The long-run negative effect has been well-established on account of the United States' bias for accommodation. In theory, stimulus should be short-run during the contraction and then completely mopped up once the economy recovers, leaving no lasting debt. However, that's not the way things have worked in the U.S. Many temporary spending increases/tax cuts are renewed time and again rather than replaced with temporary spending cuts/tax hikes until the cyclical debt is eliminated. The result is a pile-up of debt that becomes structural in nature and that should not have occurred had a neutral approach been applied. That debt has a long-term negative impact and the shallow recovery underway is, in part, a function of the nation's magnitude of indebtedness (household, corporate, and government).
Finally, even as it has not yet gained much attention outside the international financial community, there has been a worrisome structural problem with the U.S. economy in recent years, especially the most recent decade: for every dollar of GDP growth, nondomestic financial debt has increased by $2 or more. That's not a sustainable path. The economy cannot grow at robust rates in the long-term if Americans (households, corporations, government) continue to take on more debt than the economy generates income.
CP did the usual start with a selective aprt of the story to misrepresent something. Simon and Finbread did a nice job of pointing that out. 1Perry and just a couple of others made effort to move the debate. But too many hung like death to the more misrepresentative side of the story.
Interesting, but not unexpected. For now, I look forward to more from those who are actually reading all of it.
AUSTAN GOOLSBEE: I think the world vests too much power, certainly in the president, probably in Washington in general for its influence on the economy, because most all of the economy has nothing to do with the government.
Did FDR’s New Deal policies really prolong the Great Depression? Will Obama’s policies have a similar effect? « RebelThe problem with the conservative argument and their use of the UCLA study to prove their point is that Cole and Ohanian point to a single policy as the cause for much of the stifled economic recovery, one that was only in existence for two years, the National Industrial Recovery Act (NIRA).
So basically, what the 2004 UCLA study concluded was that inflated prices and wages were the cause of the slowed recovery, and the NIRA which FDR signed into law was the cause of that inflation, resulting in a 60% weaker recovery. However, because NIRA was deemed unconstitutional by the Supreme Court two years after it was enacted, a repeat of this particular economic policy mistake by the Obama administration would be impossible. While NIRA may have been somewhat of a blunder in terms of New Deal solutions, it was but one of many policies instituted by FDR, and although Cole and Ohanian present a good case, the general consensus remains that New Deal policies by and large were successful.
The UCLA study represents a point of view, but it does NOT prove that FDR's policies in the great depression extended it.
By the way, if you believe that WWII ended the great depression, that's fine. It happens to be the biggest example of Keynesian economics in practice. It was MASSIVE GOVT. SPENDING, mostly borrowed, in make work projects to build guns, planes, uniforms, boats, tanks, bombs, paint, radio equipment, etc.; all of which was totally unnecessary for a functioning economy. Then it did not turn over in the economy, we just took it out and shot it off or it got destroyed by the enemy.
If you believe WWII ended the great depression, then you are arguing that the stimulus should have been much larger and come much earlier.
Explain how this worked in the economy to a significantly different extent than the WPA and the CCC did when building roads and bridges, which actually got used by the citizens to improve commerce by making it easier to transport goods.
Last edited by finebead; 11-27-11 at 10:20 PM.
It wasn't war spending that ended it. It was the positive belief in the country after the war that ended it.
The haggardness of poverty is everywhere seen contrasted with the sleekness of wealth, the exhorted labor of some compensating for the idleness of others, wretched hovels by the side of stately colonnades, the rags of indigence blended with the ensigns of opulence; in a word, the most useless profusion in the midst of the most urgent wants.Jean-Baptiste Say