Monday, January 13, 2014

Is History Repeating Itself?

I've quoted from this article before:
Two UCLA economists say they have figured out why the Great Depression dragged on for almost 15 years, and they blame a suspect previously thought to be beyond reproach: President Franklin D. Roosevelt.
After scrutinizing Roosevelt's record for four years, Harold L. Cole and Lee E. Ohanian conclude in a new study that New Deal policies signed into law 71 years ago thwarted economic recovery for seven long years.
"Why the Great Depression lasted so long has always been a great mystery, and because we never really knew the reason, we have always worried whether we would have another 10- to 15-year economic slump," said Ohanian, vice chair of UCLA's Department of Economics. "We found that a relapse isn't likely unless lawmakers gum up a recovery with ill-conceived stimulus policies."
In an article in the August issue of the Journal of Political Economy, Ohanian and Cole blame specific anti-competition and pro-labor measures that Roosevelt promoted and signed into law June 16, 1933.
Huh.  You don't say!  Might there be any similarities between that situation and today?
But the debate hasn’t focused on the academic literature on the subject – including an important, surprising new paper from the National Bureau of Economic Research (NBER), perhaps the most respected economic research institution in the world. (The NBER is the organization tasked with determining when recessions officially begin and end.) The study’s finding: “Most of the persistent increase in unemployment during the Great Recession can be accounted for by the unprecedented extensions of unemployment benefit eligibility.”

In the aftermath of the financial crisis, the federal government has dramatically expanded the length of the unemployment insurance program from the typical 26 weeks, the period states more or less have the funds to offer, to as long as 99 weeks. That program has helped millions of people get by, but the NBER study suggests it’s also kept the labor market much much weaker than it would have been otherwise — in fact, they calculate, unemployment is 3.6 percentage points higher than it would be if benefits hadn’t been extended.
You should go read the whole thing.


maxutils said...

That i s soooo completely not fair. FDR was trying something new ... the policies oh John Maynard Keynes, who had a completely great idea: pump money into the economy with government spending, running a deficit; the multiplier effect (as the money gets spent, earned and respect) encourages growth, and the responding growth pays off the deficit. Government then stockpiles their surplus revenues for the next downturn. It didn't work. Largely, because overall, government spending is such a small percentage of GDP that anything it does is insignificant in a case where you have 25% unemployment. What does work is getting people employed ... in this case, going to war. But you can make the same case against Reagan: supply side / trickle down economics in theory seems entirely reasonable -- but it didn't work either. Giving rich people tax breaks blindly doesn't cause them to create jobs, it causes them to play the safe bet, and bid up stock prices. Which is exactly what happened. There is no such thing as macro economics. The federal government simply cannot control the whole economy ... what government SHOULD do is foster an environment that is investment favorable, and perhaps give tax incentives to firms that can demonstrate that they HAVE created jobs ... that doesn't mean we should stop trying things, though.

allen (in Michigan) said...

John Maynard Keynes was a punk and an academic fraud.

There's nothing remotely new about "pumping money into the economy". The Romans did it two thousand years ago. Hell, they even had a huge welfare state. Not something I'd bet you regularly hear about Rome, hey?

Keynes brilliance was in telling politicians what they wanted to hear and providing academic cover for their irresponsible spending proclivities. He did pretty well for himself as a result.

As for Roosevelt, you're judged by the company you keep and he got along swimmingly with Joe Stalin. Not too surprising given their respect for "the masses". Roosevelt'd be president yet but for the intercession of the Grim Reaper.

As for the study, it's old news. I read an article during the Clinton years on the startling coincidence between the crushing of economic recoveries within the Great Depression and the passage of a tax increase or a bill driving up the cost of labor at the behest of Roosevelt. Not to surprising that the intellectual titan inhabiting the White House is getting the same results since he's cribbing from Roosevelt's playbook.

By the way, you might want to get your excuses ready for the results of Obamacare. I figure some time this year the economic effects of that tragedy will start to be felt and the economy will slide from modest growth to stagnation if not a downturn.

Ellen K said...

All I know is that my father's family suffered so much that he attended 17 different schools in 12 years. He carried those emotional scars his entire life. Sadly, until Reagan, he bought into the Democrat dream. It was at that point when Reagan ran for his first term that he learned that conservatives were not welcome in the DNC.

maxutils said...

allen... the bulk of my post was that Keynes' theory didn't work...not sure why you're attacking me on that point, because we agree. Where I don't agree is that he came up with a theory that sounded good... and it did. As for Obamacare? Are you kidding me? Trying new things is fine, but they should have at least some theory behind them ... Keynes did; Obamacare does not. Everything about this plan flys in the face of economic theory, and it is doomed to failure, and I've been railing against it consistently. I need to gather no excuses ... perhaps I told you sos, though.

maxutils said...

my point was exactly that neither Roosevelt or Keynes fixed the Great Depression ... it was only that Keynes gave it a good college try. Blaming him for that is petty ... no one else came up with a better idea ...(because there isn't one).

allen (in Michigan) said...

Sorry max. It's hard to read through a red haze and any favorable mention of Keynes, including the obviously false excuse that he meant well, kicks off that reaction.

If you feel that's petty, you're entitled to your feelings but my examination of Keynes is that his only contribution was, as I wrote, providing academic cover to allow politicians to more easily engage in one their favorite pastimes which is taking from those that have and using the money to buy votes. In doing so Keynes is complicit in the prolongation of a national trauma. Also, as I wrote, Keynes seems to have done quite well for himself by providing that academic cover.

Also, you're wrong about what brought an end to the Great Depression.

If war were such an economic boon why bother sending young men off to die? Building and destroying expensive, complex war machines is the ostensible economic benefit of war so why not run the munitions factories full time, take their products out into the middle of an empty field and set fire to them?

They're built to be destroyed anyway so why go to the bother of shipping them thousands of miles to be inefficiently destroyed by the Germans or the Japanese?

In fact, contrary to widely-held belief, war's no economic benefit to anyone but the munitions makers and is, overall, an economic disaster. What ended the Great Depression was that national survival trumped the fun a bored, rich kid had tinkering with the economy.

Lastly, a nit I can't help picking.

Keynes didn't have a theory. At best he had a hypothesis but economics has never managed to come up with a valid substitute for the predictive or experimental verification demanded by the scientific method. That's why there are "schools of thought" in economics. Without experimental or predictive verification all that's left is to endlessly argue about what's right and what isn't.

That's why there's no "phlogiston school of thought" in chemistry and no "Lysenko school of thought" in biology.

The failure of economics is the failure to design a means of testing hypotheses.

maxutils said...

Are you really saying that a war that took us from 25% unemployment, at the depression's nadir, to essentially full employment plus and injection of female workers who were previously underrepresented in the labor pool didn't help the economy? And, I'm not suggesting we maintain an Orwellian state of 'we've always been at war with Ocieana' ... The Axis needed toppling, and our offensive happened to occur at a time when it worked out for the economy, as well.

I question your distinction between 'hypothesis' and 'theory' as well. I think that's purely semantics, and irrelevant. The thing about macro economics is that it's based on microeconomic theory which is very predictable...focus on one market, you can get pretty good results. If you raise the cigarette tax in one county, e.g., you can predict that demand for cigarette sales will fall in that county and rise in others ... but macro is too big, and has too many variables to control. So, you're correct that Keynes was wrong, but -- I said that already. It does NOT mean that he didn't have a decent theory. He was just wrong.

Obviously, economics will never meet a purely scientific standard of proof ... it involves people, so it can never be exact ... that's why it's so important to get one's assumptions to be as limited and as logical as can be. But it is good at predicting results, and to ignore it is to enact bad policy...