In an interview on The Lessons of the Great Depression

So going back to your other bibliographical picks, you recommend some recent papers by Cole and Ohanian  (Harold Cole and Lee Ohanian, The Great Depression in the United States from a Neoclassical Perspective and Harold Cole and Lee Ohanian, New Deal Policies and the Persistence of the Great Depression: A General Equilibrium Analysis)  What are they about?

They focused more on some of these anti-market FDR policies. I think they’re right that these are mistakes, as are some of the tax increases. There was a tax increase under Hoover and then some under Roosevelt, trying to balance the budget, which was clearly a mistake in the context of the very high unemployment rate and the poor economy. But as to how much that mattered is much less clear. Similarly the Smoot-Hawley Tariff in 1930, which every economist agrees is ridiculous – it’s not clear how much that actually mattered in terms of the macro results.

I thought that the Great Depression was the ultimate cautionary tale on the dangers of protectionism. That’s not the case?

No I think what is much clearer is the role of the financial system and the credit implosion, both in the 1930s and today. The rest of the stuff may just be a sideshow, it may not be that important. There’s a strong tendency for the economy to recover on its own, as long as it’s not subject to further new shocks, so a likely scenario is that that is what will happen today as well. And then the Obama administration will say that it’s because of our policy that things recovered, and there won’t be any way to prove whether that’s right or wrong.

So are you not a fan of what Obama is doing?

I think the stimulus package was very stupid; it was awful. It’s just a tremendous waste of money and it’s going to cause some trouble in terms of a bigger public debt; it’s just wasting resources. But the more important thing is the financial system, and the housing related aspects. So on that, despite a lot of floundering around, mostly I think what they were doing is in the right direction. I think they made a big mistake by not bailing out Lehman Brothers – I think they recognized that two days later. That was Paulson’s individual fault and responsibility from what I can gather.

But I noticed you did not sign that full page advertisement in The New York Times opposing Obama’s stimulus package. A lot of other economists did, including Edward Prescott, who won the Nobel Prize for economics, so presumably should be taken seriously. Has he done any work on this?

I don’t know what he’s contributed that is particularly relevant on this issue. He has done some brilliant work and deserved the Nobel Prize, but his empirical stuff is not that good frankly. I didn’t sign that advertisement because I don’t really like to sign things in general – I prefer to write my individual thing.

But you’re broadly sympathetic to that viewpoint?

For a while there was this ridiculous view that there was this massive consensus in favour of Keynesian stimulus. And Biden even said at some point that, “Every economist agrees that we need this stimulus.” Of course that was always nonsense. So in that sense I agreed with the sentiment of what was in that signed advertisement.