Wednesday, July 15, 2009

New Deal success and failure

Just as it is problematic to evaluate the impact of the current stimulus bill so too is it difficult to answer the question of whether the Depression-era New Deal was a success or failure. While there may be a temptation to declare it a success given that the U.S. eventually emerged from the Great Depression, that is insufficient. Given that the U.S. has recovered from every economic downturn the better metric would seem to be whether the New Deal resulted in this recovery occurring faster than otherwise would have been the case.

According to a new paper the answer to that question is an emphatic no:
The failure of the U.S. economy to recover from a downturn within a few years was unprecedented. Every previous economic crisis in the history of the United States, large or small, had been followed by a vigorous recovery. And by most objective measures, economy did seem poised to rebound quickly after the nadir in 1933. Deflation ended, financial liquidity was more than ample, borrowing costs were low and, thanks to the introduction of deposit insurance, bank panics were no longer a threat. Indeed, we have calculated that, on the basis of productivity growth alone, employment and investment should have been back to their normal levels by 1936.

But don’t take our word for it. The Nobel Prize-winning economist Robert Lucas and the economist Leonard Rapping calculated decades ago that the Federal Reserve’s efforts to expand the money supply should have brought the economy back on track by 1935.

So what went so badly wrong? Our research suggests that a slew of policies, specifically those that suppressed market competition, are central to understanding why the economy remained so weak for so long.
As I've written before, competition is the key.

HT: Hit and Run.

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