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Saturday, December 27, 2008

THE GREAT DEPRESSION AND NAZI GERMANY'S SPEEDY RECOVERY COMPARED TO THE USA: TAKE 2

Today's Buggy Topic

It's accurately captured by the subject heading here, and --- as usual --- prof bug posted it elsewhere: this time, at the Marginal Revolution . . . an unusually good economic web-site, run by Professor Tyler Cowen.  A uncommonly flexible libertarian --- Cowen actually blames the system-wide financial-meltdown this year on largely market-failures (convinced libertarians always trace the failures back to governmental policies that interfere with otherwise self-adjusting, self-regulating, optimum-working free-markets) --- he has claimed that he can't find any examples of successful pump-priming policies in the past.  And that claim encompasses Nazi Germany's fast recovery from the depths of the Great Depression in early 1933 . . . two months before FDR took office and confronted an even worse economic depression and higher unemployment.

The Second Buggy Take on the Topic

As you'll see if you click here --- a link that will take you to today's lengthy reply to a stimulating post by Professor Cowen on Nazi Germany in the 1930s --- this is the second time prof bug has commented on the topic, with that earlier comment linked to in the buggy reply. 

The topic, please note, is not just historical.  If we can't find examples of effective fiscal stimuli in previous recessions --- which means with good multiplier effects on prodding GDP growth back toward its long-term potential and hence toward full employment --- then doubt surrounds the announced plans of President Obama to institute large-scale pump-priming initiatives soon after he arrives in office next month.  The same doubts, of course, would apply to other democratic governments in Japan and the EU, similarly bent on implementing fiscal expansionary policies.

The Further Relevance of Nazi Germany: FDR's New Deal

Except for Canada --- a sparsely populated country in 1929, which was only partially industrialized and largely dependent on exporting agricultural products, minerals, lumber, and fishing --- Nazi Germany was the only wealthy country in the early 1930s to suffer roughly the same huge decline in GDP and employment as the USA.  And like Hitler's dictatorial regime, FDR's democratic government immediately initiated pump-priming measures . . . though on a more limited basis. 

The Results?

By 1936 --- as you can see from this informative chart --- the New Deal programs brought about almost as speedy an economic revival in America as Hitler's combined public-works and fast rearmament programs did in Germany. 

But only through 1936. 

The US then suffered a recession between the fall of 1937 and late summer 1938.  The causes: FDR and his advisers, contrary to right-wing mythology, were wary of deficit-spending; never pumped the prime nearly as much as Hitler's dictatorial government did in Germany; and in 1937, as tax revenue began flowing into the federal government from the new social-security system that went into effect in 1936, the federal deficit changed into almost a balanced budget.  Combined with the Federal Reserve's raising interest rates --- out of fear, believe it or not (amid deflationary falls in the general price level) of inflation --- the shift toward a balanced budget ended the big fall in unemployment from over 20% in early 1933 to 9.1% through the pre-recession months of 1937.

Note the key point here.  Tersely put, although GDP growth itself recovered rapidly from late 1938 until we entered World War II in late 1941, unemployment itself remained disappointedly high at over 8.0% until then.  In effect, only the big sustained arms programs and the creation of a vast American military of 10 million men and women brought unemployment down to under 4.0% and hence near its level in 1929 before the onset of the Great Depression.

By Contrast, Nazi Germany . . .

Continued to grow fast and reduce unemployment as Hitler expanded his rearmament programs throughout the decade, bent on an unprecedented brutal war to conquer all of Europe, make it Judenfrei with his diabolical genocide --- Jews blamed simultaneously by the Nazis for being the whip-masters of Communist Russia and capitalist-democratic America and hence the biological enemies of the Aryan peoples, destined to rule the world --- and kill off millions of Russians and others to establish vast living space (Lebensraum) for German colonization in all of Russia east of the Ural Mountains . . . all preparatory for a war for global mastery in a showdown war with Jewish-ruled America, Hitler's biggest bugaboo alongside Jewish-ruled Communist Russia itself.

Enough said by way of introduction.  Click on the link to the buggy comments at the Marginal Revolution for his evidence-driven interpretation of all this.