For some reason I have the Schechters on the brain. They are the family of chicken butchers who stood up to the New Deal. I’m also teaching them this week in my NYU class. My Schechterism is shared by least one reader, an Austrian, apparently. Thank you, Austrians. I’m gaining more respect for you every day. I can feel myself turning into an Austrian.
Over the weekend Dr. Krugman blogged some more about the shortcomings of my analysis of Keynesianism. He was responding to a WSJ piece by me. Simon Constable of Dow Jones is making a video editorial today too.
The real issue is whether the stimulus will stimulate enough to offset whatever damage it does and whatever other activity it precludes. My friend Bruce Bartlett had a strong piece in the New York Times about how stimuli are almost always late. The story was the same from November, 1948, on. In that instance, the stimulus was enacted the same month in 1949 that the recession ended.
Paul Krugman responds to both THE FORGOTTEN MAN and a Bloomberg column that I wrote recently. He’s contesting the smallest of details in a very general picture of the period — TFM is a panorama book, not a data book. Nonetheless, in the spirit of debate, it seems worthwhile to address his questions:
Dr Krugman’s first point is that TFM offers misleading statistics when it comes to unemployment. He actually uses the adjective “misleading.”
There are a number of data sets seeking to capture joblessness in that period. (Remember, they didn’t have all the tools we have today.) The annual data set which I used in THE FORGOTTEN MAN, and which Dr Krugman deems misleading, originates with the government Bureau of Labor Statistics and the great scholar of employment, Stanley Lebergott. Richard Vedder of Ohio University actually addressed/broke out employment month by month using the same data, so sometimes TFM cited him. Anyhow these data show average annual unemployment in the twenty percent range for a number of years – 1933, 1934, 1935. At points in 1937 or 1938, unemployment gets back to 20%, which I mention in TFM.
These “misleading” data, Lebergott/BLS, are widely used. How widely used? Even by the President-elect, apparently. Mr Obama, talking on Sixty Minutes spoke about unemployment in 1932 and 1933. Mr Obama said:
“Well keep in mind that 1932, 1933, the unemployment rate was 25 percent, inching up to 30 percent.”
That’s a BLS number. It’s also a Census Bureau number. Table D-1-10 “Labor Force and its Components, 1900 -1947” . Indeed it looks like the President-elect thinks even these Lebergott/BLS data are too conservative since he says “up to 30%” and the table I am citing does not go that high.
The data set that the President-elect did not cite is the one which Dr Krugman seems to be suggesting is preferable. (Dr Krugman never spells it out, he just says we’re being misleading.) The second set of numbers come from a useful paper by scholar Michael Darby. This set puts unemployment in 1932 and 1933, at 23 percent or so and at 21 percent. Eric Rauchway of UC/Davis likes this data too. It has somewhat lower unemployment numbers for the 1930s, and therefore makes the New Deal look better. Rauchway actually accuses me of “lying” because I don’t do use these numbers. That seems odd. We’re all just trying to figure out what happened, not get personal. None of us knows precisely. This is supposed to be a discussion. Here is the Rauchway post.
Dr Darby’s point, long story short, is that the make-work jobs of the New Deal were not counted in the BLS/Lebergott data. That is true and was intentional. Lebergott and the government believed that it was wrong to count short-term emergency jobs as employment because it was inhumane to pretend that a short-term project that might tide a family over was the same as “regular work.”
Makes sense to me. But suppose we accept Dr Darby’s definition, to which Dr Rauchway refers explicitly and to which Dr Krugman is probably gesturing.
What did I mean when I said that the Darby data painted a somewhat better picture of the New Deal economy than the government data? Just what I said: “somewhat.” The unemployment rates on the Darby chart, which I could find only in subscriber databases like jstor (Journal of Political Economy, Vol. 84, Number One “Three and a Half Million Jobs have been mislaid,” subscriber) range high as well. Unemployment is in the teens from 1931 through 1935, even hitting 20 percent. In 1936, a year in which the federal government spent more than it ever had as a share of the economy on peacetime projects, Washington managed to get the unemployment all the way down to 9.9 percent (Dr Darby’s “corrected BLS” number, Table 3). The next year it got near to 9.1. Then it was up again to 12.5 in the Depression within the Depression. Then 11.3. (Dr Darby has another set where things look slightly worse in some of these years)
In short, these Darby are not numbers to build the Obama presidency on. Today we consider our unemployment, in the six-seven percent range, a disaster. Even by the data that Drs Krugman and Rauchway choose, the Roosevelt Administration didn’t get to that level until 1941 (war buildup and war). President-elect Obama would run in the other direction if someone offered him a policy with that kind of outcome.
What else? Some people got tired of the “do we count the relief workers?” question. One was Lee Ohanian of UCLA. Dr Ohanian sidesteps the entire issue by counting hours worked overall. He summed it up in a note to me: “In 1939, total hours worked per working age person – including the hours of those on government payrolls – were 21 percent below its 1929 level. This is little recovery compared to hours at the trough of the Depression in 1933, when total hours per adult were 27 percent below its 1929 level. My recent work with Harold Cole indicates that hours worked should have been above normal during the mid-1930s, not 20 percent or more below normal.” This is another picture that also shows a scary amount of uenmployment.
Dr Krugman makes a second charge, that I misrepresent John Maynard Keynes by associating Lyndon Johnson’s Great Society with Keynes when the Great Society was a social and not an economic program. In 1964 Johnson pledged to build a Great Society with an emphasis on social improvement in his Great Society speech, just as Dr Krugman said. My point was that the political engine of the 1960s treated any spending, including Great Society spending, as a stimulus. Keynesianism defined the very lexicon of policy – that is why Milton Friedman said “we are all Keynesians now.” TIME even gave Keynes a cover: “The Keynesian Influence on the Expansionist Economy,” read the banner in the corner. Keynesianism was crucial window dressing for the Great Society show. Spending on all sides became permissible, and that only made sense if you cared less about deficits and more about growth – Keynesianism. Thus in July 1965, after many pieces of new legislation, The New York Times was writing headlines such as: “Johnson Policy Will seek to Prolong Boom: Administration Commits Itself to Spur Economy by Tax Cut or New Spending…” The same story has Johnson saying his new budget would “include sharp increases in spending from programs enacted during the past few years.”
President-elect Obama’s just-named chair of the Council of Economic Advisers, Christina Romer, herself hammered home the Keynesian construct of Johnson’s presidency, and the role of social welfare projects such as the Great Society within that construct, in a recent scholarly paper of her own, “Macroeconomic Policy in the 1960s: The Causes and Consequences of a Mistaken Revolution.”
Romer: “The Johnson Economic Reports were even more explicit about the lack of interest in long-run balance. The 1966 Economic Report stated: ‘In focusing on balance of the economy this policy strategy cannot give top priority to balance in the budget.’ (p 180) In listing the main tasks of public policy, Johnson’s section of the same report mentions stabilization, expanding opportunity, social welfare, even equilibrium in the balance of payments, but nothing about long-run budget balance.” (The italics are mine)
Summing up: Keynesianism is about deficit spending. From 1961-1969, i.e., the period that covers the Kennedy-Johnson years, the country ran a deficit every year except 1969, strong consistency for a non-Depression non-World War government. (Table B-79), Economic Report of the President). Then the Seventies came – deficit years. The Sixties made it clear that henceforward deficits would be the rule not the exception. We were indeed all Keynesians now.
George Will is being attacked for pointing out that net domestic private investment was negative at many points in the 1930s. But as Russ Roberts points out, George is right.
Why do we care? Because negative net domestic private investment in human language says:
“we have no hope.” And that was the attitude of business in much of the 1930s. Those New Yorker cartoons of people crying into their drink at their second home were accurate. They were not creating jobs.
Over at the Arizona Republic, Doug MacEachaern suggests it is humiliating for conservatives such as yours truly to in turn suggest that Democrats might conceivably cut top taxes. He says we are begging.
I just don’t think tax cutting or ending tax increase plans are impossible. Democrats went along with such a tax cut under President Clinton, the capital-gains tax cut. Over in the UK, this very weekend, Gordon Brown of Labour is busy announcing a Christmas package of stimulative tax cuts. It should not be totally excluded that Democrats here might drop some of their most egregious tax increases, including those that hit the wealthy. Economic circumstances are different enough today to change the conversation.
For some reason the debate around the top levels of unemployment in the 1930s has been particularly hot. The question has been whether you take the official data, as John Kenneth Galbraith did in his Great Crash book and the federal government has (”Lebergott”) or whether you also count the part-time make work jobs of the New Deal. Even if you include those you get unemployment rates we would find incomprehensible — over ten percent, lots of the time. It’s hard to see therefore why many observers have therefore spent so much energy on that. Eric Rauchway, whose own book is pretty good, for some reason feels very defensive about all this. Rauchway’s book I’ve listed in my NYU Stern School course. He’s even criticizing Jon Stewart.
I’ve had my hesitations about fooling around with the make-work New Deal jobs. One reason is that they were often jobs for just a few months. We are not talking about jobs teaching school, but rather true project-to-project tasks.
On the question of the reason for the unemployment, as opposed to the precise datum, I recommend Richard Vedder . Vedder early on, in Out of Work explained that unemployment of the 1930s was probably due to unusually high wages. Read: Wagner Act. NRA. Boosterism. Fordism.
But the big issue: was the unemployment under Hoover and FDR truly severe? Maybe it is time for another measure. Lee Ohanian of UCLA looks at the whole problem by different data and finds the answer is truly clear.
…. with the high quality of their posts on the Great Depression debate. MR’s Alex Tabarrok et al really get into the topics.
I see that at the Atlantic Megan McArdle’s discussion includes some queries on the importance of Higgsian regime uncertainty. This is the theory that says the very discretion that Roosevelt derived from his landslide in 1936 scared markets. They just didn’t know what the president would do next.
For me the most convincing part of the regime uncertainty argument for the later 1930s is that the people of the time believed it.
To wit, an example from a headline in the New York Times of Oct 23, 1937:
Capital ‘Strikes’ Laid to Tax Laws; W. O’Neil, Head of General Tires, Says They Explain Present Business Uncertainties; Cites Labor Agitation
Over at Carpe Diem host Mark Perry has two revealing graphs on the marginal tax rate that TFM confronted in the Great Depression. Prof Perry (University of Michigan/Flint) has both top marginal rates and lower rates. In this period the income tax was not a “mass tax” it was a “class tax” but what you can see from this is that just about anyone beginning to succeed paid and paid.
We used to contrast today with then, noting that now the income tax was a mass tax. But that is becoming less so as more and more go off the rolls. Lots of useful material in wonderfully timely tax tome, The End of Prosperity, by Steve Moore of the WSJ, Art Laffer, and Peter Tanous. The top 10% of taxpayers pay 70% of the taxes. In other words, the wealthy really are an isolated part of the herd against which it is easy to make class warfare. Easy as it was in the 1930s.
The New York Post carried a column this morning by me on the errors in the New Deal. One that I’ve been thinking about lately, and that I haven’t given enough attention yet, is the question of high labor costs. In a recent column Paul Krugman talks about how FDR’s New Deal had a limited success, especially in the second half of the 1930s, because FDR didn’t spend enough.
Other factors seem to me more important — that high labor price, jacked up by the then-new Wagner Act. The very unpredictability of FDR petrified employers. David M. Kennedy notes in his wonderful book that businesses lacked the heart to reinvest. This baffled FDR, but it shouldn’t have. “Why, the president asked one night at dinner, did they lack confidence in the economy? Because, Eleanor replied tellingly, “they are afraid of you.”
In the Bloomberg, I talk about the lost liberalism to which Republicans might return. This is the case for classical liberalism. Some think Americans are too thick to get the concept of classical liberalism. I do not share that view. By focusing on social conservatism, the GOP neglected lots of its own in this campaign. Politics as a result lost a great one: Heather Wilson of New Mexico.
Copyright 2009 by the Council on Foreign Relations. All Rights Reserved.
