Sunday, February 1, 2009

The New Deal

In the Washington Post, Amity Shlaes writes about the failure of the New Deal to promote economic recovery. She points out that unemployment remained high and investment low for the entire decade. But this isn't really news. After all, the common wisdom is that the War ended the Depression. Bob Higgs, for one, disputes this common wisdom, nevertheless if people believe that the War ended the Depression they must know that the New Deal didn't.

So, Shlaes goes further. Because of New Deal policies "the Depression lasted a half a decade longer than it had to, from 1929 to 1940, rather than say 1929 to 1936." So we had to have depression but it shouldn't have been so great. She declares that "the monetary shock in the first years of the Depression was imense, but it was this duration that made the Depression Great." In other words, the economy would have recovered on its own if not for FDR. The recovery that did take place had nothing to do with Roosevelt. Shlaes even has a pretty good idea of when the economy would have been complete. If not for FDR’s policies, the three years of economic decline before he took office would have been wiped out three years after he took office.

In a recent paper in the AER Gauti Eggertsson points out that this sort of argument depends on the belief in a huge coincidence. In discussing recent analysis of the New Deal, he notes that “a surprisingly large part of the literature treats the recovery as inevitable and/or exogenous and coincidental with Roosevelt inauguration.” It is surprising because as he shows in a number of graphs the recovery of investment, production, and prices all coincided with the inauguration. Eggertsson argues instead that Roosevelt created a shift in expectations that caused economic recovery.

Its not hard to identify New Deal policies that do not appear conducive to growth. On the other hand, assuming that the recovery just happened to coincide with Roosevelt's innauguration seems like a questionable place to begin your analysis.

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