Writing Worth Reading
Last updated 11 pm GMT
Writing Worth Reading
So if I want to understand what happened during the Great Depression – and even what the Obama administration is trying to do now – do I have to start by reading John Maynard Keynes’s General Theory of Employment, Interest and Money?
You’re better off reading Milton Friedman and Anna Jacobson Schwartz’s A Monetary History of the United States, which I think is a better account. Keynes was more contemporary, so maybe had not as much perspective.
This is the argument that the Federal Reserve caused the Great Depression, prompting Ben Bernanke’s famous apology to the authors. So why does this book need to be read, in your view?
I think it appropriately looks at the monetary financial situation that is at the core of the Great Depression crisis and also the current situation. So they focus on the role of the monetary authority and the banking panics, and you can fit into that the legislative changes – particularly under Franklin Roosevelt – some of which helped the situation. I think the most important of those was the introduction of deposit insurance in 1934, with the Federal Deposit Insurance Corporation. The FDIC has really worked in preventing banking panics since that time in the US. I think a lot of the solutions these days involve extending that concept beyond the commercial banks that were at the heart of the financial system in the 1930s, but of course the system has been much broadened since then.
So we shouldn't take books with titles like FDR's Folly, claiming Roosevelt prolonged rather than alleviated the Great Depression, too seriously?
It’s clear that a lot of the policies that were put into place were negative, but as to sorting out how important they were, that’s a much more challenging question. And I think Roosevelt at the time recognized ex-post that some of the things he tried were failures and then his attitude was, “OK, it’s a failure. I’ll stop doing it.” Which is actually pretty positive.
For example, some of the things he did was try to organize labour unions and also businesses essentially promoting monopoly – I don’t think that was a plus. He was trying really hard to keep wages and prices from falling with direct influence and that was a negative. The effect of the expenditure programs is less clear. In the mid-1930s with the New Deal there was an unusual amount of infrastructure-type of expenditures. But it’s not actually big enough to sort out in a statistical sense – to figure out how much it mattered in terms of the recovery after the trough in 1932-33. I don’t think we know that that was a mistake, but it’s not clear that it was all that important.
So you’re not saying the New Deal was a mistake, you’re saying basically we don’t know.
One of the things I’ve been trying to do in my research is to calculate the effect, particularly on Gross Domestic Product, of government expenditure programs. And I’ve been focusing on the US experience, because that’s where I have the information, although it would be good to go beyond that. But the thing you can clearly isolate is the effect of wartime expenditure – particularly World War Two – it is so big that in a statistical sense it gives you a lot of power to figure out what is going on.
There’s both the build-up, starting in 1941, and then there’s expenditures coming down after the war, in 1945-6. There’s a lot of evidence there. Sometimes the spending in a year is 20 per cent of GDP, which is absolutely astounding. In comparison, the New Deal programs, particularly in 1934 and 1936, are only two to three per cent of GDP of extra spending.
In terms of the stuff that’s not wartime spending – which we’re probably most interested in in the current climate –it’s just hard to know from the history of the data and the time series. The New Deal is part of my research, and it’s bigger than the other non-defence expenditure in terms of stimulus, but it’s not enough to really sort it out.
So I don’t think you can reliably say what the effect is. But conceptually you’d expect the wartime spending to have a bigger effect for various reasons on the GDP than the equivalent amount of expenditure in a non-war situation. And the wartime effect you can estimate pretty precisely, and the multiplier is clearly less than one, even in World War Two – it’s in the order of 0.6, 0.7, something like that.
Robert Barro is a professor of economics at Harvard, and a commentator for the Wall Street Journal and Business Week. His critique of the Obama stimulus package provoked a sharp attack from Paul Krugman in the New York Times, which brought a spirited response from Barro. Basing his arguments on his empirical work, Barro takes issue with some common assumptions about the Great Depression, and how America got out of it.
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