Study Says Stimulus Prolonged Depression By Seven Years

[Phokus]

Originally posted by: Phokus
1. Repost for sure, this is from 2004 (plus i had rather lengthy debate on this subject with jbourne here http://forums.anandtech.com/me...R_FORUMVIEWTMP=Linear)

2. This economist debunked the UCLA study

http://www.econ.wisc.edu/works...Eggertsson%20paper.pdf

Can government policies that increase the monopoly power of firms and the militancy of unions increase output? This paper studies this question in a dynamic general equilibrium model with nominal frictions and shows that these policies are expansionary when certain ?emergency? conditions apply. These emergency conditions?zero interest rates and deflation?were satisfied during the Great Depression in the United States. Therefore, the New Deal, which facilitated monopolies and union militancy, was expansionary, according to the model. This conclusion is contrary to the one reached by a large previous literature, e.g. Cole and Ohanian (2004), that argues that the New Deal was contractionary. The main reason for this divergence is that the current model incorporates nominal frictions so that inflation expectations play a central role in the analysis. The New Deal has a strong effect on inflation expectations in the model, changing excessive deflation to modest inflation, thereby lowering real interest rates and stimulating spending.

Originally posted by: her209
Is this the study?
PDF

The Great Depression in the United States From A Neoclassical Perspective

That's cute, there are still economists who cling to overly simplistic economics models

Also, another paper:

http://www.newyorkfed.org/rese...ts/eggertsson/gexp.pdf

Abstract
This paper suggests that the US recovery from the Great Depression was driven by a shift in expectations.
This shift was caused by President Franklin Delano Roosevelt?s (FDR) policy actions. On the
monetary policy side, FDR abolished the gold standard and ? even more importantly ? announced the
explicit objective of inflating the price level to pre-depression levels. On the fiscal policy side, FDR expanded
real and deficit spending. This made his policy objective credible. These actions violated prevailing
policy dogmas and involved a policy regime change as in Sargent (1983) and Temin and Wigmore (1990).
The economic consequences of FDR are evaluated in a dynamic stochastic general equilibrium model with
nominal frictions.

 

[Phokus]

Originally posted by: eskimospy
That's an interesting study. The majority of economists disagree with it, but interesting nonetheless. It also poorly explains other countries' emergence timelines from the Great Depression.

Much to the chagrin of Ron Paul bots everywhere, how fast countries got out of the great depression is highly correlated to how fast they dropped the gold standard:

Ben Bernanke and Harold James, in a paper called "The Gold Standard, Deflation, and Financial Crisis in the Great Depression: An International Comparison" published in 1991 (NBER working paper version here), noted that 13 other countries besides the U.K. had decided to abandon their currencies' gold parity in 1931. Bernanke and James' data for the average growth rate of industrial production for these countries (plotted in the top panel above) was positive in every year from 1932 on. Countries that stayed on gold, by contrast, experienced an average output decline of 15% in 1932. The U.S. abandoned gold in 1933, after which its dramatic recovery immediately began. The same happened after Italy dropped the gold standard in 1934, and for Belgium when it went off in 1935. On the other hand, the three countries that stuck with gold through 1936 (France, Netherlands, and Poland) saw a 6% drop in industrial production in 1935, while the rest of the world was experiencing solid growth.

A gold standard only works when everybody believes in the overall fiscal and monetary responsibility of the major world governments and the relative price of gold is fairly stable. And yet a lack of such faith was the precise reason the world returned to gold in the late 1920's and the reason many argue for a return to gold today. Saying you're on a gold standard does not suddenly make you credible. But it does set you up for some ferocious problems if people still doubt whether you've set your house in order.

http://www.econbrowser.com/arc...2/the_gold_standa.html

 

[MovingTarget]

Wow, fail. Ask anyone who lived through the depression what they thought of Roosevelt's New Deal. There are still quite a few around and they overwhelmingly approve. The author is an idiot.

 

[DaveSimmons]

Originally posted by: TheSkinsFan

Originally posted by: DaveSimmons
In fact the article claims the stimulus would have resulted in a "beautiful recovery" except...

That's not at all what the article says.

From the article...

"We found that a relapse isn't likely unless lawmakers gum up a recovery with ill-conceived stimulus policies."

"So he (FDR) came up with a recovery package that would be unimaginable today, allowing businesses in every industry to collude without the threat of antitrust prosecution and workers to demand salaries about 25 percent above where they ought to have been, given market forces. The economy was poised for a beautiful recovery, but that recovery was stalled by these misguided policies."

By artificially inflating both (salaries and prices), the New Deal policies short-circuited the market's self-correcting forces."

For the purposes of their analysis, FDR's New Deal policies (NIRA) = "stimulus"

Reading comprehension FTW.

I'm not saying that I agree with equating NIRA to Obama's own "stimulus" packages, but that is what the authors of this study are saying, so your initial statement, quoted above, was completely fabricated.

My personal opinion is that both plans for recovery are/were absolutely fucked up.

The quote lists two specific policies, antitrust and wage hikes, as stalling the recovery not the new deal as a whole.

In other words, OP's claim has no support from this paper.

 

[CycloWizard]

Originally posted by: eskimospy
That's an interesting study. The majority of economists disagree with it, but interesting nonetheless. It also poorly explains other countries' emergence timelines from the Great Depression.

Whether someone disagrees with a statement has no bearing on the truth of said statement. Nor does this study attempt to explain other countries' behaviors.

 

[CycloWizard]

Originally posted by: miketheidiot
i did, theskins analysis was off base and a complete misinterpretation of the study. He might as well have called me a poopypants. I expect better out of you since you are a science guy, him on the other hand, not so much.

His "analysis" was simply quotes from the article. Thus, it's hard for me to understand how you can construe that as a "complete misrepresentation of the study."

 

[CycloWizard]

Originally posted by: MovingTarget
Wow, fail. Ask anyone who lived through the depression what they thought of Roosevelt's New Deal. There are still quite a few around and they overwhelmingly approve. The author is an idiot.

Thanks for the rigorous analysis. :thumbsup:

 

[CycloWizard]

Originally posted by: DaveSimmons
The quote lists two specific policies, antitrust and wage hikes, as stalling the recovery not the new deal as a whole.

In other words, OP's claim has no support from this paper.

You apparently missed the other sentence that TheSkinsFan quoted:

We found that a relapse isn't likely unless lawmakers gum up a recovery with ill-conceived stimulus policies.

Or, you're simply ignoring it because it directly contradicts your statements. *shrug*

 

[WHAMPOM]

Originally posted by: CycloWizard

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.

"President Roosevelt believed that excessive competition was responsible for the Depression by reducing prices and wages, and by extension reducing employment and demand for goods and services," said Cole, also a UCLA professor of economics. "So he came up with a recovery package that would be unimaginable today, allowing businesses in every industry to collude without the threat of antitrust prosecution and workers to demand salaries about 25 percent above where they ought to have been, given market forces. The economy was poised for a beautiful recovery, but that recovery was stalled by these misguided policies."

Using data collected in 1929 by the Conference Board and the Bureau of Labor Statistics, Cole and Ohanian were able to establish average wages and prices across a range of industries just prior to the Depression. By adjusting for annual increases in productivity, they were able to use the 1929 benchmark to figure out what prices and wages would have been during every year of the Depression had Roosevelt's policies not gone into effect. They then compared those figures with actual prices and wages as reflected in the Conference Board data.

In the three years following the implementation of Roosevelt's policies, wages in 11 key industries averaged 25 percent higher than they otherwise would have done, the economists calculate. But unemployment was also 25 percent higher than it should have been, given gains in productivity.

Meanwhile, prices across 19 industries averaged 23 percent above where they should have been, given the state of the economy. With goods and services that much harder for consumers to afford, demand stalled and the gross national product floundered at 27 percent below where it otherwise might have been.

"High wages and high prices in an economic slump run contrary to everything we know about market forces in economic downturns," Ohanian said. "As we've seen in the past several years, salaries and prices fall when unemployment is high. By artificially inflating both, the New Deal policies short-circuited the market's self-correcting forces."

The policies were contained in the National Industrial Recovery Act (NIRA), which exempted industries from antitrust prosecution if they agreed to enter into collective bargaining agreements that significantly raised wages. Because protection from antitrust prosecution all but ensured higher prices for goods and services, a wide range of industries took the bait, Cole and Ohanian found. By 1934 more than 500 industries, which accounted for nearly 80 percent of private, non-agricultural employment, had entered into the collective bargaining agreements called for under NIRA.

Cole and Ohanian calculate that NIRA and its aftermath account for 60 percent of the weak recovery. Without the policies, they contend that the Depression would have ended in 1936 instead of the year when they believe the slump actually ended: 1943.

Roosevelt's role in lifting the nation out of the Great Depression has been so revered that Time magazine readers cited it in 1999 when naming him the 20th century's second-most influential figure.

"This is exciting and valuable research," said Robert E. Lucas Jr., the 1995 Nobel Laureate in economics, and the John Dewey Distinguished Service Professor of Economics at the University of Chicago. "The prevention and cure of depressions is a central mission of macroeconomics, and if we can't understand what happened in the 1930s, how can we be sure it won't happen again?"

*snip*

Source

Inflated wages, anti-competitive, and heavy handed pro-labor policy are detrimental to the overall economy. Borrowing money to maintain these conditions via "stimulus" apparently wasn't such a good idea the first time around. At what point will people take a step back and realize that, at some point, bills must be paid and that actions and policies have long-term ramifications? At what point will politicians stop using a "crisis" to forward their agenda, whether it be a "national security crisis" or a "financial crisis?" At what point will their supporters wake up and realize the foolishness of it all?

Please try reading what you post about.

 

[DaveSimmons]

They are referring to the specific policies they considered ill-conceived, which were the antitrust and wage policies.

Obama's different stimulus policies might be ill-conceived, but again this paper doesn't provide any evidence for that.

 

[TheSkinsFan]

Originally posted by: miketheidiot

Originally posted by: CycloWizard

Originally posted by: miketheidiot
lol op is a moron as always.

pro-tip for op, please read the articles you post so you don't look dumb.

I'm glad you get a serving of crow for breakfast as well. Perhaps in the future, YOU will read the article rather than listen to your buddy's drivel which has nothing to do with what the article actually said nor, therefore, reality.

i did, theskins analysis was off base and a complete misinterpretation of the study. He might as well have called me a poopypants. I expect better out of you since you are a science guy, him on the other hand, not so much.

uhh, so you're basically covering up your eyes and pretending my rebuttal to your first post doesn't exist?

Your entire first post was based upon a fabricated quote and/or a gross misunderstanding of the study itself.

Please return to my first post and attempt to address it point-by-point.

 

[Phokus]

Originally posted by: CycloWizard

Originally posted by: DaveSimmons
The quote lists two specific policies, antitrust and wage hikes, as stalling the recovery not the new deal as a whole.

In other words, OP's claim has no support from this paper.

You apparently missed the other sentence that TheSkinsFan quoted:

We found that a relapse isn't likely unless lawmakers gum up a recovery with ill-conceived stimulus policies.

Or, you're simply ignoring it because it directly contradicts your statements. *shrug*

speaking of ignoring:

http://www.econ.wisc.edu/works...Eggertsson%20paper.pdf

Can government policies that increase the monopoly power of firms and the militancy of unions increase output? This paper studies this question in a dynamic general equilibrium model with nominal frictions and shows that these policies are expansionary when certain ?emergency? conditions apply. These emergency conditions?zero interest rates and deflation?were satisfied during the Great Depression in the United States. Therefore, the New Deal, which facilitated monopolies and union militancy, was expansionary, according to the model. This conclusion is contrary to the one reached by a large previous literature, e.g. Cole and Ohanian (2004), that argues that the New Deal was contractionary. The main reason for this divergence is that the current model incorporates nominal frictions so that inflation expectations play a central role in the analysis. The New Deal has a strong effect on inflation expectations in the model, changing excessive deflation to modest inflation, thereby lowering real interest rates and stimulating spending.

 

[sactoking]

The paper is flawed. There is no empirical evidence to support any of the notions in it.

On the flip side, there is no empirical evidence that the New Deal actually helped either.

The author, OP, and everyone else fall to the fatal economics flaw of believing that projections are accurate. They also fall into the human fallacy of believing that there is no such thing as 'randomness' and that there must be an explanation for everything.

Face it, the Great Depression was a random event. There was no way to predict it. As such, there's no explanation for it after the fact.

 

[CycloWizard]

Originally posted by: DaveSimmons
They are referring to the specific policies they considered ill-conceived, which were the antitrust and wage policies.

Which is not what you said. You purposely took one catch phrase out of the article and used it in direct opposition to its meaning in context. That makes you a douchebag.

Obama's different stimulus policies might be ill-conceived, but again this paper doesn't provide any evidence for that.

No one claimed that it did, including me. However, it does indicate that the government often does more harm than good. There are a lot of indicators that the government got us in to the depression in the 30's, and there is similar evidence that they have a heavy hand in the current state of affairs. I therefore doubt the government's ability to get us out of said current mess using policies similar to those used in the 30's, especially since we were well into a financial hole prior to taking on all of the related debt for said policies.

 

[CycloWizard]

Originally posted by: sactoking
The paper is flawed. There is no empirical evidence to support any of the notions in it.

On the flip side, there is no empirical evidence that the New Deal actually helped either.

The author, OP, and everyone else fall to the fatal economics flaw of believing that projections are accurate. They also fall into the human fallacy of believing that there is no such thing as 'randomness' and that there must be an explanation for everything.

Face it, the Great Depression was a random event. There was no way to predict it. As such, there's no explanation for it after the fact.

Yes, there were certainly no causal factors involved. Here's your sign.

 

[Craig234]

Originally posted by: GoPackGo
WWII pulled us out of the depression and no communist policy of FDR.

The government doing *massive* spending, going into huge debt, to pay for the war brought the economy up?

Gee, just imagine what that much *massive* government spending, going into huge debt, could do on things that help society, instead of weapons that are destroyed.

Guess you have just proven that the formula for saving the economy is for the government to spend big and not worry about debt.

 

[sandorski]

Originally posted by: CycloWizard

Originally posted by: DaveSimmons
They are referring to the specific policies they considered ill-conceived, which were the antitrust and wage policies.

Which is not what you said. You purposely took one catch phrase out of the article and used it in direct opposition to its meaning in context. That makes you a douchebag.

Obama's different stimulus policies might be ill-conceived, but again this paper doesn't provide any evidence for that.

No one claimed that it did, including me. However, it does indicate that the government often does more harm than good. There are a lot of indicators that the government got us in to the depression in the 30's, and there is similar evidence that they have a heavy hand in the current state of affairs. I therefore doubt the government's ability to get us out of said current mess using policies similar to those used in the 30's, especially since we were well into a financial hole prior to taking on all of the related debt for said policies.

Weak. That deduction is quite useless as something to make a decision on. It is not Who does something, it is What is done.

 

[BansheeX]

Originally posted by: brandonbull
The US would have been screwed in WW2 without many of those government projects.

Therein lies the libtard fallacy that starting wars is the only way to get out of a depression. What America really needed was savings and production, just as it needs it today. However, WWII was not started by us. We were attacked by another country. That galvanized people to buy war bonds, and it forced the government to build factories. Luckily, for us, we ended up winning and our productive capacity remained intact after the war, allowing us to get rich exporting goods and making loans to a devastated world trying to rebuild. It wasn't by design, we didn't chalk up recovery that way. Why would we? Why would we now hope for another Hitler to come along and kill millions of people and devestate Europe to make us richer relative to everyone else. It's absurd. We should voluntarily start saving and producing more.

 

[sandorski]

Originally posted by: Craig234

Originally posted by: GoPackGo
WWII pulled us out of the depression and no communist policy of FDR.

The government doing *massive* spending, going into huge debt, to pay for the war brought the economy up?

Gee, just imagine what that much *massive* government spending, going into huge debt, could do on things that help society, instead of weapons that are destroyed.

Guess you have just proven that the formula for saving the economy is for the government to spend big and not worry about debt.

WW2 had another effect beyond just huge Government spending though. That is, it also had a huge psychological affect. I think both worked together to bring about the next Generation of Prosperity.

 

[Craig234]

Originally posted by: sactoking
Face it, the Great Depression was a random event. There was no way to predict it. As such, there's no explanation for it after the fact.

I don't know any credbile economists who agree with you on that. There were all kinds of warnings, especially in light of what we now know about how the economy works.

Just as there were plenty of people who saw the 2008 crash coming, if not the precise timing or degree, but people making don't want to fix the problems.

Do you ask the subprime mortgage industry and Wall Street firms who were exploiting it to stop making that money? Do you ask politicians to stop it, when they are getting backed by the finaincial interests and the public will blame them for 'interfering in the free market'? Do you get the public who is largely uninformed and misinformed by the finance-driven media to threaten the prosperity they think they have?

Indeed, the reforms taken after the great depression ended the cycle of major recession and depression we'd always had, for decades, until they were repealed bit by bit.

That started with the right-wing ideologue Reagan; one early change was the deregulation of Savings and Loans, resulting in the major crash there, and a massive bailout.

And over 700 convictions of those ijnvolved, back when the government still prosecuted financial crimes.

 

[DaveSimmons]

Originally posted by: CycloWizard

Originally posted by: DaveSimmons
They are referring to the specific policies they considered ill-conceived, which were the antitrust and wage policies.

Which is not what you said. You purposely took one catch phrase out of the article and used it in direct opposition to its meaning in context. That makes you a douchebag.

Obama's different stimulus policies might be ill-conceived, but again this paper doesn't provide any evidence for that.

No one claimed that it did, including me. However, it does indicate that the government often does more harm than good. There are a lot of indicators that the government got us in to the depression in the 30's, and there is similar evidence that they have a heavy hand in the current state of affairs. I therefore doubt the government's ability to get us out of said current mess using policies similar to those used in the 30's, especially since we were well into a financial hole prior to taking on all of the related debt for said policies.

How about this:

Ohanian and Cole blame specific anti-competition and pro-labor measures ...

Again, not borrowing or deficit spending as you claim in your OP comments, only the specific policies of unions excessive wages and promoting antitrust violations.

My point was that this paper, regardless of its accuracy, offers no support that deficit spending extended the depression, or any evidence against the value of the current stimulus policy.

Which again isn't saying that current policy makes any more sense that allowing monopoly abuse, just that the paper doesn't support the deficit part of your comments.

The paper might offer evidence that "bad policy is bad" but I hope that isn't a revelation.


Let me try restating my point:

Your OP seems to say that the paper is evidence that the new deal as a whole was responsible, and from that you can say things like deficit spending will delay recovery.

The paper doesn't argue that, it argues that two specific parts of the new deal caused the problem, not all of it. Not deficit spending, not public works, not social security -- just union wages and antitrust.

 

[sactoking]

Originally posted by: CycloWizard
Yes, there were certainly no causal factors involved. Here's your sign.

Show me one person who recognized the "causal factors" and predicted the Great Depression.

Redneck logic FTL.

 

[sactoking]

Originally posted by: Craig234
I don't know any credbile economists who agree with you on that.

Well, I don't know any credible economists, so if you do, please let me know who they are.

There were all kinds of warnings,

Really, I don't remember seeing ANYONE saying "Be careful, the DJIA will drop 1,900 points from 9/29/08 to 10/6/08!".

especially in light of what we now know about how the economy works.

Fundamental attribution error. We THINK we know how the economy works now. We THOUGHT we knew how the economy worked on 9/28/08. We THOUGHT that NYC was safe on 9/10/01. No amount of 'lookback' now changes the fact that we DIDN'T know what was coming, and it won't change the fact that we WON'T know when the next monumental event will happen.

Just as there were plenty of people who saw the 2008 crash coming, if not the precise timing or degree,

Then they really didn't see it coming, at least no more so than the person who sits back and pontificates about whether the market will go up or down tomorrow with no specific details of how much or why. Anyone who claims they "predicted" the crash either needs to show their extensive track record of correct predictions of their bank account to show that they're a billionaire as a result of said prediction.

 

[CycloWizard]

Originally posted by: sandorski
Weak. That deduction is quite useless as something to make a decision on. It is not Who does something, it is What is done.

You are, of course, correct. However, if I start a company and buy 100 widgets, thereby spending $1,000,000, that is always more efficient than the government buying 100 widgets and spending $2,000,000 to do it. That, and hopefully my company isn't a few trillion in debt but still spending money on useless crap like widgets.

 

[CycloWizard]

Originally posted by: DaveSimmons
How about this:

Ohanian and Cole blame specific anti-competition and pro-labor measures ...

Again, not borrowing or deficit spending as you claim in your OP comments, only the specific policies of unions excessive wages and promoting antitrust violations.

So you are going to ignore anything else that is quoted from the article other than your one truncated sentence? Really? Isn't it hard to see with all that sand in your eyes?