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Monday, December 22, 2008

WAS NAZI GERMANY'S SWIFT RECOVERY IN THE GREAT DEPRESSION AN EXAMPLE OF SUCCESSFUL KEYNESIAN PUMP-PRIMING?

Today's Buggy Topic

It's another in the lengthy bugged-out series, three months old by now --- maybe longer, who can remember that far back in time? ---about the policy lessons of the Great Depression era of the 1930s and whether they could and should be applied to the US and virtually all other countries these days amid the first system-wide financial crisis on a global scale, along with serious recession, since that dismal period 8 decades ago. 

More specifically, a thread was started in early December, 2008 at the Marginal Revolution by Professor Tyler Cowen of George Mason University --- a talented, wide-raging libertarian economist of unusual flexibility --- on whether Nazi Germany was an example of successful Keynesian fiscal-stimuli?  It's a good case-study, the more so because Hitler's Germany --- along with its quasi-fascist Militarized Japan --- experienced a noticeably fast recovery from the depths of the Great Depression in 1933.  Yes, far faster than the US in the New Deal era . . . that recovery the more impressive because Germany, alone in Europe, suffered roughly the same huge drop in GDP and employment as the USA between 1929 and 1933.  

Click here for a very good chart that documents the plunge in GDP in those initial years and the speed and strength of the recovery by 1939, the year World War II erupted in Europe. 

Enter the Controversies About the Nazi-German Recovery

Did the Nazis pursue strong and sustained public works fiscal stimuli, especially between 1933 and 1936 --- by which time both the American New Deal programs and Nazi German policies showed a strong recovery . . . only for the German recovery to continue, thanks to ever faster rearmament in preparation for trying to conquer all of Europe, until 1939?  Was there ever any strong fiscal stimuli other than rearmament in the first three years of Nazi rule?  (Hitler came to power in January 1933.  FDR took office in March of the same year.)  Even if the fiscal stimuli between 1933 and 1936 were largely in arms-production --- the entire German economy, like its equivalent in Militarized Japan, restructured for large-scale war --- were they really that powerful in their galvanizing GDP growth between 1933 and 1936?

Interestingly, Keynes --- a convinced proponent of democracy. who admired FDR (only to be disappointed when he met Roosevelt and found that FDR was actually a fiscal conservative, who worried about deficit spending) --- seemingly thought so.  Note the qualifier about FDR's fiscal conservatism.  Essentially, the first Roosevelt administration reversed the Federal surplus and turned it into a fairly moderate deficit between 1936 and 1937.  With US GDP back to its 1929 level by late 1936 --- and unemployment down from over 20% to around 9% --- the 2nd Roosevelt administration actually reversed the deficit trend and tried to bring in a balanced Federal budget for 1937. 

The Result

Along with a reduction of the money supply by the Federal Reserve --- which feared that the fast GDP growth between 1933 and 1936 signaled a new inflationary era --- the reduction in deficit spending sparked a recession in mid-1937 that lasted nearly a year and sent unemployment rising to almost 13%.  Despite a new interest in deficit spending that FDR then embraced, unemployment by the end of 1939 was still at a disappointing level of 11.3%.  The disappointment was all the greater, please observe, because GDP itself had soared in that period. 

It was only with massive rearmament by the US after Pearl Harbor --- December 7th, 1941 --- that unemployment returned to the 1929 level of around 4.0% . . . aided, of course, by 11 million men recruited or drafted into the military in WWII.

No Need To Say More By Way of Introduction

Click here for the link to the Marginal Revolution link and Prof Bug's lengthy, documented  commentary on Nazi German recovery.