Scott Sumner: “It’s Complicated: The Great Depression in the US”

Yesterday I was surfing the internet for some information on events in 1937 – the year of the Recession in the Depression. While doing that I found a great lecture Scott Sumner did at Oxford Hayek Society in 2010.

Scott’s lecture basically is a wrap-up of his forthcoming book on the Great Depression. Scott tells me the book likely will be published later this year. I have had the pleasure and honor of reading a draft of the book. You all have have something to look forward to – it is a great book!

The thesis in Scott’s book is that the Great Depression in the US was a combination of two shocks. A negative demand shocks – excessive monetary tightening – and a series of negative supply shocks caused by Roosevelt’s New Deal policies particularly the National Industrial Recovery Act (NIRA) and the Wagner Act. His arguments are extremely convincing and I believe that you cannot understand the Great Depression without taking both these factors into account.

Scott does a great job showing that policy failure – both in the terms of monetary policy and labour market regulation – caused and prolonged the Great Depression. Hence, the Great Depression was not a result of an inherent instability of the capitalist system.

Unfortunately policy makers today seems to have learned little from history and as a result they are repeating many of the mistakes of the 1930s. Luckily we have not seen the same kind of mistakes on the supply side of the economy as in the 1930s, but in terms of monetary policy many policy makers seems to have learned very little.

I therefore hope that some of today’s policy makers would take a look at Scott’s lecture. You can watch it here.

Scott has kindly allowed me also to publish his PowerPoint presentation from the lecture. You can find the presentation here.

And for those who are interested in studying the disastrous labour market policies of the Rossevelt administration I strongly recommend the word of Richard Vedder and Lowell Gallaway – particularly their book “Out of Work”. Furthermore, I would recommend Steve Horwitz’s great work on President Hoover’s policy mistakes in the early years of the Great Depression.

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Cato Institute on US military spending and the fiscal cliff

In an earlier post I claimed that the “full” fiscal cliff would not necessarily be a disaster for the US economy – and I was probably also unusual forthcoming in my hope that US defending might be cut as a result of the fiscal cliff, but this blog is primarily about monetary policy issues so I don’t want to bore my readers with more of my views on the US defense budget. Instead I would like to recommend my readers to have a look at what the Cato Institute has to say on this issue.

This is from Cato Institute’s Facebook page:

In recent days several senior Republicans have come out saying they would be willing to break their anti-tax pledge as part of the fiscal cliff negotiations. At least one of those lawmakers, Senator Lindsey Graham, has said that this is because he is unwilling to let sequester budget cuts “destroy the United States military.” Cato scholars have long argued that the proposed sequester cuts would allow the United States to maintain a wide margin of military superiority, while paying substantial dividends for the U.S. economy over the long run.

• “Budget Hawks or Military Hawks?,” Cato Video with Grover Norquist -

• “The Bottom Line on Sequestration,” by Christopher Preble -

• “The Pentagon Will Survive the Fiscal Cliff,” by Justin Logan -

Enjoy and stop worrying about lower public expenditures – after all the Sumner Critique applies: NGDP will be unaffected by lower defense spending as long as the Federal Reserve implements the Bernanke-Evans rule. By the way fiscal conservatives should be impressed with this – if the Fed keeps NGDP on track (or follow a Bernanke-Evans style policy rule) then it will remove any keynesian style opposition to fiscal consolidation.

You might also want to have a look at this excellent article by Gallaway and Vedder on the “The Great Depression of 1946″. There was of course no Great Depression in 1946 despite a massive cut in US military spending by the end of the Second World War. It is not everything Gallaway and Vedder write that I agree on, but I nonetheless think that they make a very compelling case that even drastic cuts in defense spending is unlikely to lead to any serious economic downturn. That was the case in 1946 and would be the case in 2013.

By the way Cliff is not worried…



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