money supply, get the banking system back on its feet and restore trust in financial institutions. ...

GET THE SMALL THINGS RIGHT ... Roosevelt instituted a disastrous legacy of agricultural subsidies and sought to cartelize industry, backed by force of law. Neither policy helped the economy recover.

He also took steps to strengthen unions and to keep real wages high. This helped workers who had jobs, but made it much harder for the unemployed to get back to work. One result was unemployment rates that remained high throughout the New Deal period. ...

DON’T RAISE TAXES IN A SLUMP The New Deal’s legacy of public works programs has given many people the impression that it was a time of expansionary fiscal policy, but that isn’t quite right. Government spending went up considerably, but taxes rose, too. Under President Herbert Hoover and continuing with Roosevelt, the federal government increased income taxes, excise taxes, inheritance taxes, corporate income taxes, holding company taxes and “excess profits” taxes.

When all of these tax increases are taken into account, New Deal fiscal policy didn’t do much to promote recovery. ...

WAR ISN’T THE WEAPON World War II did help the American economy, but the gains came in the early stages, when America was still just selling war-related goods to Europe and was not yet a combatant. ... The war years were generally not prosperous ones. As for today, we shouldn’t think that fighting a war is the way to restore economic health.

YOU CAN’T TURN BAD TO GOOD The good New Deal policies, like constructing a basic social safety net, made sense on their own terms and would have been desirable in the boom years of the 1920s as well. The bad policies made things worse. Today, that means we should restrict extraordinary measures to the financial sector as much as possible and resist the temptation to “do something” for its own sake.


  1. Don't you mean "cauterize" instead of carterize?

    Also, getting small things "right" is easy to see in hindsight.

    Finally, your statement that you can't turn bad into good is essentially what the market is saying to everyone right now. It will fix the economy, just like gravity fixes falling.

  2. I'm quoting an article by Tyler Cowen. But no, Prof. Cowen didn't mean either "cauterize" or "carterize". He said "cartelize", as in "to create a cartel".