Christina Romer, the appointee-designate (or whatever) as director of the president’s Council of Economic Advisors is said to have argued, in her influential article “What Ended the Great Depression?” [JSTOR link], that “expansionary monetary policy was the key to the partial recovery of the 1930s” and therefore, “monetary policy is key.” And indeed Romer does argue this, but contrary to a variety of panicky emails that have shot through my inbox, her argument is not inconsistent with the president-elect’s stated plan for fiscal stimulus. Why?
Romer’s argument goes something like this:
(1) Per E. Cary Brown, and Keynes before him, the New Deal did not provide enough fiscal stimulus to spur recovery during the 1930s—not that it didn’t work, but that it wasn’t tried.
(2) Yet there was significant recovery during the 1930s, both as to economic growth and to job growth.
(3) So we have a mystery: where did the recovery come from? Did it come from the ordinary operations of the economy? No; there was an inflow of money from outside.
(4) Why was there an inflow of money? Not because of the Fed—it wasn’t cooperative. But by stabilizing the banks and devaluing the dollar, Roosevelt’s administration set policy that drew overseas investments into the US.
(5) This money came from overseas at first because of the devaluation, but it came in quantity later because it needed someplace safer to go than a Europe menaced by Hitler. Other countries’ misfortune was America’s good luck. (Which means you can’t necessarily say that there would have been a recovery without the war; the inflow of overseas investment owed partly to the war.)
(6) Romer’s conclusion then is that “the rapid rates of monetary growth were due to policy actions and historical accidents.”
She’s very clear throughout that deliberate policy choices were key, and she thinks the deliberate policy choice of FDR to devalue in 1933/34 was most key.
But there’s nothing particularly prejudicial there against fiscal policy. Nor an argument about the superiority of monetary policy. But an empirical case that owing to planning and luck, monetary policy worked in the 1930s.
And just now we haven’t stabilized the banks quite as the New Deal did in 1933.
(Also.)
12 comments
November 24, 2008 at 9:41 pm
urbino
When will this blog finally relent, and admit that the New Deal, not slavery, caused the Civil War?
November 24, 2008 at 10:16 pm
Ron Tunning
Urbino, I’d like some evidence of your conclusion since it so obviously conflicts with the widely held assumption that the Civil War can be attributed to the flawed concept of equality that ultimately led to Bill Clinton’s ascendancy as the first “black president”.
But then, I suspect you’re willing to absolve Clinton of his responsibility for the current economic meltdown despite the overwhelming claims that his encouragement of lending to minorities is what got us into this mess.
FDR’s treachery in abandoning his “class” profoundly reshaped the American landscape, but I daresay that as one who so thoroughly enjoyed respite in Warms Springs, Ga., it’s highly unlikely that he would have intentionally crafted a set of policy initiatives that would lead to the dissolution of the Union.
He was, after all, a “union man”, albeit not tested in regard to civil unions.
November 25, 2008 at 9:16 am
Ahistoricality
Both of you are ignoring the evidence: time-traveling islamofascists replaced the Founding Fathers with body doubles and revised the Declaration of Independence and Constitution — abandoning the Articles of Confederation for ideological reasons — creating a quantum causality wave that made the otherwise erudite and wise George W. Bush stupid just in time for the 9/11 attacks, which were coordinated through suicide wormhole technology. This is why we can’t find Osama bin Laden: he’s actually hiding in a parallel existence, playing pinochle with his parallel self and waiting for the final victory to come. Barack Obama is another time-traveller, from a future of racial harmony and socialized medicine, who is working against bin Laden, but who nonetheless is also working against the interests of the real Founders who wrote the Articles of Confederation and then time travelled foward to lead the Confederacy.
November 25, 2008 at 9:50 am
Walt
urbino, and Roy make serious, substantive comments, Ahistoricality, but then you just have to take it too far. Like Hitler.
November 25, 2008 at 10:16 am
Ahistoricality
I’m sorry you feel that way, but the chauvinistic tunnel vision of single-timeline American specialists just doesn’t encompass the reality of the multiverse the way we World Historians understand it. Like Hitler, we have a vision of a world unified under a healthy, vigorous, expansive Historical hegemony, and like Hitler, we will keep invading your blogs until you appease us with internationalism, then we will invade your other blogs, conferences, textbooks and seminars, anyway.
November 25, 2008 at 10:18 am
eric
we will invade your other blogs, conferences, textbooks and seminars, anyway.
It’s funny because it’s true.
November 25, 2008 at 10:25 am
Michael Turner
I love this line in Thoma’s piece: “Tax cuts don’t pay for themselves, and starving beasts get angry, not thin.”
Actually, they get thin and angry, but it’s still a great line.
I also love it that Mark Thoma posts the entire text of this EoftheAW blog entry as an update to his blog entry found at “Also, this” — except for the “Also, this” part itself, which would otherwise have pointed to his own blog entry. Good thing he caught that one. If he hadn’t, the cosmos would have collapsed in on itself and turned inside out, the arrow of time would have taken a U-turn, the New Deal actually would have caused the Civil War, and people would lose arguments whenever they failed to compare someone to Hitler. Tyler only knows what would have happened to God.
November 25, 2008 at 4:39 pm
urbino
It seems her [unpublished] paper on taxes and growth is generating a rhubarb, too.
November 25, 2008 at 4:43 pm
eric
I don’t know it. Whereas I have spent a fair bit of time with her work on the Depression.
November 25, 2008 at 5:01 pm
urbino
Right. I wasn’t suggesting a post. Just noting that this isn’t the only article of hers that progressives are concerned about.
November 26, 2008 at 9:40 am
David
Note that Romer’s paper has fiscal policy being ineffective as late as 1942, undermining the WWII-saved-the-economy story as discussed here. As Eric mentioned, her point that the recovery was monetary in nature does not mean fiscal policy could not have worked, only that it did not play a role.
February 1, 2009 at 10:07 am
People send these things to me, honest. « The Edge of the American West
[…] as even some George Mason economists will tell you, devaluing the dollar was possibly one of the best things FDR did, contributing mightily to the “spectacular” rate of recovery under the New […]