The New Deal and the Great Depression
A quick (and I would have thought unnecessary) note to dispel the idea that the failure of the New Deal to end the Great Depression is a repudiation of the “Keynesian” approach being taken to address the current crisis. Fiscal policy in the 30s, though activist, was conservative. The diagram, in billions of dollars, compares the output gap (the difference between actual and potential GDP, calculated by subtracting each year’s GDP from the 1929 baseline of $103.6 billion), the federal budget deficits or surpluses, and a “Keynesian” response to the output gap, assuming a multiplier of 1.5. The “Keynesian” response is simply the output gap, for a given year, divided by 1.5.
Two points here:
(1) The New Deal was not an application of Keynesian theory. (Of course, Keynes’s General Theory of Employment, Interest and Money didn’t appear until 1936, so it would have been impossible, in any case.)
(2) There appears to be a positive relationship between government deficits and recovery. A story one could tell is that from 1931 through 1936 budget deficits gradually reduced the output gap, but a balanced budget in 1937 caused a downturn in 1938. Whether cause-and-effect are like this we cannot of course know for sure. But the timing fits.
Christina Romer was right in her Brookings talk the other day when she approvingly quoted E. Cary Brown’s conclusion that “in the Great Depression, fiscal policy failed to generate recovery ‘not because it does not work, but because it was not tried’.”
Where the Economy is and Where It's (Apparently) Going
Some Reality about Deficits
Armageddon: The Aftermath
The Hype
How to Explain It
Is Health Care Reform Popular?
The Point of the Public Plan
The Context of Health Care Reform
Addendum
Is Low Life Expectancy the Fault of Our Health Care System?
What Americans Believe
American Health Care: Best in the World?
Is 76.5 Large?
NBC-WSJ Poll
Inside the Asylum
More About Bubbles
Why Did Economists Miss the Housing Bubble?
Why Has Monetary Policy Been so Ineffective?
The Geithner Plan
Is 22.2 Large?
Economics: A Theoretical Divide
Stimulus By the Skin of Our Teeth
The Interregnum
Postmortem
Obama and McCain on Tax Cuts and Health Care
Religion and the New Atheism
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