Saturday, November 22, 2008

Tyler Cowen on lessons from the New Deal

We've been hearing a lot these days about the need for a new New Deal to save the economy. Tyler Cowen goes through some of the lessons of the old New Deal to show what did and didn't work:
"The good New Deal policies, like constructing a basic social safety net, made sense on their own terms and would have been desirable in the boom years of the 1920s as well. The bad policies made things worse. Today, that means we should restrict extraordinary measures to the financial sector as much as possible and resist the temptation to “do something” for its own sake."
There can be a real danger in just trying to do something. As Cowen points out, the old New Deal was a mixed bag of ad hoc policies, some very good and some very bad. We'd certainly be better off today without the legacy of agricultural subsidies.

It's also important to remember what really drove the recovery in the 1930s:
"A study of the 1930s by Christina D. Romer, a professor at the University of California, Berkeley (“What Ended the Great Depression?,” Journal of Economic History, 1992), confirmed that expansionary monetary policy was the key to the partial recovery of the 1930s. The worst years of the New Deal were 1937 and 1938, right after the Fed increased reserve requirements for banks, thereby curbing lending and moving the economy back to dangerous deflationary pressures."
Interestingly, Christina Romer was just picked to head Obama's Council of Economic Advisors. That's really good news.

1 comment:

Mike LP said...

As I am in Korea I do not get too much news but think that I read a blurb about Obama trying to get make 2.5 million jobs through a Public Works program similar to that of FDR? Though the onset of monetary policy and Keynesian economics are definitely what were most important in getting us out of the depression, the PW was the most impressive policy to me from the social perspective.