Brad DeLong's prescription is to follow the example set by FDR in the 1930s: How to Fix the Economy: "Try Everything". He favorably quotes the former president, who once proclaimed:
The country needs and ... demands bold, persistent experimentation,” he said in 1932. “Take a method and try it. If it fails, admit it frankly, and try another. But above all, try something."In some ways, this sounds admirable. But in other ways, it sounds...well, it sounds a bit crazy. Even DeLong acknowledges this when he writes:
To be sure, Roosevelt’s New Deal policies sometimes conflicted with one another, and quite a few of them were counterproductive. But, by trying everything, and then scaling up the most successful policies, Roosevelt was ultimately able to turn the economy around.Hmm. Ultimately turned the economy around? I guess so...even if it did take 8 years. One has to wonder how long it would have taken if FDR had done nothing at all? I also wonder which of the many (some declared unconstitutional) experiments ultimately turned the economy around. The bold experiment of declaring war in 1941?
One of the problems associated with macroeconomic experimentation, apart from the fact that most experiments fail, is the aura of uncertainty it engenders. The appearance of senior leaders resorting to bold and persistent experiments is unbecoming and even a little scary. What will they think of next?! Should I invest now, or should I wait?! It does not take a rocket scientist to appreciate the effect that policy uncertainty might have on prolonging an economic slump. I'm not sure how important this force is quantitatively (because it is hard to measure) but I don't think one can easily dismiss the role it can play in an economic crisis and recovery. Certainly, there is no shortage of narratives out there that blame FDR's "bold and persistent experiments" for transforming a recession into depression (many also blame President Hoover for the same reason).
Truth be told, I doubt that DeLong actually endorses "bold, persistent experimentation" in the sense of "anything goes." The set of "bold, persistent experiments" after all is very, very large. As he suggests, we already possess a set of tools--we (think) we know the nature of promising interventions--if only those squabbling politicians would employ them! In addition, he provides a short list of potential interventions (some of which, like QE, were actually implemented).
It seems that DeLong was motivated to write this piece mainly to criticize Martin Feldstein's needlessly inflammatory language in promoting an otherwise sensible policy proposal. I do agree with DeLong on that sentiment. But if this was the intended purpose of his article, then why invoke Hoover-FDR fables?* And why speak favorably of the FDR-style "kitchen sink" approach to macro policy? After all, if we don't know what we're doing, then isn't the principle of primum non nocere at least as compelling?
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*Note: FDR actually criticized Hoover in 1932 for his "reckless and extravagant" fiscal policy. Consider the following data:
Given the typical governmental response to economic crises since and including the depression, doing nothing would actually qualify as a bold persistent experiment.
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ReplyDeleteProf J: Except that the bold experiment you suggest was the preferred fiscal approach to depression until 1933, as evidenced by every previous depression. Other than that, you're definitely right.
ReplyDeleteCW,
DeleteTrue as that may be, those previous recessions tended to end relatively quickly. Why did the recession in the early 30s not end quickly as well? Did the bold and persistent interventions have anything to do with prolonging the recession? Does anyone really know the answer to this question?
The general theory back in the 30s was that the depression was lasting so long was that there had been massive productivity improvements in manufacturing, mining and agriculture, but that productivity had risen much faster than wages. Even as industry was spending money on massive restructuring, the feeling was that this wasn't transforming into larger payrolls or higher pay. There were natural experiments in which bumper crops or resource discoveries seemed to lead to local "recoveries", so the feeling was that something had to be done to "get the ball rolling". This feeling shows up in movies, books, magazine articles and probably elsewhere.
DeleteIf you ask people who were alive in the period, they will say that they felt that the various New Deal programs were effective. They did put money in people's pockets and that increased spending. Fortune had a rather hilarious analysis of the problems of measuring unemployment based on one family's entries and exits from various New Deal sponsored jobs, but they did manage to cobble together a living. Granted, it wasn't until the government commandeered the entire economy and spent massively on WWII and post war benefits and construction that the slowdown ended.
There was plenty of opposition to the New Deal programs, but the free land and subsidized farming program of the late 19th century had ended and the nation was urbanizing. There had been an effective depression running from shortly after the Civil War and into the 20th century. The spending in the first world war and other social spending had lifted a lot of slum dwellers out of abject poverty, and by the 1930s they didn't want to slide back in as would have happened without the New Deal interventions.
With the bold and persistent interventions of the FDR administration the US would have slipped back into late 19th century stagnation. They needed an excuse to generate purchasing power. Anything that gave money to people who were likely to spend it would do. They could have implemented the "spare change" program to make sure everyone had change of a dollar and it would have done better than doing nothing.
Kaleberg:
DeleteRe: "There had been an effective depression running from shortly after the Civil War and into the 20th century."
Can you please clarify what you mean by "an effective depression?" According to my data, real per capita GDP in the U.S. in the postbellum era increased by 80%; e.g., see here:
http://andolfatto.blogspot.ca/2014/09/whos-afraid-of-deflation.html
DeLong may be going too far but, if you follow the debates, it seems that there are two broad reasonable approches which would get the economy out of the crisis. Higher inflation targets and fiscal stimulation. It seems also possible that each method doesn't work very much without the other.
ReplyDeleteEconomists are busy arguing over which one would work better and how we should implement them. Meanwhile the world burns.
Benoit,
DeleteFor myself, I think that a good case can be made for reacting to the crisis along the suggestions provided in DeLong's list. At the very minimum I would say do: (1) cut taxes, (2) maintain G, (3) increase treasury debt, and (4) QE. The U.S. did a lot of (3) and (4). And the U.S. is not presently in crisis, though one might argue that the recovery was not as brisk as it could have been.
In Europe...well, Draghi is doing what he can. Europe does not have the fiscal consolidation that the U.S. has.
As for economists debating over merits and defects of alternative policy proposals, that's our job!
What you are saying is correct, but why aim for "the very minimum" especially when other economists could have a different "very minimum" that doesn't overlap with yours. If you were all pushing a wider array of tools, there would be more chance we would get an overlapping consensus that could translate into action.
DeleteConsider that point (1) and (4) might be completely offset by monetary policy if we are already near the the inflation target and are not willing to raise it (which could explain why the US recovery took so long).
Also consider that (2) and (3) may not be possible in the eurozone because of their political structure.
Plus, without higher inflation targets, if the natural real rate is under -2% we may not get to full employment unless governments replace all the missing spending for a very long time. Without a market for investments with lower than -2% return, we can only hope that governments will invest in the right mix of things and the right maturity structure matching the timing of future consumption needs. If governments only spend on projects having low or short term value, they may be sterilizing people's savings. That is when people retire, start spending their savings and the labor supply drops, interest rates will rise, the value of stocks and bonds will drop and governments may have to raise taxes more than if the necessary investments had been made.
If you were a monetarist who only wanted to change targets and didn't believe in anything fiscal, I would be arguing that the expectation channel may not be as effective as he thinks.
Inflation targets are meaningless. The Fed either raises rates or lowers them. All the rest is economists and commentators trying to earn a living during a depression. As they said back in the 1930s, "strictly from hunger".
DeleteI have no idea of why DeLong wants to cut taxes. That's been proven not to work. We should do something more likely to get things rolling like giving everyone a chicken to sacrifice. Really, it would be more effective. If nothing else, everyone gets a roast chicken out of it.
The retirement savings boom is a fantasy. Most people don't have anything saved. Those who do aren't going to be spending any more than they are spending while still at work, and odds are their job will be eliminated when they leave. There is a savings glut, but only a big tax increase on the rich might force some of those savings to be spent.
The picture you used reminds me of a story I first heard Jeff Sachs use:
ReplyDeleteA peasant discovers that many of his chickens are dying, so he seeks advice from a priest. The priest recommends that the peasant say prayers for his chickens, but the chickens continue to die. The priest then recommends music for the chicken coop, but the deaths continue unabated. Pondering again, the priest recommends repainting the chicken coop in bright colors. Finally, all the chickens die. "What a shame," the priest tells the peasant, "I had so many more good ideas."
Good one. And imagine what would have happened if the chickens (by chance) stopped dying? It would have been worse outcome, I'd argue.
DeleteHaving known chicken farmers who have had problems with their chickens, it sometimes seems like this. One expert says it's the feed, another the straw. You try the new feed, and you try the new straw. Eventually you either lose your flock or they recover. Whatever happens you'll never find out if it was the feed or the straw of it they all just had some chicken flu.
DeleteI never noticed this before, but it's a lot like the way one fixes one's computer.
FDR did one thing. He reduced the debt-per-dollar ratio.
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ReplyDeletedeclaring war would have done nothing to unemployment if the huge sustained spending increases hadn't happened. you're saying early-30s government spending increases prolonged the depression while the war also ended the depression? but the war saw huge spending increases. surely in the early 30s lots of other things were going on? financial crisis, massive bank runs, huge deleveraging in the private sector. the government ended the depression by spending like maniacs for years from 40-45 in ways that didn't happen in the 30s.
ReplyDeletethese ideas about "policy uncertainty" seems to be made up from nowhere- "spending prolonged the depression! uncertainty boo!". but spending ended the depression. if you don't like gov spending then OK, but if spending increases ended the depression then that's what happened. ignoring the existence of the financial meltdown in the early 30s is bizarre.