Complete this sentence: The lesson of the Great Depression is…
This is a foolish question to ask. It has only been seven decades; far too soon to know. I left high school believing this to be true: FDR delivered America from the Depression; the Savage government put New Zealand back to work.
Yes, and no.
I have been waiting to hear some good rebuttal to those who say: "Press on and get it over with. Take the hit. All this indebtedness and printed money has created a phoney economy. It can't sustain itself. Kick out the props. Let the bankruptcies and implosions ensue, and then let's pick up and move on with a new bunch of winners and losers."
But what if you create a vortex of failure that pulls down ever more businesses and people?
Let us turn to this week's instalment from the man the libertarians and Friedmanites have been roundly mocking. They put his Nobel Prize in inverted commas; they say he's a problem, not a solution. All the same, I consider the price we might pay for vast economic convulsion and I think: can we have another look at Krugman's ideas?
He writes that the problem with FDR was not that he was Keynesian but that he was not Keynesian enough. It was that vast engine of state-funded economic activity, World War II, that finally got things rolling.
That said, F.D.R. did not, in fact, manage to engineer a full economic recovery during his first two terms. This failure is often cited as evidence against Keynesian economics, which says that increased public spending can get a stalled economy moving. But the definitive study of fiscal policy in the ’30s, by the M.I.T. economist E. Cary Brown, reached a very different conclusion: fiscal stimulus was unsuccessful “not because it does not work, but because it was not tried.”
And F.D.R. wasn’t just reluctant to pursue an all-out fiscal expansion — he was eager to return to conservative budget principles. That eagerness almost destroyed his legacy. After winning a smashing election victory in 1936, the Roosevelt administration cut spending and raised taxes, precipitating an economic relapse that drove the unemployment rate back into double digits and led to a major defeat in the 1938 midterm elections.
What saved the economy, and the New Deal, was the enormous public works project known as World War II, which finally provided a fiscal stimulus adequate to the economy’s needs.
This morning on the radio, Tony Alexander said that the lesson of the Great Depression was that a Government should loosen the purse strings. Hear, hear! Sooner the better. I endorse the words of Ben Gracewood in our forums on Monday:
Listen, it's mid-morning already and I can't see any sign of contractors laying fibre up my driveway.
What gives, National?