Tuesday, December 9, 2008

Conservative attack on the New Deal and a Counter

The next Administration's planning for a stimulus program to create jobs has generated a counterattack on the New Deal by conservatives. Their historically inaccurate argument is that government policy had the effect of discouraging private investment.

Conservative George Will supports Russell Roberts [George Mason University]:
"By acting without rhyme or reason, politicians have destroyed the rules of the game. There is no reason to invest, no reason to take risk, no reason to be prudent, no reason to look for buyers if your firm is failing. Everything is up in the air and as a result, the only prudent policy is to wait and see what the government will do next. The frenetic efforts of FDR had the same impact: Net investment was negative through much of the 1930s."

Though the data are accurate, the interpretation is not. Net investment was negative because firms don't add plant capacity [net investment] if they don't have enough customers for their existing plant. They won't even if they have ample cash surpluses. As for the data, as soon as the New Deal began, gross investment, which includes replacement capital, and net investment rose every year except 1938. Even in years when net investment was negative, its negative value was diminishing, a good sign. In 1938, The Administration, in a poorly timed effort at budget balance, cut back the stimulus and thus created a recession within the depression.

Here is Brad de Long's response:

Lessons from the Great Depression Blogging

Apropos of Krugman's evisceration of the underbriefed George F. Will http://delong.typepad.com/sdj/2008/11/what-a-change-t.html:

Path Finder

I have never been able to make any sense at all of the right-wing claim that the New Deal prolonged the Great Depression by creating a "crisis of confidence" that crippled private investment as American businessmen feared and hated "that Communist Roosevelt." The crisis of confidence was created by the stock market crash, the deflation, and the bank failures of 1929-1933. Private investment recovered in a very healthy fashion as Roosevelt's New Deal policies took effect.

The interruption of the Roosevelt Recovery in 1937-1938 is, I think, well understood: Roosevelt's decision to adopt more "orthodox" economic policies and try to move the budget toward balance and the Federal Reserve's decision to contract the money supply by raising bank reserve requirements provide ample explanation of that downturn. And once those two factors had run its course the continuation of Roosevelt's policies was no obstacle to an investment recovery driven by war-related exports monetary expansion produced by capital flight from Europe."

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