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Sunday, November 9, 2008

WILL OBAMA PURSUE A NEW NEW-DEAL RECOVERY PROGRAM? LESSONS FROM THE FDR NEW DEAL ERA

Today's Buggy Topic

As usual, it was started at another economic web-site --- this time, the Marginal Revolution, run by Tyler Cowen (a very good, very flexible libertarian economist at George Mason University).  It deals with the impact of the New Deal on economic recovery in the 1930s after Franklyn D. Roosevelt assumed office in March 1933, two months after Hitler and the Nazis took power in Germany.

The key question that Professor Cowen's original post posed was this: why was there strong productivity growth in the US economy in the period between 1933 and our entrance into WWII at the end of 1941, even though investment by the business world languished in that period and contributed to the still fairly high levels of unemployment that persisted until 1941: around 11-12%, about half of the level that existed in early 1933 . . . followed by a big reduction in unemployment from around 21% to 9.5% or so by 1937, only to rise in the 1937-38 recession and stay, to repeat, at a surprisingly high level of 11-12% until the big rearmament of the US economy and the creation of a huge army of 10 million reduced it to the point that large numbers of women and formerly excluded African-Americans in the South had to be recruited to work in armaments factories.

The Buggy Response

Prof bug responded at length to the Tyler post, arguing in a typical bugged-out way that the large number of other posters --- some of them professional economists or grad students in that discipline --- were keeping the discussion, typically too, way too abstract and theoretical.  In particular, prof bug expanded the discussion's implicit points about the larger impact of the New Deal on economic recovery; looked at the recent debate by economists on it; sorted out what was clearly economically stimulating to economic recovery in the New Deal's programs and what hindered it; and above all set out a comparative perspective by way of an empirical test of the issues . . . superficial as such a top-skimming discussion entailed for such a test. 

No need to say more about prof bug's lengthy comments and its historical and comparative perspective on the New Deal's impact.  Click here for the Marginal Revolution thread.

Note, Though, Two Methodological Issues At Stake Here

*  The first one is how way too many economists seek to make sense of the world by instinctive deductive inferences from a few taken-for-granted theoretical premises --- as though their statistical models have underpinned those theoretical premises to transform them into not just hard-anchored scientific laws, but can also ensure that these alleged scientific laws can be easily applied to concrete, complex economic problems and policy-guides.  Oh sure!  Fortunately, behavioral economists --- a small but growing and influential group in the profession --- aren't operating in this way.  They are studying real economic and wider social behavior in concrete situations the way anthropologists or political scientists or psychologists do; and in fact they draw on a lot of recent work in psychology and social psychology, instead of postulating as axiomatic that economic agents --- whether workers, business managers, or government policymakers --- act as rational self-seeking maximizers.

The second methodological issue brings us back to the very different political responses to the Great Depression in Germany and the United States in 1933

In particular, contrary to what you will likely see in print even in good historical works, the Depression in Germany --- where the economic decline was almost as large as in the US --- did not cause the Nazis being elected to office, followed by a massive totalitarian state, war, and the Holocaust.  Huh?

Tersely put, there is no social science causal theory that economic crises of any sort cause any dictatorship to come to power.  In the US, where GDP fell faster and further between 1929 and 1933 --- unemployment too --- the response, politically, was the election of FDR and his administration's recovery programs.  At most, any social scientist could say that the Nazi Party benefitted from the Great Depression in Germany, where democracy in the Weimar Republic was not well established, nor solidly supported by the German Right or the Communist Left.  On this view, the Great Depression's havoc might be a necessary condition of the Nazis taking power in 1933: without it, the Nazis wouldn't have gained over 40% of the vote in two general elections in late 1932 and 1933.  Observe the italics around might.  Whatever else led almost a majority of Germans to vote for Hitler in the last free elections, the powerful elites in the military, big industry, the financial world, politicians and parties on the right, and in the state-bureaucracy all wanted what he did: to rearm Germany and seek to overturn its defeat in WWI and establish German dominance over Europe. 

What Follows, Methodologically Speaking

In shorthand terms, this: Sooner or later, a German-launched war in Europe with huge destructive potential would have occurred with or without Hitler.  In particular, given the fragility of the Weimar Republic and its failure to win the support of most of the German right and the Communist left (which also grew fast in the Depression era, like the Nazis), Germany would have begun the war with some sort of militarist right-wing, anti-democratic, anti-Semitic dictatorship . . . such dictatorial government rife on the Continent of Europe anyway by 1939 except in the tiny countries of Scandinavia, Holland, Belgium, and Switzerland, with France sill democratic but politically polarized and full of latent civil-war conflict that burst into the open after the German conquest in the late spring of 1941.  Further to the east, the Soviet Union was already a mass-murdering totalitarian system.

Whether, without Hitler and an explicit Nazi ideology, that militarized, anti-Semitic German dictatorship would have launched the Holocaust during or after a successful conquest of Europe is the key uncertainty here.  Maybe not.  No way to be sure about such a counterfactual key event.  Note though.  Eliminationist anti-Semitism pervaded the German world-view by the early 1930s, Jews blamed for most of Germany's misfortunes --- not just in Germany itself, please note, but almost everywhere in Eastern Europe too.  And so, with enthusiastic support of the masses in Central and East Europe and a conquered Rusia --- with, further, support of German collaborating regimes in Western Europe --- at a minimum, a German-dominated Europe without an explicit Nazi program would have very likely led to the cruel uprooting and expulsion of not only German Jews (about 0.6% of Germany's 60 million people in 1933), but of the Jews elsewhere in Europe . . . with large numbers brutalized and transported to some isolated area in Madagascar or Asia.