10 Jan 2009

Sneak Peak for My Upcoming Book on the Great Depression

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If I were really creative I would do trailers showing me reading and typing, etc. Fortunately, I have no competence with video or graphic editing. So for those dying for the release of my forthcoming book on the Great Depression, you will have to be satisfied when I respond in the comments at Marginal Revolution like so:

Stan wrote:

The story I’ve heard about FDR and the Great Depression is a) he applied mild fiscal stimulus in the period 1933 – 1937 and reduced the unemployment rate from the mid 30’s to 14% (lower if you include public employment), b) he reverted to classical economics in 1937 and brought on a severe recession, and c) spent vast sums on the military during WW II and ended the Depression. If this isn’t true, would somebody explain why?
I’m not an economist, and I’m interested in the answer.

Stan, I knew FDR raised taxes in 1937 but I wasn’t sure if he also cut spending; according to this site, he did. So yes, on the surface Krugman would have a pretty strong card to play there.

I’m actually working on a book on the Depression right now, and I’m going to deal with this very point. But for here, some really quick responses:

(1) If you play with the dates on this site, you can see that total federal spending absolutely collapsed during the 1920-1921 (some say -1922) depression. Unemployment shot up to more than 11 percent in 1921. I don’t have the figures handy, but wholesale prices declined very sharply too, I think even more quickly than they fell from 1929-1930. So according to your hypothesis, this should have been an awful Depression, and yet we don’t even hear about it in school. Unemployment was down to 6.7% by 1922, and down to 2.4% by 1923. And really, you should look at how much federal spending fell during this period from 1919 levels; it is shocking.

(2) To explain why the “depression within a Depression” of 1937-38 was so bad, and why unemployment was still over 14% in 1940, Vedder and Gallaway cite the high wages of the period. In particular, in 1937 the Supreme Court ruled that the Wagner Act (NLRB) was constitutional, and union membership shot up by 40% in a single year (the biggest jump in US history). Money-wages rose sharply, thus unemployment shot up. And, I would argue, the fact that you were still smack-dab in the New Deal prevented recovery.

(3) As far as WWII getting the US out of the Depression, the best refutation of that is Bob Higgs’ work. He probably has some essays online, but I am using his collection of essays in the book _Depression, War, and Cold War._ Very briefly, his point is that the official statistics are meaningless in the war years. Sure, measured unemployment went way down, but duh, if you ship millions of able-bodied men overseas, that will happen. And sure, official GDP stats shot up, but when the government imposes price controls and rationing, and then has outlays exceeding 40% of GDP, that will happen too. But it’s not obvious that this is a true economic recovery.

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