15 Nov 2008

The New Deal Made the Great Depression; and What’s the Trade Fallacy? Quick!

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This will be a post in two parts. First, let’s celebrate historian David Beito’s great column on LRC today, where he makes a basic point I’ve been pounding away at. Namely, even if you knew little about economics, if I told you that the worst economic downturn in US history occurred when the government applied the most “stimulus” in US history, what would you conclude? Then if I added that basic economic theory teaches that the “stimulus” efforts would be expected to increase unemployment and delay recovery, what would that do to your confidence in your original answer? And yet, our most recent Nobel laureate concludes from all this that the New Deal spared the US from what would have been an even bigger disaster. Here’s Beito’s take on this:

I don’t know for sure that that the old anti-depression policy would have made for a shorter downturn but, then, Krugman doesn’t know that the reverse is true. I point to the historical evidence from previous depressions that were fought by using the old anti-depression policy. These were mostly over in two or three years.

If Krugman believes that the decade-long Great Depression was exceptional in nature compared to previous depressions and could only be fought with a new Keynesian approach, he needs to give some evidence for that claim. As far as I can tell, however, he doesn’t try. Pending such an attempt, the main burden of proof is on him, not me.

It is not ridiculous at all [to compare the 1921-1922 depression with the Great one], that is if the goal is to understand why we had an unprecedented decade long depression. The comparison becomes especially instructive if we limit the analysis to the first year of both downturns. Between 1921 and 1922, there was a significantly faster drop in prices and GDP and a greater rise in unemployment than between 1929 and 1930. From 1921 to 1922, Unemployment advanced from 4 percent to twelve percent, the gross national product fell by a staggering 17 percent. All this was in one year. By contrast, unemployment was still well under 10 percent at the end of 1930.

I have not verified Beito’s claims, but the guy has a PhD in history and blogs at HNN; he doesn’t sound obviously crazy or shady. I had no idea that unemployment was so high or that output fell so much in the previous downturn. Beito’s right: this is a great case study in the effectiveness of two different approaches. (I am sure Rothbard went over all of this, and that I have just forgotten the numbers relating to the earlier depression.)


Anyway, I went to Beito’s original blog post and was reading the comments. I came across this:

Basically I am wondering if anyone in the world is actually an economist. Or is everyone a bunch of stupid idiots with big titles and completely no sense. I am not an economist but I do know a few things. 1. To improve an economy you have to be able to produce more with less input. 2. Any policies that help this will help everyone. 3. Any policies that hurt this will hurt everyone. So with that simple definition what do wars do that will increase economic output. Almost nothing…Trade agreements that move jobs from highly automated equipment to highly unskilled labor, ie more workers less equipment is bad for the economy. Why, because you are producing less with more people, dumb (*&^!! So all this stuff we buy from China and Indian and Mexico is a complete bunch of baloney that ruins the economy. So you get really three simple ways to fix the economy in about 2 months. 1. End the war and slash military spending. 2. End any trading with countries who do not have the same minimum wage laws we have. 3. Loan any money to business’s who are very likely to become highly automated, ie less people more output.

Now in the spirit of this guy’s comment, I will refrain from pointing out what I perceive to be its glaring flaw. (First, I could very well be an idiot with a big title, and second, I want to produce my blog posts with the least amount of labor as possible.) Can anyone quickly come up with it? If this guy said the above at a dinner party, would you be able to explain in 30 seconds to everyone’s satisfaction why he’s a buffoon?

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