Dr. Cole is professor of political economy at the University of Pennsylvania, he as written a very profound book detailing how Roosevelt’s economic policies during the Great Depression did in fact hamper recovery. This is not a purely academic debate, for it places the role of liberal government in its proper context, especially given the mythic status of liberal gods like Roosevelt and Ben Bernanke, an informed public must be given accurate representations of how America got out of the Great Depression. The war helped a great deal, but policies and political craft alone must be clear if we’re ever going to understand how we got out of a near fatality.
Team Obama’s economic guru’s like Christina Romer have failed both this President and the mythic status of Keynesian economic craft. Romer has returned to the famed University of Chicago economics department where she will continue to hail the absolute status of Keynesian economics, even though she failed. I surmise that a greater character would have found much intellectual and personal material from which to mine a needed reversal fit for tragedians. Not with Romer. This dismal science often embodies dismal prospects.
Dr. Bernanke has written in his doctoral dissertation that the success of defeating the Great Depression is due to monetary expansion and the defeat of a cycle of both deflation/inflation 1932-34. This was the key reason for a rise in output/productivity.
There’s one problem. A boost in aggregate demand did end the GD, for a recovery was well underway in ’32 prior to the New Deal. What gives?
The growth/recovery that we experienced prior to the GD was due to a rise in productivity. Productivity is considered a supply side (Hayek/Reagan) factor. Productivity is determined by technology and the regulatory regime of the economy. It is for the most part independent of any spending policies. For those new to this debate: growth of productivity is the sum of labor input. During the GD, higher aggregate demand did not expand even though unemployment went down between ’32-’37.
How does this help us understand the Great Recession we’re now in? It helps clarify that structural unemployment and increases in productivity can happen at the same time. This is due in changes in the nature of the economy. Hint: those jobs we lost are never coming back. Its time for Washington to embrace Reaganite policies and find the new Bill Gates in breakthrough technologies. If not, then we’re in for a lost decade with profound social and political consequences.
What can be done in the meantime? We need broad based tax reform that is a simpler tax code, improves incentives to hire and maintain industries in America, broaden the tax base, lower corporate taxes, and equalize the tax treatment of capital income.
Only these measures will save America, not the stop gap measures that have dominated policy for the last three years.