Not being an economist, I find it a lot harder to argue with Paul Krugman now that he has been awarded the Nobel Prize for Economics. That makes him a certified top expect – and I am a mere amateur. And while the other Nobel prizes have made some real boners (Yassir Arafat and the Nobel Peace Prize?), the economics prize doesn’t have the same reputation. (Although the award given to Myron Scholes and Robert Merton, the inventors of the “financial weapons of mass destruction” – derivatives – in 1997, the same year the hedge fund they had helped create went spectacularly bankrupt – seems quite the bad decision today.)
Regardless of prizes though, Krugman’s piece today makes some important counter-points I had not heard regarding the lack of efficacy of FDR’s New Deal. Certainly, my reading of history made it clear that the New Deal had not lifted America out of the Great Depression – but I had never found convincing the traditional conservative explanation that the problem was FDR’s expansion of government. After all, Hoover’s refusal to expand the government had not reigned in the Depression – and it was the massive government expansion called World War II that finally broke America out of the Depression. I’m willing to concede the conservative point that some of FDR’s government interventions may have backfired – such as interference in wages and prices – but as Krugman points out in his column, many of FDR’s reforms have lasted to this day and helped mitigate the effects of the current financial crisis – from Social Security to federal deposit insurance.
Krugman posits that FDR failed to get us out of the Depression because he did too little rather than too much. He points out that overall government spending did not increase as much as is commonly understood:
The effects of federal public works spending were largely offset by other factors, notably a large tax increase, enacted by Herbert Hoover, whose full effects weren’t felt until his successor took office. Also, expansionary policy at the federal level was undercut by spending cuts and tax increases at the state and local level.
Which leads Krugman to the conclusion that:
The economic lesson is the importance of doing enough. F.D.R. thought he was being prudent by reining in his spending plans; in reality, he was taking big risks with the economy and with his legacy. My advice to the Obama people is to figure out how much help they think the economy needs, then add 50 percent. It’s much better, in a depressed economy, to err on the side of too much stimulus than on the side of too little.
Krugman has me convinced of his thesis for now. It certainly makes more sense than the alternative explanations I have heard about the New Deal and the Great Depression. But the last word – and the final prescription – should come from Franklin Delano Roosevelt himself:
It is common sense to take a method and try it: If it fails, admit it frankly and try another. But above all, try something.
This is my hope for an Obama presidency – one that I saw as far back as December when I posted this quote – and one that his campaign has born out.