Marshall Auerback is a Denver, Colorado-based global portfolio strategist for RAB Capital.


If the US government had a dollar every time someone proclaimed to learn the lessons of the Great Depression, we probably wouldn’t have a budget deficit. Usually, these debates turn on the question of fiscal policy and whether in fact, FDR’s New Deal had a discernable role in generating recovery. “Fiscal austerians” have done much to dismiss the economic achievements of the New Deal, some even suggesting that FDR’s fiscal policies worsened the crisis.

For a brief period during 2008, the views of neo-liberals like Alan Greenspan and Robert Rubin were shunted aside. But the FDR revisionists, who disapprove of fiscal policy measures of any kind, have come back. Now they’re brandishing the old arguments that “excessive” government spending risks “crowding out” private spending, making it impossible for the US government to deal with the recession (because it has run out of money) and hindering the capacity of the private sector to recover because of too much government interference in the “free market”. These complaints are usually accompanied by a wave of rhetoric condemning the “business un-friendly” policies of the current Administration, along with dire warnings of a “national solvency” crisis. After all, fiscal austerians are nothing, if not fully predictable.

Was the 1937 Relapse Caused by Increased Taxes and Unions?

In that context, we have to give some credit to Professors Thomas Cooley and Lee Ohanian, who have taken a more novel approach in their critique of the New Deal. In some respects, they actually validate the case for fiscal policy expansion (although the two authors might not see it that way). Cooley and Ohanian argue that:

The economy did not tank in 1937 because government spending declined. Increases in tax rates, particularly capital income tax rates, and the expansion of unions, were most likely responsible. Unfortunately, these same factors pose a similar threat today.

The OMB numbers suggest that spending actually DID decline in 1937 and 1938 (see here) and, contrary to the assertions of Cooley and Ohanian, that decline had a very deleterious impact on economic activity and employment. I will address the tax issue presently, but let’s first deal with the “excessive unionization” canard. An objective observer looking at the US in the 21st century would hardly conclude that unions have any real power in the American economy today, any more that we have a “socialist” government dedicated to the promotion of a vast left wing agenda which enhanced union power. Obama has not addressed Labor Law reform and wages haven’t risen in a generation; in fact, last year they fell.

True, the President occasionally does display a social democratic rhetoric, but so far, redistributive policies have primarily benefited financial institutions. Social security benefits are under threat via a new “bipartisan commission” on long term deficits, public health care insurance proposals were eviscerated in the “health care reform” bill, and trade unions outside the public sector have withered over the past 30 years. Cost of living adjustment clauses have largely disappeared since the early ’80s (although some government benefits like social security retain them), average hourly earnings are virtually flat, and I would not be surprised to see wage deflation before the unemployment rate peaks this time around. US households are paying down debt on a net basis — even credit card debt — and creditors remain reluctant to make new loans. So the odds of a wage/price spiral taking root as a consequence of excessive union power look decidedly low – in fact, close to zero.

On the other question of taxes, I actually have some degree of sympathy with the arguments of Cooley and Ohanian, but largely because functionally, a tax increase works as a countercyclical policy which mitigates the impact of fiscal policy expansion.

Let’s go back to basics. Under a fiat currency regime, such as we have in the US, when the Federal government spends, it electronically credits banks accounts. Taxation works exactly in reverse. Private bank accounts are debited (and private reserves fall) and the government accounts are credited and their reserves rise. All this is accomplished by accounting entries only, but the main point is that spending creates new net financial assets and taxation drains them.

So in one sense, Cooley and Ohanian are right. Tax hikes do cut aggregate demand, much as government spending cuts do. In economic terms, both serve to depress economic activity. We agree with the authors: tax rises at this juncture are a dumb idea. They won’t serve to “reduce” the deficit, because the resultant impact on private sector activity is likely to diminish it and thereby increase the gap between government expenditures and revenues as the economy slows down.

The broader issue of government spending versus tax cuts is a political/distributional argument, and economists (and others) can legitimately argue about the respective multiplier effects of one versus the other. But at least this kind of discussion shifts the debate in the right direction -toward increasing economic activity and, hence, job growth and away from wrong-headed discussions of fiscal austerity and deficit reduction as a primary policy goal of government. FDR ran into trouble only when he moved away from fiscal expansion toward austerity in 1937.

At the outset of the Great Depression, economic output collapsed, and unemployment rose to 25 per cent. Influenced by his “liquidationist” Treasury Secretary, Andrew Mellon, then President Hoover made comparatively minimal attempts to deploy government fiscal policy to stimulate aggregate demand. Further, the Federal Reserve actually sold bonds to push up interest rates in a mindless effort to stem the gold outflows that we occurring as the rest of the world lost confidence in the US economy. So much for the halcyon days of the gold standard!

FDR’s Employment and Wage Strategy Worked

This all changed under FDR. The key to evaluating Roosevelt’s performance in combating the Depression is the statistical treatment of many millions of unemployed engaged in his massive workfare programs. The government hired about 60 per cent of the unemployed in public works and conservation projects that planted a billion trees, saved the whooping crane, modernized rural America, and built such diverse projects as the Cathedral of Learning in Pittsburgh, the Montana state capitol, much of the Chicago lakefront, New York’s Lincoln Tunnel and Triborough Bridge complex, the Tennessee Valley Authority and the aircraft carriers Enterprise and Yorktown.

It also built or renovated 2,500 hospitals, 45,000 schools, 13,000 parks and playgrounds, 7,800 bridges, 700,000 miles of roads, and a thousand airfields. And it employed 50,000 teachers, rebuilt the country’s entire rural school system, and hired 3,000 writers, musicians, sculptors and painters, including Willem de Kooning and Jackson Pollock. So much for the notion that government jobs are not “real jobs”, as we hear persistently from critics of the New Deal!

The reasons for the discrepancies in the unemployment data that have historically arisen out of the New Deal are that the current sampling method of estimation for unemployment by the BLS was not developed until 1940 (for more detail see here). If these workfare Americans are considered to be unemployed, the Roosevelt administration reduced unemployment from 25 per cent in 1933 to 9.6% per cent in 1936, up to 13 per cent in 1938 (due largely to a reversal of the fiscal activism which had characterized FDR’s first term in office), back to less than 1 per cent by the time the U.S. was plunged into the Second World War at the end of 1941.
In fact, once the Great Depression hit bottom in early 1933, the US economy embarked on four years of expansion that constituted the biggest cyclical boom in U.S. economic history. For four years, real GDP grew at a 12% rate and nominal GDP grew at a 14% rate. There was another shorter and shallower depression in 1937 largely caused by renewed fiscal tightening (and higher Federal Reserve margin requirements).

This economic relapse has led to the misconception that the central bank was pushing on a string throughout all of the 1930s, until the giant fiscal stimulus of the wartime effort finally brought the economy out of depression. That’s factually incorrect. Most accounts of the Great Depression understate the effect of the New Deal job creation measures, because they don’t show how much of the decline in official employment was attributable to the multiplier effect of spending on direct job creation. Also, the “work relief” category does not include employment on public works funded by the Public Works Administration (PWA) nor the multiplier effect of PWA spending. The figures tell the story indirectly, however, in the path official unemployment followed — steeply declining in periods when work relief spending was high and either declining more slowly or increasing in periods when work relief spending was cut back. In fact, by the end of 1934, more than 20 million Americans (one out of six!) were receiving jobs or public assistance of one form or another from the “Welfare State”.

Yes, 9.6% unemployment at the end of 1936 was still a big number. But it’s hard to imagine the Democrats being in political peril for the midterms, or witnessing the current abysmal state of Obama’s popularity ratings, if today’s Administration could reduce unemployment by two-thirds in one term in office, as FDR did under any honest measure of unemployment. Suffice to say, unemployment reduction was the singular focus of the Roosevelt Administration; by contrast, today we have “the new normal”, in effect, a faux intellectual argument to justify why we can’t generate higher job growth. It’s a testament to political failure.

In reference to the criticism of FDR’s “high wage” policy by Cooley and Ohanian, it is worth noting that the wage “inflation” which they decry was in reality a product of a deflationary environment in which the general price level fell faster than the money wage level. During the outset of the Great Depression, output generation collapsed in the face of the US federal government’s fiscal inaction and central bank interest rate hikes. This had the strange result of generating a counter-cyclical real wage increase, which in fact was nothing more than a product of depressed nature of the economy, in which overall prices were deflating prices faster than wages (for more information see here).

Overlaying the wage data with the true reduction in unemployment between 1933 to the end of 1936, makes it difficult to mount an empirical case that FDR wage improvements during the Great Depression were damaging to overall economic growth and increasing employment. Even if some sectors were disadvantaged (and that isn’t proven by Cooley and Ohanian) the evidence actually suggests that the rises in real wages were associated with rising overall employment.

Relapse Caused by Austerity Measures

What about the relapse in 1937/38? By 1936 many economists and financial experts (notably FDR’s Treasury Secretary, Henry Morgenthau) feared the country would go bankrupt if the government kept deficit-spending (sound familiar?). And after all, they argued, the government deficits had “pump-primed” the economy. The private sector could now take off on its own and get back to close to the full employment level of 1928-early 1929.

Consequently, Roosevelt ran (in 1936) on a platform that he would try to reduce, if not eliminate, the deficit. He won the election by a landslide — understandably, as the U.S. was out of depression by 1937. True to his campaign promise, government spending was cut significantly in 1937 and 1938, and taxes were raised to “fund” the new Social Security program. By 1938 Roosevelt submitted a budget in which the deficit was virtually eliminated (0.1% of GDP). The resultant economic relapse, based on efforts to balance the budget, exacerbated by a nonsensically tight monetary policy brought on by the Fed, duly followed.
This is unsurprising. Any type of fiscal austerity during a period of economic slowdown, whether via government spending cuts or higher taxes, will indeed depress economic activity.

But the other lesson of the Great Depression is that properly targeted fiscal policy which focuses on job creation can work. The Great Depression was indeed a disastrous human calamity but FDR’s New Deal (including the high wage policies) attenuated the disaster. There is nothing to the claims that the interventions made things worse, other than when Roosevelt himself capitulated to the tired old forces of financial conservatism and fiscal austerianism, and the economy paid the price. Thankfully, FDR was not ideologically wed to the ideas of fiscal austerity and quickly reversed course. It helped, of course, that his Cabinet was well represented by progressive figures such as Frances Perkins, Henry Wallace, Harold Ickes and Harry Hopkins, who overcame the forces of economic conservatism embodied by FDR’s Treasury Secretary, Henry Morgenthau. We need these kinds of progressive forces in current Administration, especially given the recent resignation of CEA head, Christina Romer. It’s time to let go of the old ideology, which created today’s crisis. Here’s hoping that President Obama, like FDR before him, changes course quickly. America is ready for a new New Deal.


UPDATE: September 6, 2010 8:20am

See Krugman today as well:

1938 in 2010


Marshall Auerback is a Denver, Colorado-based global portfolio strategist for RAB Capital plc and a Fellow with the Economists for Peace and Security ( He is a frequent contributor to the blog, Credit Writedowns, and the Japan Policy Research Institute ( and is a contributor to The Big Picture. Auerback is also a fellow at the Roosevelt Institute.

via New Deal 2.0

Category: Economy, Taxes and Policy

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

39 Responses to “The Real Lesson From the Great Depression: Fiscal Policy Works!”

  1. NormanB says:

    By Dec 1936 the real total return on the stock market from its Aug/Sep 1929 peak was zero. In other words, the stock market was just as high Dec 1936 as it was Aug 1929. Therefore, something horrible happened to send the stock market and the economy back down going into 1937.

    I have read that FDR and the Democrats decided that prices needed to be kept high so they instituted rules across the board mandating high prices and various labor practices. I’m not knowledgeable enough on this matter to know for sure but I think I can generalize and say that government intervention in the ‘clearing’ mechanism of the economy had a deleterious effect on it, like it always has and like it is now doing in the housing market.

    On matters of economics we need to be saved from our government much more than we need to rely on it.

  2. DL says:

    Invariably, people who say that “stimulus” spending “works” are unwilling to discuss the question of whether the spending will “work” over the time period that the debt (thus created) has to be paid off.

    If any of the people who advocate “stimulus” spending were intellectually honest, they would accompany their suggestion of such spending with a specific and highly credible proposal for paying off the debt that they so advocate creating. This would at least be the proper debate to have, i.e., long term costs versus long term benefits.

    If we are going to have a massive new spending program, it shouldn’t be one that gets rammed through the Senate with just 51 votes in the middle of the night.

  3. Lancep1 says:


    This tracks a lot of my thoughts, however, it also seems a good bit too sure of itself as an argument. Some answer to potential counterarguments, and a bit of humility about how we tease out the effects of various things seems warranted to me (as it should from those who you are arguing against.)

    For example, if balancing the budget after the enormous economic growth leading into 1937 can be blamed for the relapse (aside: I don’t see why the high wage argument can’t sit comfortably alongside yours) then it easily leads to the counterargument that the “growth” of the previous four years was of a particularly unsustainable nature over a longer time frame. Absent government spending it wouldn’t have existed. Instead, growth might have occurred anyway, if possibly at a lower level, and in activities reflecting longer term private demand/desires and much more resistant to a simple slowing or contraction of government spending.

    I am not endorsing that view, though I suspect it is true to some extent, if not to an extent that invalidates your argument. Rather I am showing that overconfident assertions based on simple Aggregate Demand models (even if they work and you are in fact correct about the best policies to choose) do not answer many relevant questions, assumes what the goal of economic activity should be that are certainly questionable, and possibly mistakes cause and effect. In sum, it is certainly arguable that FDR raised “growth” but undermined economic health more generally. Or, it could also be argued that FDR raised growth, but only at the cost of not being able to remove stimulus since economic activity once it was removed would have to be switched to other areas (the economic “recalculation effect) and thus a relapse was inevitable. I could go on to point out many other potential objections.

    Also, I do think it should be noted, though it does not invalidate your argument, that the impression you give of Hoover’s policies seems a bit off. While you may still feel his efforts were minimal, readers should note that real government purchases actually rose by 11.0% between 1929 and 1932, with federal government purchases alone growing 18.1% between 1929 and 1932.

    That may be minimal in your mind, but they hardly represent a government that was on an austerity campaign.

    Looking at the data, the remarkable changes leading up to the turnaround in output (instead of coincident to it) is an astounding explosion in private domestic investment. Obviously that was from a very low base given its total collapse previously, but it does stick out and might argue for some different interpretations about what drove the rebound.

    Those objections aside, I do agree that any move toward austerity at this point would likely lead to a rather bad outcome in the short term. Whether those costs would be worthwhile bearing over a longer time frame is obviously open for debate.

  4. mbelardes says:

    Fantastic article putting the FDR programs in perspective in the context of today. I find it hard to disagree with much of the discussion, especially since I am biased to almost immediately cringe when I see FDR or the WWII-era brought up in the context of today.

    “It also built or renovated 2,500 hospitals, 45,000 schools, 13,000 parks and playgrounds, 7,800 bridges, 700,000 miles of roads, and a thousand airfields.”

    This is exactly my point, we got bang for our buck in the New Deal. We are not getting that with the Stimulus 1.0 bill and I fear the nimrods in the GOP and DNC are too focused on ideology and reelection that practical policy to get us bang for our buck in Stimulus 2.0.

    Here is the problem with this entire debate.

    “Austerians” do not want to discuss the clear benefits of deficit spending.

    “Keynesians” do not want to discuss the clear problems with deficit spending.

    Nobody is willing to articulate where we should legitimately cut spending and where we should realistically increase spending.

    We are fighting over blind spending or blind cuts.

    What I find most irritating about the Keynesians though is this outrageous reliance on the 1930′s and 1940′s to make their entire point about spending (Which I am thankful this article above did not end in “So just dump money and call it stimulus” and instead said “Let’s get an actual plan, like a Newer Deal”). They ignore a lot of the major structural changes that took place in the global economy post-WWII.

    Then there is this idea of spending for spending’s sake. I beg someone with political power to articulate what we should deficit spend on and how that is a long term public good. The original “stimulus” bill was a bipartisan-short-termed waste. I am fine blowing through trillions of dollars (and I’m 26 so my generation has to pay it back) so long as we are INVESTING capital in long term public goods that will give our country a competitive advantage in the future. Where was this in the first bill? Tax cuts and dollars funneled for government “jobs” and pet projects? Ridiculous. NOT THAT it was all a waste, just that the bulk of it was and that is the problem.

    We are definitely getting Stimulus 2.0, let’s just hope we get some bang for our buck in the form of a New Deal 2.0 instead.

  5. machinehead says:

    ‘Any type of fiscal austerity during a period of economic slowdown, whether via government spending cuts or higher taxes, will indeed depress economic activity. But the other lesson of the Great Depression is that properly targeted fiscal policy which focuses on job creation can work. ‘

    All true enough. But nowhere does Marshall Auerback address the essential backdrop of the government’s size and indebtedness. Entering the 1930s, federal debt was low after a string of surpluses in the 1920s. Moreover, the federal government was small as a percentage of GDP, as the now-enormous entitlements programs initiated by Frank Roosevelt didn’t exist then. So with a clean slate, Frank had enormous untapped potential for government expansion and borrowing.

    Three generations later, we now up against the limits of such processes. The majority of the federal budget is on ‘entitlements autopilot;’ federal debt is around the 100% of GDP danger zone; total public and private debt is at an unprecedented 360% of GDP.

    It’s not that fiscal deficits are ineffective or undesirable per se. Rather, it’s that the ability to finance them is slipping from our grasp. Worse, the entitlements schemes have Ponzi characteristics, with large unfunded promises. As a result, the federal government is insolvent (negative net worth) though liquid (able to roll over debt and borrow more).

    No one knows how far this unsustainable dynamic can be pushed before a market rebellion occurs. Deficits are now permanent, and the negative net worth deepens every year. For now, and perhaps for another decade, the interest cost will be bearable. But there’s no guarantee that a Treasury auction glitch won’t occur before exponential runaway sets in.

    In isolation, countercyclical spending is a fine idea. But coupled with an ‘infinitely elastic’ fiat currency, the perverse incentives it offers to lawmakers ensure that we will spend ourselves into debt penury. Democracy and fiat currency mix like teenagers and whiskey!

    Marshall Auerback sasses the gold standard and lauds the gold-grabber Roosevelt. But the prevailing doomsday-machine fiat standard ultimately will toss out his fiscal-stimulus baby with the debt-default bathwater onto history’s scrapheap. Austerians, Fiscalerians and Fiaterians can merrily accompany each other down the broken flagstones of the highway to hell. I quote the words of Winston Churchill which were dinned into Auerback’s ears in his long-ago public schoolboy days:

    ‘For five years I have talked to the House on these matters, not with very great success. I have watched this famous Island descending incontinently, fecklessly, the stairway which leads to a dark gulf. It is a fine broad stairway at the beginning but after a bit the carpet ends. A little farther on, there are only flag stones, a little farther on still, these flag stones break beneath your feet. If mortal catastrophe should overtake the British Nation, historians a thousand years hence will never understand how it was that the victorious nation suffered themselves to cast away all that they had gained by measure-less sacrifice. Now the victors are vanquished and those who threw down their arms are striding on to world mastery.’

  6. ToNYC says:

    The problem with solutions is that the fiscal policymakers are c***blocking useful changes because the name of the game is keeping the still successful looters away from any real enforcement. If money is still the major factor in elections, we get the best government that money can buy.
    Stay home and trade amongst yourselves. Your dollars are your votes, cast them carefully.

  7. Lamont says:

    “The OMB numbers suggest that spending actually DID decline in 1937 and 1938 (see here) and, contrary to the assertions of Cooley and Ohanian, that decline had a very deleterious impact on economic activity and employment”

    These numbers don’t include state and local govt spending. If they did, you’d see Barry that total govt spending went up in 1937 from 1936 and again in 1938 from 1937. The data is easy accessible by using the drop down menu here:

    “…government hired about 60 per cent of the unemployed in public works and conservation projects”

    All part time and for a maximum of one year, plus everyone in the program was supposed to continue looking for real work while they were in this program.

    “President Hoover made comparatively minimal attempts to deploy government fiscal policy to stimulate aggregate demand.”

    Pres Hoover did more to stimulate aggregate demand than any other President before him. His interference in the economy only seems minimal compared to the President after him. Note that before Hoover, the US economy always recovered with no stimulus.

    “If these workfare Americans are considered to be unemployed, the Roosevelt administration reduced unemployment from 25 per cent in 1933 to 9.6% per cent in 1936, up to 13 per cent in 1938.”

    These jobs were considered part time and temporary and workers will still supposed to be looking for real jobs while on the program. Folks were considered unemployed while in the program as they were supposed to find real work and leave the program the moment they did. The program was about getting unemployed folks to do something for the money, no matter how little they actually did or how economically useless their work was.

    “It also built or renovated 2,500 hospitals, 45,000 schools, 13,000 parks and playgrounds, 7,800 bridges, 700,000 miles of roads, and a thousand airfields.”

    This doesn’t indicate the quality of such: ie. small rural wooden school houses, dirt roads, some dirt airfields, parks where it’s a rural area anyway. Much of this construction would be replaced or roads and airfields had to be repaved within a short time, and much of the work was economically useless.. The TVA also to a large extent put themselves, under the umbrella of the govt, in direct competition with private utilities which were already present. Private utility companies expanded substantially and were a big economic growth driver in the 1920s. In the 1930s expansion was minimal, much of the reason being the govt expansion.

    “once the Great Depression hit bottom in early 1933, the US economy embarked on four years of expansion that constituted the biggest cyclical boom in U.S. economic history. For four years, real GDP grew at a 12% rate and nominal GDP grew at a 14% rate.”

    This is nothing but a statistical phenomena and something pundits usually do to mislead readers. When you start at a low base then things will increase at higher rates. For example, an increase from 5 to 6 is a 20% increase, while an increase from 15 to 17, which is twice the amount in nominal terms, equates to only a 13% increase.

    “Any type of fiscal austerity during a period of economic slowdown, whether via government spending cuts or higher taxes, will indeed depress economic activity.”

    The tightening wasn’t during a slowdown. The economy was ramping up in 1936 after the soldiers bonus payments. Note that most of the increase in Federal govt spending in 1936 was due to the soldiers bonus checks, not by direct govt spending. Those checks were virtually the same as the current stimulus checks handed out by both the Bush and Obama administration. When the money was spent, it was gone. The big increases in state and local spending in 1937 and 1938 made up for the drop in federal spending after the checks were spent, but the reality is that the Federal govt can’t issue ever greater amounts of stimulus checks every single year to keep GDP going up. It doesn’t make America wealthier. Now days it makes us poorer because of how it would make worse the trade imbalance and cause oil prices to go much higher. It’s a failed policy.

  8. NormanB Says ” By Dec 1936 the real total return on the stock market from its Aug/Sep 1929 peak was zero.”

    Actually, the return was far less than zero. The 1929 price was not regained until 1954. In Nasdaq terms, that is the = of Nazz 5100 in 2025.

  9. gbgasser says:


    Who gives a crap what the stock market did during that period!? The number of people trading stocks at that time was a much lower percentage than today since the average joe had no private retirement accounts to speak of. All that number show is that the “BIG BOYS” were scared and they werent trading with each other much. Not gonna see much movement in a market with few buyers.

    I think you are correct about some wrong headed thinking about keeping prices high but thats more a reflection of people never really dealing with this type of thing in a financialized economy of the scale of the 1920s-30s. Remember Nixon enacted some wage and price freezes in the 70s as well. Not many would support that type of govt intervention today either.

    But neither of these facts affect what the proper path forward from here is. A recession (depression) is a drop in economic activity (spending). IOW fewer people are buying things. When fewer people buy things (or the same number of people buy fewer things) incomes fall, they have to. Everyones income is the result of someone elses spending. Those arguing against govt spending have to say where the additonal spending is going to come from.
    Are you seriously arguing that we dont need to buy more things?? Or that there is nothing worth buying? I can agree that spending on placing wine in all public drinking fountains might raise economic activity but would not be good spending. There are plenty of bad places for the govt to spend money, equally as many as there are for the private sector to spend money. Our private sector just finished a binge where they tried to make all of us real estate brokers, mortgage lenders, contractors, construction workers or sellers of fancy debt derivative products… how’d that work out.

    People arent buying enough things right now so the govt must step in. They are the only ones that can when the private sector says….” no mas”…. There are lots of things we shouldnt spend on but lots of things we can, in addition to giving a payroll tax holiday AND direct hiring of people through the private sector. Have the govt pay business owners to hire someone and have work for them to do. Dont just give them a tax break and HOPE they’ll hire, give them money and tell them to spend it on x number of jobs. Its been over two years, its time to move.

  10. for the ‘Look Magazine’-Demographic, that may be among us..

    also re: TVA,

    a fine ex. of .. “In the department of economy, an act, a habit, an institution, a law, gives birth not only to an effect, but to a series of effects. Of these effects, the first only is immediate; it manifests itself simultaneously with its cause – it is seen. The others unfold in succession – they are not seen: it is well for us, if they are foreseen. Between a good and a bad economist this constitutes the whole difference – the one takes account of the visible effect; the other takes account both of the effects which are seen, and also of those which it is necessary to foresee. Now this difference is enormous, for it almost always happens that when the immediate consequence is favourable, the ultimate consequences are fatal, and the converse. Hence it follows that the bad economist pursues a small present good, which will be followed by a great evil to come, while the true economist pursues a great good to come, – at the risk of a small present evil….”

    w/ Auerback, We’d do well to wonder ‘which kind of Economist he may be..’

  11. NormanB says:

    BR: I said TOTAL (adding in dividends received from Aug 1929 to December 1936) REAL (divided by the decline in the CPI which raised the REAL RETURN). I’m greatly shocked that you formulated your retort based on PRICE which wasn’t what my short and easy to read comment stated. Gotta read things better, BR.

  12. gbgasser says:


    “Note that before Hoover, the US economy always recovered with no stimulus.”

    Oh dont make me laugh. There was no one even keeping up with any metrics of the macroeconomy prior to the 1930s. If by recovered you mean, the rich people didnt lose everything and were able to find more near slave labor to do their next “value extraction” process then yes. Tell you what why dont we send you back to the early 1900s or late 1800s as a worker and see what you think the “recoveries” felt like.

    That was a good one….. thanks for the chuckle.

  13. gbgasser says:

    So Mr Hoffer

    By your definition there are no good economists since no one knows the future. Many talk as if they do. I remember Peter Schiff (he’s probably one of your favorites) in ’08 “predicting” hyperinflation by this time…….. hmmmmm where is it…… I guess his model was just a little off.

  14. gbg,

    yes, that could have been clearer..

    the TVA/ ‘Coal Ash’-Pond incident was, only, meant to be indicative of the Ecological hazards of TVA, in general..

    for others, long since known..

    so, No, ‘predicting the Future’ isn’t a prerequisite..

    also, on Schiff, he has his own Ideas, though, Au has outperformed many other ‘Investment Options’..

  15. Lancep1 says:


    I noticed that you said real total return. However, if I hadn’t I don’t see how sneering at me would have been called for, and for a host who provides as much stimulating discussion, data and thought as Barry, it seems doubly unwarranted.

  16. DM RTA says:

    ” when the extent of mal-investment and over indebetness has passed a certain limit, measures which postpone liquidation only make matters worse” Lionell Ribbons quoted in the book Deflation 2004 by Chris Farrell ….Chris wrote this also in the next paragraph: …”Investment booms surrounded new technologies, but the ROI is always uncertain. How many miles of canals should be dug? How many lines of railroads make competitive sense? Which city will grab enough business to justify building skyscrapers?”…

    Somewhere else in the book he discusses how these opposite social/economic forces can exist (even co-exist) in different vertical columns of the economy at the same time.

    It’s a decent older book and it makes you wonder just who should be deciding to gamble with more failed policies or let the chips fall where they will. What exactly has Japan accomplished and how exactly are we going to be brilliant compared to them when burdened with politics just as much as any other nation. Personally, I’d rather bet on the reset button combined with the promise of a generation of young eager Americans who vow not to make the same mistakes, than an entire body of lawyers elected every few years…but that is just me.

  17. Broken says:

    “Fiscal Policy Works!?”

    I suppose this is news to those who believe the revisionism which paints FDR, the New Deal, and fiscal policy in general as horrible economic failures. The New Deal certainly had some failed experiments as well as successful ones, but it is hard to deny the stellar growth rate, jobs created, and massive new infrastructure at a cost which was hardly overbearing. The average economic growth rate from 1932-1940 was 5.9%, including the 1937 recession. No president since has matched that. Yet this performance is deemed by some as a failure, “proving” that fiscal policies don’t work.

    There is also the false claim that the build-up to WWII explains why GDP went from $92.2B to $126.7B in 1939-1941 . This ignores the fact that total Gov spending, including Defense, only increased from $14.8B to $26.5B, and only accounts for 1/3 the overall economic growth. Either you conclude that government spending had a 3X multiplier effect or that the private economy had a very healthy growth rate of its own. Neither answer makes the FDR haters happy.

  18. machinehead says:

    That the economy performed well from 1932 to 1940 (from an apocalyptically depressed base) is not in dispute. It is not surprising that enormous, debt-financed fiscal stimulus was capable of stoking growth.

    Nevertheless, two legacies of Roosevelt are deplorable. One is his unnecessary and unprincipled seizure of gold from private citizens, under a WW I ‘Trading With the Enemy Act’ which had nothing to do with the peacetime conditions under which the seizure occurred. Rogoff and Reinhart, in This Time Is Different, characterize Roosevelt’s abrogation of gold bond contracts as the only technical default marring the credit history of the United States. It remains immoral and disgraceful.

    A second poisoned legacy of Frank Roosevelt is the Ponzi character of federal entitlements financing. According to the Financial Report of the United States, Social Security has a negative net worth of $7.677 trillion. Later entitlements (Medicare and Medicaid) boost the negative net worth to $45.8 trillion — refer to Table 5 of this US Treasury publication:

    Tragically, thanks to Ponzi-scheme entitlements, the US is condemned to permanent deficits from here on out. Consequently, its capacity to engage in countercyclical fiscal stimulus is severely compromised.

    It didn’t have to be this way. Relief could have been targeted to the indigent, as it always was. Roosevelt’s objective in creating universal entitlements was political: universality, he said, meant they could never be repealed. He was quite correct. But the baleful effect of unsoundly-financed middle-class welfare has ruined us. Frank Roosevelt was the cavalier author of our misfortune.

  19. Broken,

    OOC (out of curiosity) do you think that FDR’s devaluation of the ‘unit of account’, from $~20 to $~35/Au had Anything? to do with the #s you’re quoting?

    something tells me that, if We were to undergo a similar de-valuation of out, current, ‘unit of account’, We could see some mighty strong (Nominal) ‘rates of “Growth”, going fwd:, from here..

    What sez U?

  20. JustinTheSkeptic says:

    Admittedly it has always been easier to yell stimulus from the highest mountain because that is what wins votes. But why have we let it become the only way to get out of a slow down? Is Schumpeter’s idea of Creative destruction totally alien in today’s world? Why can’t an economy find where equilibrium is (or even over shoot it) on the down side and then bounce back? What needs to be studied is how to create the economic/business environment whereby people are willing to re-engage again without government stimulus. How did we get out of the 1873 depression, the 1911? So of the problem could be fixed by never letting it get so out of hand in the first place – the interest rate mechinism has been broken for some time now. How much of that is the result of global markets being “sticky?”

  21. Sechel says:

    We’ve had some contraction in credit, but is that deflation ? I don’t think so.
    And as you’ve said Barry the CPI understates inflation due to Boskin’s jiggering.
    It feels very much the drumming up of deflation fears is cover for future Fed stimulus the purpose of which
    is to deal Obama’s re-election campaign.

  22. Broken says:

    @machinehead Says: “It is not surprising that enormous, debt-financed fiscal stimulus was capable of stoking growth.”

    Not enormous. Total Fed, state and local expenditures were $8.7B in 1933 out of total GDP of $56.4B, or 15.4%. In 1936, total gov expenditures were $13.1B out of total GDP of 83.8, or 15.6%. Almost no increase. Gov expenditures declined to 13.9% in 1937. In reaction to the 1937-38 recession, total gov expenditures increased again and were $15B out of a total GDP of $101.4B in 1940,or 15%.

    So, total government expenditures as % of GDP did not increase from 1933-1940. What DID increase was the percentage of government spending by the Federal government, which went from 26% of total government spending in 1933 to 43% in 1940. In dollars, from $2.3B to $6.5B. Meanwhile, state and local government spending shrank.

    In terms of gold policy, Roosevelt wanted to float the dollar without a massive gold transfer out of the country. Hence, his gold policy. I am not a gold standard advocate, so I don’t get too worked up about this.

    Regarding Soc Sec, the treasuries that SS funds are invested in have outperformed the vast majority of 401Ks over the last 10 years, so I have a hard time buying the argument that the average Joe would be better off if his retirement fund was managed by Wall Street.

  23. jeg3 says:

    Most of what passes for economics is Neoclassic economics (Gov’t Regulation Bad, Tax cuts for wealthy & tax increases for everyone else = good, and cut wages of the middle class; also the Neoliberal and libertarian agenda). The only positive about libertarian is the recognition of bubbles, and the big negative is being part of the Koch Cult:

    and of course Purgatory Ben:

    Better analysis of the GFC:

    Personally I believe in Schumpter for Tech creative destruction, BR for FIRE creative destruction – no bailouts, bankruptcy court, Keen’s modeling of Fisher-Keynes-Minsky for Ponzi Finance, and some from the Chartalist (MMT). Still trying to work it all out. If your worried about federal debt then increase the top tax rate to 70% including capital gains, especially if the Gov’t is keeping the economy afloat by increasing necessary spending. We need to work on 21st century infrastructure (internet, energy, robotics, nanotech, biotech, space exploration, etc.) and correct past egresses (brownfields-superfund sites cleanup, ecological restoration, etc.), and so on which gov’t spending will give more bang for the buck down the road.

    Going back to the gold standard [or unjustly under another currency like Greece & Ireland) seems to be self-sabotage which appears to be the game of ex-pats and others (and who they are fronting for?).

    and since the only time the Bank of England defaulted was on the gold standard:

    Economics is about work. Work = Application of knowledge that is useful to a society.
    Gold plays no greater part than any other element, the education of a society is much more important.

  24. Broken says:

    @Mark E Hoffer

    Serious inflation did not kick in until the war. Remember, it took a while to overcome the massive deflation that was ongoing when Roosevelt took office. I don’t have the numbers right in front of me, but I can look them up if you want.

  25. jz says:

    The best post I read was from mbelardes. “Here is the problem with this entire debate.

    “Austerians” do not want to discuss the clear benefits of deficit spending.

    “Keynesians” do not want to discuss the clear problems with deficit spending.

    Nobody is willing to articulate where we should legitimately cut spending and where we should realistically increase spending.

    We are fighting over blind spending or blind cuts.”

    Not only that, but we have become polarized as Republicans are austerians and Dems are Keynesians.

    What no one wants to talk about is that a huge amount of money flowed to the states so they could keep up on their outrageous pension plans. I talked to a fireman, who was hoping to retire and get $100,000 a year.
    When I informed him that it would take $5 million in principle to generate that income, his jaw dropped.

    So what Obama and the Dems have done has been to use the stimulus money to pay off states and cities so they do not go bankrupt and keep paying on these unaffordable benefits. These workers need to wake up and see that the total revenues to their cities and states are going down and accept some belt tightening. Instead, they are adamant about what is owed them and point to their contracts. Well, contracts can be broken with bankruptcy, and I for one am tired of seeing this country go into a huge amount of debt paying the benefits of non-working people. There has needed to be a lot more cities and counties declaring bankruptcy than there has been. It is this type of government spending that I am so opposed to.

    On the other hand, stimulus spending can be beneficial if it is used to make the economy more productive. That means better roads, high speed rail, alternative energy ETC. I am concerned with the federal government at the forefront that such stimulus will be given more to those politically allied with the ruling party than productive entities, but that is somewhat to be expected.

    I voted for the Dems in 2006 and Obama in 2008 and have seen enough to change my vote back to the Republicans. The reason is the Dems disingenuousness.

    Back in 1990, there were some folks proclaiming that 65 million Americans were going to get AIDS. In 2010, the number is like <5% of that. Instead of the people making those faulty guesses admitting they were wrong, they are taking victory laps saying that they saved the lives of 60 million Americans.

    So you have Dems like Krugman out there saying that while unemployment is bad, can you imagine what it would have been without the stimulus? Bleeech!!

    The problem with the stimulus was not the stimulus per se. It was where it went: propping up bankrupt communities and home owners temporarily is not going to stimulate the economy.

    Maybe with Republicans controlling the House, any future stimulus will be better targeted. We need a much better bang for the buck than we got.

  26. kaleberg says:

    The gold standard is basically meaningless in any economy with reserve banking. In the 1930s, the reserve ratio worked out to about 20:1. That was set by fiat. It could have been 2:1 or 200:1. Gold isn’t magic. If you set the reserve to 1:1 (or less), you can’t have economic growth. Do the math.

    I think the real problem is thermodynamic. Money has a natural flow in capitalist societies, and the equilibrium is that all the money eventually winds up in a small number of pockets at which point it is impossible to justify any further investment. You can run a simple simulation of this. It’s just like thermodynamic heat death. Unless you assume that you can get and stay rich by investing more than you are going get in return, you’ll find that economies tend to wind down. Do the math.

    The only way out is some kind of engine of creative destruction. In the good old days this was starvation resulting from the high price of food. (In the middle ages they distinguished starvation due to “cares” in which food prices were high for economic reasons from “fames” in which food prices were high because food was simply unavailable. This distinction was moot for those dead of starvation.) The resulting labor shortage was effectively a tax on the rich, forcing them to pay more to exploit their assets.

    There are other approaches, but they all basically come down to taxing the rich. You can start a war, and, if you win, tax the other side’s rich. You can increase spending, on a war or what you please, and tax your own rich. You can develop new sources of wealth that will let you tax the rich by means of deflating the value of their current assets. It doesn’t really matter as long as you get the money flowing again.

    At some point economics has to be consistent with accounting, just as string theory has to yield Newtonian dynamics. If you want to know what is going on, do the math.

  27. I love these arguements. The classic “If you only had better stimulus.”

    It seems to me humans are just inclined to feel like they have to “DO SOMETHING!” Then the somethings end up as one big 5,000 page log….aka a Bill on the House floor. Perhaps we would all do well to crack the “Forgotten Man”. Is Ms. Shalaes book considered revisionist history? I would contend, after reading Ammity’s book, that FDR is not the man that my college history dept. made him out to be.

    On a side note. I keep hearing about this deflation theme and how it will lead QE 2.0. and therefore investors should position themselves short duration and long “stuff”. I want to agree, except….It seems to me though that every bond manager/equity manager that I read about or talk to is positioned short duration and long commodities exposure. How many bond managers do you know of Barry that say, jeez, I think long duration is the trade here (ex Japan bond investors of course). The boat seems to tilted still too far towards the inflation trade despite all this talk of “inflation”.

  28. bman says:

    Ok so +750 Billion to the banks and everyone says the alternative is unthinkable, Then 50 billion for infrastructure jobs and everyone starts to squawk about the return on the investment and whether it will really help the (Whose?) economy. One day the rest of the nation is going to wake up, I have a feeling it won’t be a bright sunny day! Tax the rich. Embrace the idea, especially if you are rich, It is your last best chance for maintaining the status Quo.

  29. tawm says:

    > An objective observer looking at the US in the 21st century would hardly conclude that unions have any real power in the American economy today….

    WTF? Apparently, the public sector unions, and those organizing service industries (SEIU) and academe (UAW) have no effect on the US ecnomy??!

  30. Joe Friday says:


    “I remember Peter Schiff … in ’08 ‘predicting’ hyperinflation by this time…….. hmmmmm where is it…… I guess his model was just a little off.”


    * He was WRONG about hyperinflation

    * He was WRONG about the dollar

    * He was WRONG about all other commodities except for gold

    * He was WRONG about all other foreign currencies except for the Yen

    * He was WRONG about all foreign equities

    * He was WRONG about U.S. treasuries

    * He was WRONG about interest rates, both foreign and domestic

    Even his own EuroPacific investment portfolio was DOWN 61%.

    Did I mention he was WRONG ?

  31. Joe Friday says:


    “According to the Financial Report of the United States, Social Security has a negative net worth of $7.677 trillion.”

    The actuaries say that Social Security is solvent through 2085, and they only do 75-year projections:

  32. Broken says:


    You have it right.

    I generally don’t like “economics by physics analogy” but your model is good. Money eventually flows into a smaller and smaller number of black holes (IE, the super wealthy) until it just stops moving altogether. Plenty of third world countries have demonstrated this quite vividly.

    Tax brackets which stop at $300K made sense in 1930. Today it makes no sense at all that Warren Buffet is taxed at a lower rate than his secretary, which Warren himself pointed out as unjust and economically unsound. There should be brackets all the way up to $10 billion. A top rate of 75% at $10 billion annual income would not be unreasonable. Likewise with estate tax.

    Although it would take ~1000 of me to make one Warren Buffet or Bill Gates, my net worth is ~1000 times the average person. So I am not making this argument as some disgruntled proletariat.

    It is not economically sound to tax very large incomes at such a low rate. If you disagree, why is it that growth is so low the last few decades when tax rates on the wealthiest are at all time lows?

    Frankly, I would rather pay higher taxes on good returns than pay low taxes on crappy returns. YMMV.

  33. Dow says:

    Rather than blame union members and/or pension plans for the recession (an oldie but a goodie), why not spend some of that energy demanding some finreg with fangs?

  34. Sechel says:

    The deflation press scares me. I think it’s engineered hype. We know that C PI understates inflation, and the government is looking for an excuse to monetize the debt and do anything that will help Obama in the next election. The decline in housing related assets is due to over-supply and printing more money will not change that.

  35. JasRas says:

    I’ve read the “Myths of the Great Depression” and I’ve read the above…and what we were fed in H.S. and college. I suspect the truth is somewhere in the middle and proving causation is not only difficult but near impossible the further away we get from the time period. I would guess that there was simply too much futzing around from D.C. in both directions and that both extended the pain. There were simply too many things being done to know what “worked” and what “hampered” Certainly mother nature didn’t help with the dust bowl. Neither did the over-build in the mechanization of the “family farm”. The quantum leap in farm tech displaced many people–and that was going to happen with or without the great depression… In addition to new “high tech” industries consolidating; automotive, broadcasting/radio went from many to few in a short period–also through hyper competition. Lest we think we were the center of the storm, don’t forget that there were macro-economic activities that were put into action overseas that were starting to affect us as well. “The Lords of Finance” is a great book that looks at these events within some context that helps one realize that, once again, we are not an isolated economy within a petri dish… yet so many think we are.

    Only politicians are foolish enough to think they have the power to change the tide of economic events set in motion far beyond their reach… and voters believe them, sadly.

  36. Every depression in U.S. history has resulted from federal surpluses. Most recessions have resulted from reductions in federal debt growth. The recoveries from all recessions and depressions have corresponded with increases in debt growth. Our transition from depression to booming recovery, during WWII, corresponded with massive increases in federal debt growth. For the above facts, see:

    This tells me a growing economy requires a growing supply of money. Now, what are the debt hawk facts that prove otherwise?

    Rodger Malcolm Mitchell

  37. DeDude says:

    “Maybe with Republicans controlling the House, any future stimulus will be better targeted. We need a much better bang for the buck than we got.”

    You can’t seriously think that the tea-partiers will do stimulus. They are about austerity for the consumer class (Social Security cuts) and tax-cuts for the rich. That is exactly the opposite of what is needed in a country that has been ravaged by asset bubbles (excess money amongst the rich) and lack of growth in the economy (70% of which is consumption).

  38. Ted Kavadas says:

    There are a lot of issues here that can be commented upon; perhaps the most important is the following:

    I think that there is danger in thinking that conditions of The Great Depression are similar to those of today, and as such, putative solutions used then can be successfully applied to our current situation.

    For those interested I discuss this subject further in a blog post here:

  39. bman says:

    @Broken, I agree, it seems as if you agree with me too.
    back around WWII the top bracket tax rate was ~90%
    And noone complained.