Matt Yglesias

Bartlett: New Deal Failed Because It Wasn’t Big Enough

Bruce Bartlett has a very nice column on the real lessons of the New Deal:

One reason why Republicans strenuously oppose the Obama administration’s fiscal stimulus plan is because it repeats the errors of Franklin D. Roosevelt. To them, the New Deal was mainly about vastly expanding government spending and deficits, which Republicans believe made the Great Depression worse rather than better. Therefore, doing so again in the present downturn will also lead to failure.

The true New Deal legacy, however, is more complicated. Serious mistakes were indeed made. In particular, the National Industrial Recovery Act was fundamentally ill-conceived and retarded economic recovery. But in terms of fiscal policy, Roosevelt’s error wasn’t that he spent too much, but that he didn’t spend nearly enough.

Right. I think the right-wing’s view that the New Deal was, on net, a bad thing is mistaken. But it’s certainly true that the New Deal featured some bad ideas. And the day Barack Obama proposes organizing the economy into cartels that will be able to exercise enough market power to force retail prices up, I hope John Boehner will go on Fox News and ring the alarm bells. But in fiscal policy terms, the best evidence from the 1930s and 40s suggests that fiscal expansion can work—but that when faced with really big problems it needs to be really big in order to work.

By Request: State Budgets

Sam Penrose asks:

Why do states have to balance their budgets every year?

One answer is “it’s not a very good idea.”

Another answer is that there’s no real reason and, in fact, they don’t really “have to” do it at all. As this primer from the National Conference of State Legislatures makes clear the nature of the balanced budget requirement varies from state-to-state in a number of respects, up to and including the fact that Vermont has no such legal requirement.

The practical issue is that no state has the capacity to issue the sort of routine, revolving debt instruments that are used to finance the federal deficit. I don’t think there’s anything actually stopping a state from trying to change its laws and build this capacity. I do suspect that if a state did try to move toward funding a structural deficit that people in other states might start to worry about what the broader consequences would be of Louisiana or Michigan defaulting on its debt and perhaps you’d see some kind of move to formalize the tradition of state balanced budgets.

But better than balanced budgets would, I think, be some kind of federal requirement for rainy day funds. States would, ideally, be made to sock away an amount of money equal to such-and-such a percentage of annual state expenditures. The funds would be “deposited” in some kind of federal account and then “released” by some kind of fiscal policy board that would also, obviously, have the authority to suspend the contribution requirement. I suppose there might be constitutional issues with this, though it’s not obvious to me that that’s the case.

The Case Against Direct Emulation of Nazism

This seems like a silly case to need to make, but Tyler Cowen steps up to the plate with an argument that Adolf Hitler’s fiscal policies did not serve the public interest. Shocking, I know. The conclusion:

In other words, Nazi fiscal policy boosted measured gdp rather than driving a recovery with higher real standards of living.

He wants us to draw the broader conclusion that this should make us skeptical about the ability of spending-side fiscal stimulus to improve living standards. But the puzzle can be solved in this brief excerpt included in his post from a Robert J. Gordon paper:

Tooze confirms previous findings that relatively little of the expansion in public expenditures took the form of public works like the autobahns, while over 80 percent consisted of spending for rearmament. Abelshauser (1998, p. 169) calls this “military Keynesianism on a large scale.”

But of course I don’t think anyone ever thought that armaments expenditures increases living standards. When a country produces more HDTVs, more people have HDTVs and living standards go up. When a country produces more tanks and military explosives, none of the tanks or military explosives go into private hands (we hope!) so living standards are unchanged. But producing HDTVs doesn’t increase your ability to conquer France, whereas tanks and explosives are useful for conquering France. Hitler’s policy objective was to prepare for conquering France. And his policies worked quite well (though Ernest May reminds us not to neglect the importance of French intelligence failures), they just served Nazi objectives. But I don’t see why Hitler couldn’t have spent the money on something else.

If we use fiscal policy to raise measured GDP primarily through building tanks, we’ll have higher GDP and more tanks. But if we use fiscal policy to raise measured GDP primarily through repairing existing roads and building new mass transit and high-speed rail lines, then we’ll have higher GDP, better roads, and more mass transit and HSR systems. It seems to me that living standards would therefore be higher.

Cowen’s post does illustrate a point that often goes missing in American discussions, namely the fact that our habit of spending a much bigger share of GDP on the Pentagon than do our rich democracy peers has a substantial negative impact on American living standards. If that money were either spend on public sector programs that people could use, or invested by the private sector in creating goods and services that people want, most people would be better off. We’re used to thinking of ourselves as the most prosperous people on the planet, but between our massive expenditures on military hardware and medical waste and the highly inegalitarian distribution of our income, that’s increasingly not the case.

Platform Blogging

I haven’t seen much coverage of the new Republican Party platform yet. I know platforms are of limited relevance, but still it ought to garner some attention. There’s some eye-opening stuff here. For example, they denounce the practice of adjusting for inflation when assessing the federal budget, complaining that in the federal government’s “deceptive and irresponsible accounting, an increase in a program’s funding is actually a decrease if it is less than the rate of inflation.”

This is just ignorant — you can’t do accurate accounting unless you incorporate inflation adjustments into your figures. Otherwise you wind up with nonsense. For example, here’s a chart of US defense spending at different points in time:

As you can see, they’re using constant 2008 dollars as their metric here — the practice the platform denounces — because if you didn’t do that you’d wind up with bizarre and inaccurate results. The chart would say that the Reagan-era defense buildup was more expensive than the Vietnam War, which it wasn’t, or that the Iraq War is is expensive than World War II which, again, it isn’t.