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I love Robert Taft. I have a framed Time magazine cover with his portrait in my office. It was the cover that was published with just five weeks to go before the 1952 GOP presidential-nominating convention. At that point it was still considered possible for Taft to get the nomination instead of Eisenhower (who, by the way, looks better with every new president we get).

You won't find strict consistency in Taft's views but he was a gem.

"If any policy leads backward and not forward, it is the policy of spending billions of borrowed money and piling up a tremendous debt for future generations to pay."

So what happened? Billions were spent but no one in the 40's and 50's were ever saying 'woe are we, paying off those billions spent on the WPA and the Hoover damm!" Not only that, WWII came around and the spending that required made the New Deal look like a kid spending his modest allowance on bubble gum. But the 40's, 50's, 60's did not appear all that bad despite the fact that debts from the Great Depression and WWII that were relatively huge when incurred, were being serviced and paid off.

I'm with Mario on Taft. He recognized that the source of America's strength is its economy. Wars threaten the economy and thus US strength.

Eisenhower absorbed that, ended the Korean War and cut defense, for which he was attacked by Truman (breaking protocal). He warned against defense spending. Eisenhower does look better with passage of time.

FDR ended the New Deal in order to re-arm, and pay for the war. The Republicans almost took the House in 1940. The Republicans did take over in 1946 and forced huge budget cuts.

Boonton, The New deal deepened the great depression. It gave us powerfull government which has been a threat to our liberties.

It is true that we were able to overcome most of that and teh world war two debt, but guess why?

Because all of the other major industrial nations had been devestated by a world war.

For a while we were nearly the only people with jobs and were rebuilding the world.

No such advantage exists today.

Kyle8

I'm sorry but you'll have to explain this a bit more. You're saying that the New Deal debt was a horrible handicap to our growth and the WWII spending, while necessary to win the war, made things all the worse....but the only reason we were able to grow so fast after all this was because all the other major industrial nations had been devastated?

By this reasoning if the USSR had launched a nuclear war just before communism collapsed and left all the other major industrial nations in ruins they would have suffered no economic repercussions for decades of communist economic mismanagement.

This thinking appears to view trade as a zero sum game. Poor, devastated neighbors means you get to grow faster despite your mistakes. Seems like the opposite should be true. Prosperous neighbors should mean trading opportunities to help offset the costs of your mistakes. If anything the destruction of WWII should have made it all the harder for the US to avoid paying the huge costs Taft was warning about.

Kyle8,

Um, the turnaround point for the GD more or less coincided with FDR becoming president, or perhaps just before then. There is a serious argument pushed by many here that many of FDR's policies slowed the recovery out of the GD (and did so later as well), and there was the 1937-38 double dip that many blamem on his policies, but I do not think anybody serious would (or can) claim that the GD itself got worse as a result of his policies compared to its lowest point in late 1932-early 1933.

Kyle8 -
Not only is the case that the New Deal deepened the depression extremely dubious to begin with, you're missing Boonton's primary point - which is that Taft really doesn't have a solid grasp of public finance and the nature of pulic debt burdens. Granted, we were entering new territory at that point - it's understandable he didn't. But we, in 2010, should better distinguish between problematic and unproblematic debt loads based on our experience over the last several hundred years. We should be able to recognize that one-off contributions to the debt below a reasonable percent of GDP are nothing to worry about - particularly if they accomplish an economic recovery, and that the real problem is unsustainable long-term debt, entitlements, etc.

I'm more concerned personally with the lack of evidence on the regime uncertainty argument. The last I looked through the NFIB surveys was a month or two ago, but don't these show that policy uncertainty isn't as big of a problem as other issues, and that it hasn't really spiked recently (ie - in a way that could be attributable to this administration?). People who cite this seem to cite it as a matter of convenience, can only provide newspaper articles and anecdotes, and always seem short on data.

Regime uncertainty can be empirically tested. If regime uncertainty should not hold back investment in a uniform manner but should hit hardest in the industries with the most uncertain regimes. Otherwise it seems like a catch all mantra invoked whenever the party you don't like as much happens to be in power.

"But we, in 2010, should better distinguish between problematic and unproblematic debt loads based on our experience over the last several hundred years. We should be able to recognize that one-off contributions to the debt below a reasonable percent of GDP are nothing to worry about - particularly if they accomplish an economic recovery, and that the real problem is unsustainable long-term debt, entitlements, etc."

I would say debt problems always seem to be in the future. Never once have I heard anyone say we are suffering because we must service debts incurred in the past. Where was the suffering to pay off the debts of the Vietnam War? The deficits of the Regan years? The first Gulf War? It always seems to be the debts of the future that are supposedly the problem, the debts of the past seem like trivial affairs that were part of the 'good old days'.

Likewise what many people seem to miss in the long term debt discussion is the incoherence of the austerity argument. The worst case long term forecasts are for deficits that are mutli-trillion dollars. If this is true then deficit reduction today is irrelevant. If a UFO landed today and paid off the entire debt that would only delay the onset of the forecast crises by a few years. Deficit reduction today would be like building a sandcastle against an oncoming herd of rampaging elephants.

Personally I suspect the projections of crises are based on mathematical errors. Specifically, I suspect they project revenue by averaging economic growth for the past few decades and then making that a bit lower to account for the declining marginal return on capital. That's fine for a forecast IMO. What then happens is they project spending by averaging the change in health care prices.

The problem with this is that health care has been growing faster than the average of the entire economy. This creates an either or situation. Either health care cost increases will slow down or health care will grow in its portion of the economy. If its the later option then the economy's growth rate mathematically has to increase as it is more and more dominated by an industry that is growing quickly. Either way it seems to me forecasts are getting distorted. If costs slow down, then projections of spending 30+ years out are way off base. If growth accelerates then revenue projections are off base.

I don't think it's really surprising that the Keynesians around here have commented on this thread.

What we must remember is that the questions we're discussing are not simple. The historical facts of the accumulation of past deficits can be interpreted in different ways. The Keynesian view is that deficit based demand-management is necessary to avert recessions and allow full employment and output. Austrian economists, of course, disagree. But, the question can only really be sorted out by an examination of theory and history.

I think Daniel's point about structural vs non-structural deficits is interesting. I don't agree with deficits of either sort. But, for the purposes of the following argument let's assume that the Keynesian argument for deficit financed stimulus in recessions is correct.

Keynesians would claim that such a policy is independent of structural deficits. I don't think this stands up to careful scrutiny. During the period normally associated with Keynesianism in Britain, from WWII to the 80s the welfare state grew and entitlements grew. This wasn't only because of the political success of the left-wing of the time. Just as important was the fate of various groups under the Keynesian system. The price inflation that Keynesian policies produced devalued savings. That meant that saving for retirement using bonds was no longer practical, which forced the extension of the state-pension. Saving for periods of unemployment or poor health was also made more difficult by the inflation, giving broader support for welfare.

I suppose a legitimate criticism of my point is that those were the policies of "dinosaur" Keynesians not modern Krugman-style "liquidity trap" Keynesians.

The Keynesians here are essentially saying that, since the central govt deficets are monetized by the central bank, these debts are not comparable to household debt or the debts of the provincial govts. They are right about this, but wrong that these policies are any less problematic as a result.

@Barkley,

There you go again.

No one "serious" would claim that Roosevelt's policies made things worse. You state that as a comment on a post about Sen. Taft, who claimed the policies prolonged the GD. As did many at the time and since. Including Roosevelt's own Treasury Secretary.

Among academic studies, there is Robert Higgs, "Regime Uncertainty: Why the Great depression Lasted So Long and Why Propserity Resumed After the War." And the work by Lee Ohanian at UCLA. Just to get you started.

"The problem with this is that health care has been growing faster than the average of the entire economy. This creates an either or situation. Either health care cost increases will slow down or health care will grow in its portion of the economy. If its the later option then the economy's growth rate mathematically has to increase as it is more and more dominated by an industry that is growing quickly."

Um... no it doesn't. Just because one sector has stronger growth does not mean everything else stays the same and therefore the economy must have stronger growth. For example, if the sector is growing rapidly because its a bubble, or is driven by subsidies (creating a bubble), or because it is heavily protected, or it is rapidly expanding because costs are ballooning and its sucking resources out of other sectors, etc etc.

In fact, funny I mention it, because that is exactly what is happening in the health care sector.

Part of the problem with discussions about Keynesianism here is that the K word is so indistinct now.

We really have a whole set of different ideas:

* Radical Keynesianism - Socialization of investment. Long term demand management strategies.
* IS/LM Keynesianism
* post-Keynesianism - Emphasis on Sraffian capital theory, Chartalism and strange models of consumption demand.
* Post Keynesianism - Emphasis on radical uncertainty and financial market instability.
* New Keynesianism - Emphasis on price stickiness and treatment of expectations similar to that of Monetarist and New Classicals.
* Krugmanite Keynesianism - Emphasis on the liquidity trap.

I don't know which group the posters here belong. But, I think it's important because the degree of difference of opinion is much greater in some cases than others.

The view Bill Woolsey expressed in the thread on Krugman's model falls between Krugmanite Keynesianism and monetary disequilibrium theory.

Well let's see, we have some people who claim that things got a lot better under Roosevelt, Sorry, that is just factually untrue.

They seem to think that debt does not matter, Also factually untrue. (sure you can grow out of them, but what if your policies do not provide any growth?)

And they seem to buy into that old myth that the government can stimulate aggregate demand enough to pull us out of a recession. Of course, the experience of the US in the 1930's, Britain in the 1950's, Japan in the 1990's, and the US again recently seem to prove that is a bunch of bunk also..

@Jerry:

In defense of Barkley for a moment: to say that FDR's policies caused the Depression to last longer than it otherwise would have (which is what Cole and Ohanian and Higgs argue) is different than saying it made things "worse" than when FDR started. Almost every macroeconomic indicator was better, say, in 1936 than in 1933. That's the point I understood Barkley to be making. Unemployment was lower for example, so one can't say that FDR's policies made unemployment "worse" even if one believes that FDR's policies prevented the unemployment rate from falling faster than it did.

Steve, what do you think of Bill Woolsey's remark in the other thread? Do you think it's possible that the natural rate of interest is below 0%?

@Steve,

If you go to the doctor with a disease and his "treatment" prolonged the disease, you would say that he made things worse. Ditto for Roosevelt's "treatment."

I believe Treasury Secretary Morgenthau's famous statement was made in 1938 after unemployment rose back approximately to where it had been when Roosevelt took over. The New Deal ended only with re-armament and the threat of a Republican takeover of the House.

The Depression was Great and Long precisely because it was the first time government took an activist stance. That started, of course, with Hoover, and Roosevelt ran against Hoover's interventions. Then he doubled down on them when elected. Much as Obama did with Bush policies.

It's possible to both prolong the disease and reduce some of the symptoms, no?

I agree with everything else you say Jerry (as you know). But Barkley was responding to a different point, as I read him. The treatment might prolong the disease, but that doesn't mean the patient's fever isn't down or his pains aren't somewhat reduced. I read Barkley, analogously, as saying FDR reduced the severity of the symptoms and you are saying (and I agree) that it was done at the cost of prolonging the disease and making the patient worse off in the long run.

Steve,

I'm certainly saying that, but more. When did the New Deal end? When did the US economy recover?

Someone used 1 1936 date: convenient, but that ends the analysis just before the 1937-38 depression. Unemployment went back up.

According to Higgs, recovery did not come until after the war. FDR definitely prolonged the Great Depression, and, only by selective use of dates, can one say he improved things. Until he abandoned the New Deal.

Some FDR policies may have been helpful, and some were definitely not. The problem is that there was not really a policy, just experimentation and change.

Sound familiar?

The economy did get better under FDR -- until the New Deal was finally put in place because it was finally implemented. Then unemployment jumped up, and was on the rise right until we entered WWII and sent all those unemployed people off to war.

Something Scott Sumner used to say about this subject is that we must be careful not to treat the "New Deal" as one particular thing. It never was, it was just promoted that way, it was a set of quite piecemeal measures, some very stupid, some quite reasonable.

Horwitz,

Where can I locate the transcripts of these radio debates?

Current asked,

"Steve, what do you think of Bill Woolsey's remark in the other thread? Do you think it's possible that the natural rate of interest is below 0%?"

I too would be interested in seeing Steve's take on that.

I haven't been following the other thread as I'm swamped with start of the semester stuff (as well as prepping for this conference this weekend). My off-the-cuff reaction is that it's weird to try to imagine what a natural rate of interest less than zero might mean. If I have a few mins in the next 24 hours, I'll pop back over there and see exactly what Bill is arguing.

I generally have a presumption in favor of Bill's arguments, but this might be the exception! :)

@Mario:

The versions I have are from the Congressional Record of various weeks in 1938 and 39. I don't know if they have been collected in one place. They are all under "extensions of remarks" in the CR.

Steve,

Thank you.

I'm referring to Bill Woolsey's post here:
http://www.coordinationproblem.org/2010/08/krugmans-waytoosimple-model.html?cid=6a00d83451eb0069e20133f34f686e970b#comment-6a00d83451eb0069e20133f34f686e970b

Bill is saying that the natural rate of interest may be negative, and that it may be negative now.

I agree with him that it's at least a possibility.

Anyway, if you haven't got the time to think about it, it doesn't matter. But, I think it's an interesting question in general.

I don't think that Mises time-preference argument really indicates that the nominal interest-rate must always be non-negative.

liberty,

I don't think the health care sector is a bubble but that doesn't really matter in terms of my skepticism about projections of fiscal doom. If health care is a bubble, its expansion cannot continue at this pace for multiple decades to come. In that case projections of dramatic spending are overstated. If health care is not a bubble and continues to grow at this rate sooner or later its growth will push overall economic growth higher thereby voiding the assumptions of modest growth in the projections.


I agree with Sommer on the New Deal and the Great Depression, it is complicated. The New Deal was not a pure Keynesian policy play. For example, Social Security was just a tax during the Great Depression as it would be years before the first check went out. While Keynesian 'types' supported it when you get down to business it wasn't a Keynesian policy. IMO the real Keynesian policy was WWII itself which no one can deny wasn't a massive fiscal expansion, did not result in a rapid return to full and even over-employment and did not produce a post war depression even though I have no idea how Austrian theory can possibly explain why the war wouldn't have created such a massive malinvestment overhang that there would be no way around a post war depression.

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