My Exchange with Gauti Eggertsson at EJW Continues

Steven Horwitz

Back in September of 2009, I published a piece in Econ Journal Watch criticizing a 2008 AER article of Gauti Eggertsson's that addressed the role that the Roosevelt administration's policies played in ending the Great Depression.  Eggertsson responded in the September 2010 issue of EJW.  My reply to his response is now available in the January 2011 issue.

Here's the abstract:

In this rejoinder, I address five issues raised by Eggertsson’s reply to my commentary. First, I argue that the pre-depression gold standard, though not ideal, was not a barrier to a desirable reflation. I then offer an account of the 1937-38 recession that views it as a continuation of the Roosevelt regime in a way that contradicts Eggertsson’s attempt to cleave it from the expectations-enhancing regime change he focused on. I also respond to his invoking the “conventional wisdom” regarding Hoover and Roosevelt by offering additional evidence that said wisdom is faulty. Fourth, I respond to his admission of ignorance of Robert Higgs’s work by recapping and adding to the evidence for regime uncertainty’s role in extending the Great Depression (evidence notably about private investment and about private-sector hours worked). I critically assess the role investment played in Eggertsson’s original AER article by noting his failure to distinguish government and private investment, as it was the latter that Higgs demonstrates was affected by regime uncertainty and whose weakness constituted the failed recovery. Finally, I note that if narrow methodological strictures blind us to the evidence provided by narrative history, we will fail to understand that history at our own peril, as the growing parallels between the Great Recession and the Great Depression demonstrate.

Comments

[J Oxman]

Prof. Horwitz,

Very nice work.

Your articles reminded me of advice regarding good research topics I received once and promptly forgot (until now): challenge conventional wisdom.

[Rafael Guthmann]

People still believe in this story that FDR saved the US from the depression? To the degree of accepting a paper about it in the AER?

All other countries at the time had recovered better than the US from the depression, while the US stayed with unemployment rates of over 15% for 10 years. But some myths never die.

Gauti B. Eggertsson claims that US gdp would dip over 30% without Roosevelt's intervention, that's a quite heroic conclusion, to say the least: during the 30's, of all countries in the world with already had decent macro stats, the US had the worst macroeconomic performance. To claim that the US would perform even worse than that without Roosevelt's policy changes is unpersuasive.

[Rafe Champion]

One of the reasons that myths survive is explained in another piece in Econ J Watch on the teaching of economics without teaching the economic way of thinking.

http://econjwatch.org/694

[Rafael Guthmann]

Another problem in modern economics is that economists forgot the economic meaning of the terms they use: general equilibrium now only means a model where all markets are interconnected and the result of this model (the equilibrium of the model).

Once upon a time, general equilibrium meant that the action plans of every individual in the market were compatible. Today one can use "general equilibrium" models to explain unemployment...

People even use general equilibrium models to explain the disequilibrium phenomena par excellence: recessions. A recession is a process of systematic frustration of action plans, of revelation of incompatibility of plans. Modern DSGE models assume that individuals are omniscient lighting calculators in some areas, while they are irrational in other areas.