Amity Shlaes

Amity Shlaes: The Forgotten Man

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Whaples, Consensus on the Great Depression

by Amity Shlaes
January 15, 2009

One of the things we’ve been thinking about at the Council is the meaning of the New Deal and its impact on the Great Depression. We also talked a lot about it in my course at NYU/Stern. I get the impression some colleagues believe that the professional consensus is that the New Deal worked, economically. At Newsweek Daniel Gross sounds pretty certain of himself when he mocks those who are skeptical about the New Deal. Daniel writes that I, “George Will, and assorted libertarians cling bitterly to the notion that the New Deal didn’t work, that FDR’s policies of regulatory reform and sharply increased government spending were an abject failure, that the economy didn’t turn around until the day Japanese bombers dropped their payloads on Pearl Harbor. They believe Keynesian-style stimulus didn’t work in the 1930s, so it won’t work now.”

Back in the 1990s the Journal of Economic History published analysis of a survey of economic historians on their opinions about various events in history. (I want to thank the Beacon and Marginal Revolution, who pointed this out to me). This survey was well before the current stimulus was a gleam in President-elect Obama’s eye, or the bailout a gleam in Secretary Paulson’s eye. The author, Robert Whaples, put forward the following proposition in an anonymous survey of randomly selected economic historians. Some were trained more as historians and some were economists.

“Taken as a whole, government policies of the New Deal served to lengthen and deepen the Great Depression.”

A full seventy-four percent of historians disagreed. That’s a high rate of New Deal supporters — but still leaves one in four on the other side, not supporting.

Economists had a different reply. Forty-nine percent of the economists agreed, or agreed with provisos, with the idea that the New Deal made the Depression worse. Fifty-one percent disagreed.

In other words, there’s a big debate over government’s role, and no consensus at all among those who emphasize numbers when they look at this period. The late Arthur Schlesinger (historian, not economist) wrote, quoting someone else, that history is an argument without end, and concluded “that is why we love it so.” That is why most of us love it so, too.

Robert Whaples, the author of that original paper, emailed today with an update. Whaples wrote that in 2007 he did do a random sample of history department members, which is different from economic historians. To this group, Whaples put forward the following statement:

“Taken as a whole, government policies of the New Deal served to lengthen and deepen the Great Depression.”
Here are their responses in percentage terms:

1 (strongly disagree) 35
2 (disagree) 49
3 (neutral) 5
4 (agree) 5
5 (strongly agree) 5

To me this Whaples work suggests that the farther away from econ you get, the lefter you get when it comes to your New Deal take.

What about that the question of whether the war ended the Great Depression? Dan in Newsweek seems to think that’s a nondebatable. But it is debatable. Even members of the new administration provide evidence for that. Check out Christina Romer’s paper which emphasizes monetary policy as the conclusion to the Depression (NBER). Hunting around I see that Tyler Cowen has written about Dr Romer.

7 Comments

  • Posted by Bryant

    Are these the same economists whose blind devotion to free market dogma created the intellectual environment that seeded this crisis? Are those the ones who believed that that FDR extended the depression?

  • Posted by Bob_in_MA

    That survey seems to leave no room for one likely scenario: that the New Deal had no effect on the length of the Depression.

    One factor that seems not to be mentioned in current comparisons of now to then, and Obama to Roosevelt, is that almost all assets, stocks, housing, bonds and commodities, had bottomed during the summer of 1932. Stocks had fallen 90%. So the recovery in assets from 1933-1937 was really just an inevitable bounce from an extremely low bottom and probably would have occured no matter who was in the White House.

    Asset prices are likely to continue to fall for the first 18-24 months of Obama’s administration.

    For the record, I’m a life-long Democrat and I believe things like the CCC and WPA were no-brainers, though much of the rest may be questionable. Having a bunch of unemployed 23-year-olds hanging around bored, with little chance of finding employment seems like a really bad idea.

    Likewise, I see spending to maintain unemployment benefits, spending by state and local governments and maybe some public works projects as no-brainers now.

  • Posted by Blue Sun

    It is interesting that, with one exception, every year of Roosevelt’s New Deal, from 1933 to the U.S. entry into World War II saw the GDP rise. The only exception was in 1937, when FDR listened to the Republican “economic experts” and did what today’s free market economists and Republican politicians are calling for – he suspended the New Deal and cut spending. GDP immediately fell for that year.

    Luckily, FDR learned his lesson in one year and reinstated New Deal spending in 1938, turning the GDP trend up again, where it remained throughout the remaining pre-war years. Unfortunately today’s free market economists and Republican politicians STILL haven’t learned the lesson of 1937.

    In the first four years of New Deal spending, FDR saw the unemployment rate fall from 25% to 10% – not bad for a spending policy that many blatant revisionists are now whining was ineffective against the Great Depression and will do nothing but harm to our current spiraling recession and brutal liquidity trap.

    But then, we all know the old definition of an economist: someone who can explain to you tomorrow why what he predicted yesterday didn’t happen today.

  • Posted by neil wilson

    I do find your entire premise to be quite funny.

    Stocks were underpriced in 1929???? I believe this is not true. Do you disagree?

    The economy was a disaster from 29 through the start of the New Deal. I believe that to be true. Do you disagree?

    The economy was far better under Roosevelt than it was under Hoover. Again, I believe this to be a fact. Do you disagree?

    I assume that you think that buying undervalued stocks is a good thing. I assume you think it is better than buying overvalued stocks.

    We can argue whether the New Deal helped or hurt. I don’t think we can argue that the actions taken after 1933 were far better than the actions taken from 1929 through 1933. Again, do you disagree?

  • Posted by Austin Norman

    Of course the only thing that got us out of the last depression was WW2 plain and simple. I think we are going into another depression don’t you? I mean lets be reasonable here there are plenty of things Obama could have done if he wasn’t “owned”. They are just printing out more money i.e. the Federal Reserve prints the money, and giving it to huge mullti-national companies and banks. The main problem is the fact that there are too many houses on the market and the ONLY smart thing I have seen if the 8,000 tax credit given for buying a house. The best thing the government could do is give as many incentives as possible to buying and holding onto real estate. My prediction is that unemployment will probably go well over 20% and many of the ultra wealthy people and the banks will buy up all the “true wealth-assets-not money” for pennies on the dollar from their decline. Basically it’s all about consolidating the wealth and wiping out the poor middle class. What can we do about it do you think? The only idea I can think of is to buy gold and silver as an investment. The only thing that can keep this from happening in the future though is to abolish the Federal Reserve but in order for that to happen Obama would have to decide to get out of the “brotherhood” so to speak which is very unlikely at this point. The only president to ever break away from being owned was JFK and he isn’t with us today for that reason.

    Peace

  • Posted by Austin Norman

    Note and thought on my other post above: Khem! Today Citi Financial went up and are supposedly going to make a profit for the first time in months. I got to thinking that their execs are with the CFR so basically they are a CFR company. I have noticed that hardly ever if at all do CFR companies actually go broke no matter how bad things get.

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