Horwitz on the Great Depression in the new EJW

The new issue of Econ Journal Watch is out, which includes my article "Great Apprehensions, Prolonged Depression: Gauti Eggertsson on the 1930s."  In addition, Larry White and I recorded a podcast on the article, which you can find here.  Here's the abstract of the paper:

Gauti Eggertsson uses a dynamic stochastic general equilibrium model in arguing that the period 1933 to 1937 represented recovery from the Great Depression, by virtue of regime change between the Hoover and Roosevelt administrations. He claims that the Hoover administration was defined by adherence to three “policy dogmas,” and that Roosevelt shifted expectations for the better by making credible commitments rejecting those dogmas. Eggertsson’s argument is wrong on several counts. He misrepresents Hoover’s economic policies, he mischaracterizes Roosevelt as “dogma-free” and committed to a clear alternative plan for recovery, and he misreads the economic consequences of Roosevelt’s policies. Eggertsson’s problems begin with his notion of “recovery,” wherein the economy’s progression from critical condition to prolonged infirmity is trumpeted as “recovery.” Eggertsson’s article is entitled “Great Expectations;” I have titled this piece “Great Apprehensions” because the Hoover-Roosevelt period needs to be seen a whole, in which the statist trend of policy and rhetoric created great uncertainty about the rules under which enterprise and investment would proceed. Moreover, Eggertsson’s narrative cutoff at 1937 is misleading and opportunistic, as the ensuing years are all part of the same prolonged apprehension and under-performance.

I want to note that this paper is dedicated to the students in my Fall 08 American Economic History class and Spring 09 Great Depression senior seminar at St. Lawrence.  Numerous hours of conversation with them, not to mention several sources they found in their own research, played an important role in making this paper possible.  The relationship between those courses and this paper are excellent evidence that teaching and scholarship are not two distinct activities.  Often they are just two different manifestations of the same activity.  I write about what I teach and I teach what I write about;  good teaching generates ideas that become research and research informs good teaching.

Comments

[Bill Woolsey]

Steve:

I enjoyed your comment on the AER article. I haven't read the original article yet. As a slight criticism of your comment, I don't fully understand the point of the original article. Yes, a Roosevelt regime change, but to what end?

But that isn't where your commet led me. We know that the market solution to bank runs is for the bnaks to use the reserves, pushing the reserve ratio towards zero, and then suspend and pay penalty interest. Fed policy aimed at protecting its reserve ratio, and even convertibility, was an anti-market intervention. On the other hand, it is difficult to see permanent devaluation as anything but a move a away from the gold standard. There is some more fundamental standard. The compensated dollar would make that explicit. (You know I lean towards a 3% growth path for nominal expenditure on final goods, using index futures convertibility.)

I just wanted to share the direction in which your comment led me.

http://monetaryfreedom-billwoolsey.blogspot.com/

[Barkley Rosser]

Steve,
Hmmm. Well, I guess one can argue policy uncertainty under Hoover. But why was he worse in this regard than FDR? Why did things start to get better when FDR came in and not before?
There certainly is a case that Hoover is more statist than most think. However, I also think this case has been way oversold, both by you and by others such as Bryan Caplan. The differences betweeen Hoover and FDR remain far greater than between Hoover and Coolidge (or Harding). There are many. Policies towards unions, banks, the gold standard, levels of government spending, social security, and on and on. About the only way this argument holds together is to somehow say that people knew what FDR was going to do but not what Hoover was going to do, and so even though FDR's policies involved far more government intervention than Hoover's, their known nature made them less damaging and allowed the economy to grow. Something like that.

[Bill Woolsey]

Rosser:

The difference between Hoover and Roosevelt is that Roosevelt devalued the dollar.

Both Hoover and Roosevelt tried to reduce aggregate supply to stop or reverse deflation of prices. This is counterproductive.

By devaluing, Roosevelt created the expectation of reflation, which reduced money demand, and raised nominal expendenture. He continued with the efforts to reduce aggregate supply, and so, while output increased (the economy went into what we call a recovery phase, output didn't recover to the 1920s trend.)

The notion that the efforts to reduce aggregate supply were ineffective under Hoover because it was mostly jawboning and then enforced under Roosevelt and so it worked--well, that is implausible. Reduced aggregate supply may raise prices, but it directly reduces output and employment. It _is_ counterproductive.

There are and were economists (which we here know well) that believe that the least bad option is to encourage deflation so that hte price level will be lower (including wages) and that this will allow a market generated recovery. Hoover didn't favor that approach.

The alternative is to increase the quantity of money, perhaps a lot. With a gold standard, that might not be possible. While we know in fact that the Fed didn't do as much as it could, we could imagine it trying and facing a gold run. IF that had really happened, then the gold standard would have clearly been the contraint on aggregate expenditures. But they didn't try.

The paper that Steve challenges is basically saying that we went from what Keynes described as a "classical" regime to what modern Keynesians call a Keynesian regime. That isn't what happened.

[Barkley Rosser]

Woolsey,

I had gold standard on the list of differences, with that implying that FDR was willing to "devalue the dollar" as you put it, although the 1930s became a free-for-all of "beggar thy neighbor" competitive devaluations, and some other currencies were devalued more than the dollar, so it is somewhat of a complicated situation, to put it mildly.

Do you then disagree with my claim that on the other matters I listed there was no difference between Hoover and Roosevelt, or not much of one? Or is it your point that devaluing the dollar was the difference that really mattered?

[Barkley Rosser]

Uh, obviously I meant to ask Bill if he disagreed with my claim that there were significant differences between them on these other matters. Sorry.

[Bill Woolsey]

Rosser:

The gold standard is what mattered.

In my view, competitive devaluations are only a problem if your goal is to build gold reserves (measured in ounces.) If the goal is to raise nominal expenditure, everyone can do that at once.

Another way to look at it, is that if some countries think they can ride out the depression without devaluation, and some other countries devalue, then it is more difficult for those who don't. This is a feature, not a bug.

If the dollar fell due raising the quantity of money to meet the demand and to return nominal income (or better yet, keep it) on its prior 5% growth path, that this may have forced Japan or the EU to expand more so reverse (or better yet, dampen) the appreciation of their currencies--great. That is exactly what they should have been doing.

I don't claim that Hoover was no different than Roosevelt in all ways. As I said, Hoover jawboned and Roosevelt enforced. Roosevelt's policies were worse. Promoting unions more was worse. More debt finance was not significant. Anti-business rhetoric was worse.

But devaluation was enough to create more spending, production, and employment. Though not enough to overcome all of the other bad policies.