Category: History
How would monetarism have fared against the Great Depression?
Paul Krugman has covered this topic a few times lately, most recently here. For instance he writes:
The main point, however, is that we are a very long way from classic monetarism, of the form that says that the central bank can control broad monetary aggregates like M2 at will, and in turn that these broad monetary aggregates determine the course of the economy. That’s not at all true when you’re up against the zero lower bound — which is why Friedman’s analysis of the Great Depression was wrong…
I view Friedman’s position differently and in general I find this discussion would proceed on better terms with more direct quotations from primary sources. On the question of what Friedman actually thought, I will reproduce part of an earlier post of my own:
When it comes to 1929-1931, Friedman favored the Fed a) buying up a lot more bonds, and b) serving as a lender of last resort to failing banks. They are separable but Friedman favored both.
In the Monetary History, Friedman and Schwartz approvingly quote Walter Bagehot about the need to do whatever is required, however bold or desperate, to stop a banking panic. Part of the passage runs like this:
“The way in which the panic of 1825 was stopped by advancing money has been described in so broad and graphic a way that the passage has become classical. “We lent it,” said Mr. Harman [one of the Bank’s more senior directors] on behalf of the Bank of England, “by every possible means and in modes we have never adopted before;…”
Here is Charles Goodhart quoting Friedman on why the Fed should have been a lender of last resort to troubled banks. Or see p.269 of the Monetary History, where Friedman and Schwartz explain how it was too difficult for banks to borrow from the Fed at favorable rates in the early 1930s. Or read this Friedman interview.
In other words, had the U.S. followed Friedman’s (later) advice, matters would have gone far, far better. We’re talking about lender of last resort aid to banks, not just printing currency, and we are talking about a time period before the U.S. economy hit a zero lower bound. (In any case LLR functions still work at a zero lower bound.) The money supply would not have fallen by one third or anything close to that.
Now, given 2008 and the like, one can readily argue that Friedman’s proposed actions for 1929-1931 would not have been enough to stave off a major recession. One might also, if only from tone, argue that Friedman did not sufficiently appreciate this point, or that he failed to realize interest rates might have fallen to near-zero anyway. I can’t prove those claims with textual evidence, but I think there is a good chance they are true.
That said, it is incorrect to suggest that monetarism had an impotent, currency-printing, Pigou effect-relying approach to the Great Depression. Had we followed Friedman’s advice, things would have been much, much better, all the more so for the broader world at large. If you doubt this, take a look at Sweden, the country which in the 1930s perhaps came closest to Friedmanesque policy, including no gold standard and floating exchange rates (pdf, and by the way read Bernanke’s FN1: “The original diagnosis of the Depression as a monetary phenomenon was of course made in Friedman and Schwartz (1963). We find the more recent work, though focusing to a greater degree on international aspects of the problem, to be essentially
complementary to the Friedman-Schwartz analysis.”), combined with a less deflationary monetary policy. Their Great Depression was much milder than in most other parts of the West.
In other words, against the Great Depression monetarism would have fared pretty well. Not perfectly, but pretty well.
Addendum: Here is Friedman’s classic 1968 essay on what monetary policy can and cannot do (pdf). And I don’t wish to pick through the various other authors on Friedman vs. Keynes, rather I will refer you to what Friedman actually wrote on the topic when debating a variety of Keynesians and addressing precisely this issue (jstor pdf, maybe this is a better link).
Hayek in the 1930s
Paul Krugman on Hayek’s influence in the 1930s:
…back in the 30s nobody except Hayek would have considered his views a serious rival to those of Keynes…
Alvin Hansen reviewing Hayek’s Prices and Production in 1933 in the American Economic Review.
The present volume is, it seems to me, the only book of recent years which at all approaches Keynes’s A Treatise on Money in the impetus it has given to renewed interest and discussion of business-cycle theory.
This in itself is high praise. Altogether aside from the soundness of its
conclusions, the value of the book and its important place in the recent
literature of cycle theory is unquestioned.
von Hayek’s contributions in the field of economic theory are both profound and original. His scientific books and articles in the twenties and thirties aroused widespread and lively debate. Particularly, his theory of business cycles and his conception of the effects of monetary and credit policies attracted attention and evoked animated discussion. He tried to penetrate more deeply into the business cycle mechanism than was usual at that time. Perhaps, partly due to this more profound analysis, he was one of the few economists who gave warning of the possibility of a major economic crisis before the great crash came in the autumn of 1929.
To be clear, it is true that Keynes’s General Theory eclipsed Hayek but to say that Hayek was not a serious rival to Keynes in the 1930s is a Whiggish misreading of the history of economic thought.
Addendum: Don Boudreaux also comments noting that Hicks specifically referred to the great Hayek-Keynes rivalry of the 1930s. See also Greg Ransom’s citations from Hicks and Coase in the comments.
Do note that reading Hayek out of the debate diminishes Hayek but perhaps even more it diminishes Keynes who clearly won over the profession.
The stimulus that is Russian
A business owner in Russia has a better chance of ending up in the penal colony system once known as the gulag than a common burglar does.
More than 110,000 people are serving time for what Russia calls “economic crimes,” out of a population of about three million self-employed people and owners of small and medium-size businesses. An additional 2,500 are in jails awaiting trial for this class of crimes that includes fraud, but can also include embezzlement, counterfeiting and tax evasion.
But with the Russian economy languishing, President Vladimir V. Putin has devised a plan for turning things around: offer amnesty to some of the imprisoned business people.
And this:
In 2010, the police investigated a total of 276,435 “economic crimes,” according to the Russian prosecutor general’s office, whose statistics show burglary and robbery are prosecuted less than economic crimes.
…Russia’s infamous penal colonies, rural camps swirled in barbed wire, appear today much as they did when Aleksandr Solzhenitsyn wrote “The Gulag Archipelago” in the 1960s. But at least one of every 10 prisoners today is a white-collar convict.
And why are so many businessmen in prison?
…in Russia, the police benefit from arrests. They profit by soliciting a bribe from a rival to remove competition, by taking money from the family for release, or by selling seized goods. Promotion depends on an informal quota of arrests. Police officers who seize businesses became common enough to have earned the nickname “werewolves in epaulets.”
There is more here, interesting throughout.
*A Call to Arms*
The author is Maury Klein and the subtitle is Mobilizing America for World War II, and it weighs in at almost 900 pp. So far it is quite good, and well-written, though fairly slow in getting off the ground. Here is one bit:
The navy was in no better shape. It too suffered from an antiquated organization and sclerotic leadership that still looked back to the last war. When Frank Knox took office, his staff included only a military aide and some secretaries. The navy had six bureaus but no central procurement authority and hardly any knowledge of or statistics on the proposed expansion program. Nor did it have any inventory of existing stocks or catalog of facilities or any semblance of long-range production planning. Its contracting machinery was primitive and glacial. James Forrestal, occupying the new position of undersecretary, had neither office nor staff nor defined duties. He and Knox would have to start from scratch, often butting heads with an entrenched officer corps.
Here is a useful WSJ review.
Celebrity translators, plus a Karl Kraus update
A second major example Italie cites is Jonathan Franzen‘s forthcoming The Kraus Project: Essays by Karl Kraus. (At this point it also seems worth pointing out that both these translations-by-notable-novelists are translations of works of non-fiction — disappointing, too.)
Fascinating, too, that the brilliant Kraus isn’t seen as the main selling point of the The Kraus Project:
Even the book’s cover is a departure, reversing the usual billing for author and translator. The title may be The Kraus Project, but featured placement and the biggest letters belong to Franzen.
“To me, this is a Franzen book,” Galassi said. Such, apparently, is the state of translation in the US, that even the likes of Jonathan Galassi — himself a dabbler in translation (even well-regarded, in some circles, as such) — doesn’t think that Kraus could sell the book on his reputation alone (one that surely dwarfs Franzen’s by any measure, save that of contemporary tabloid mentions), but rather that the Franzen-connection is seen as the main selling point and draw.
That is from Literary Saloon. I have pre-ordered my copy.
By the way, why not do the same for economics? Let’s say you are a big name but a little short on ideas or too busy to finish a book. Why not just edit and recycle one of the classics under your name and call it a “Project”?
*The Great Escape*
The author is Angus Deaton and the subtitle is Health, Wealth, and the Origins of Inequality. It is a very good book, as you might expect. Here are two bits I found especially interesting:
In Sweden in 1751 — well before the modern mortality decline — it was riskier to be a newborn than to be an 80-year old.
And, somewhat more recently:
…until around 1900, adult life expectancy in Britain was actually higher than life expectancy at birth. In spite of having lived for 15 years, those teenagers could expect a longer future than when they were born.
The book’s home page is here.
Joke from India
Why were Adam and Eve the happiest married couple ever?
Because neither had a mother-in-law.
*Revolutionary Iran*
The author is Michael Axworthy and the subtitle is History of the Islamic Republic. It is already out in the UK. This is one of the few must-read books of this year (How Asia Works and China’s War With Japan are the other two, plus Knausgaard), excellent and insightful from beginning to end.
Eminent domain and the decline of Detroit
Ilya Somin reports:
Detroit’s sixty year decline, culminating in its recent bankruptcy, has many causes. But one that should not be ignored is the city’s extensive use of eminent domain to transfer property to politically influential private interests. For many years, Detroit aggressively used eminent domain to promote “economic development” and “urban renewal.” The most notorious example was the 1981 Poletown case, in which some 4000 people lost their homes, and numerous businesses were forced to move in order to make way for a General Motors factory. As I explained in this article, the Poletown takings – like many other similar condemnations – ended up destroying far more development than they ever created. In his prescient dissent in Poletown, Michigan Supreme Court Justice James Ryan warned that there was no real reason to expect that the project would produce the growth promised by GM and noted that Detroit and the court had “subordinated a constitutional right to private corporate interests.”
Here is a bit more.
Wealth taxes: a future battleground
That is my latest New York Times column, and it starts with this:
IF you’d like to know where American political debates are headed, the data suggest a simple answer. The next major struggle — in economic terms at least — will be over whether taxes on personal wealth should rise — and by how much.
The mathematical reality is that wealth is becoming more important, relative to income. In a new paper, “Capital Is Back: Wealth-Income Ratios in Rich Countries 1700-2010,” Professors Thomas Piketty and Gabriel Zucman of the Paris School of Economics have performed the heroic task of measuring wealth for eight leading economies: the United States, Canada, Britain, France, Italy, Germany, Japan and Australia.
Their estimates reveal some striking trends. For instance, wealth accumulation in these eight countries has risen relative to yearly production. Wealth-to-income ratios in these nations climbed from a range of 200 to 300 percent in 1970 to a range of 400 to 600 percent in 2010. Behind the changing ratios is some bad news, namely that slow productivity growth and slow population growth have depressed income growth, but also some good news — that relative peace and capital gains have preserved wealth.
I would say that we have much become much more efficient in preserving old wealth than in creating new wealth, and this is overall a worrying trend.
I argue that debt to wealth ratios are usually manageable, even in the case of Japan. The real issue is that politics can make it very difficult to tax wealth and in that sense fiscal problems remain real and are fundamentally tied to governance, not debt to gdp ratios.
Overall I favor consumption taxes myself, for the traditional reasons. But with rising wealth to income ratios, governments are sure to look where the money is. I expect this to be a major battle, as it already is in Italy with the recent debate over the IMU property taxes.
There is much more in the column, you can read the whole thing here.
*The Great Tamasha*
The author is James Astill and the subtitle is Cricket, Corruption, and the Spectacular Rise of Modern India. This is an excellent book on India even if you, like I, have no real understanding of cricket. Here are a few bits:
According to an analysis by Richard Cashman of the 143 Indians who played Test cricket up to 1979, half had a college degree, compared to 1 or 2 per cent of Indians as a whole.
And:
Cricket is now ubiquitous on Indian television. It is shown constantly on 16 sports channels and relentlessly discussed on over 100 news channels.
And quoting Ashis Nandy:
“Cricket is an Indian game accidentally discovered by the English.”
Recommended.
China allegory of the day
The subtitle of the article is:
A Chinese museum has been forced to close after claims that its 40,000-strong collection of supposedly ancient relics was almost entirely composed of fakes.
Here is one good excerpt:
Wei Yingjun, the museum’s chief consultant, conceded the museum did not have the proper provincial authorizations to operate but said he was “quite positive” that at least 80 of the museum’s 40,000 objects had been confirmed as authentic.
“I’m positive that we do have authentic items in the museum.”
Here is another bit:
Mr Wei said that objects of “dubious” origin had been “marked very clearly” so as not to mislead visitors and vowed to sue Mr Ma, the whistle-blowing writer, for blackening the museum’s name.
“He [acted] like the head of a rebel group during the Cultural Revolution – leading a bunch of Red Guards and making chaos,” Mr Wei claimed.
Shao Baoming, the deputy curator, said “at least half of the exhibits” were authentic while the owner, Wang Zonquan, claimed that “even the gods cannot tell whether the exhibits are fake or not,” the Shanghai Daily reported.
China is in the midst of a museum boom, and it is believed that eighty percent of the fossils in Chinese museums are fake.
Here is a very good piece by Kate Mckenzie on the Chinese economy.
The Puzzling Return of Glass-Steagall
I am puzzled by the renewed demand for the return of Glass-Steagall. I am puzzled not because Glass-Steagall might be bad policy but because it is so clearly a policy that doesn’t deal with the problems that created the financial crisis. If one had to sum the crisis up in one sentence it would be hard to do better than “a run on the shadow banking system.” The shadow banking system is that collection of mostly non-bank financial intermediaries who base their credit creation not on deposits but on repo, money market funds, SIVs, asset backed securitizations and other financial structures. The big new fact that I learned from the financial crisis and that I thought someone like Elizabeth Warren would surely also have learned is that the shadow banking system is larger than the regular banking system.
Separate commercial and investment banking? Please. The problem was that investment banking, in the form of shadow banking, become so separated from commercial banking that the Fed no longer had any idea where a majority of credit was being generated. Credit creation separated from banking as understood by the Fed, and moved into the shadows, hence, the term shadow banking.
Compare Glass-Steagall with the Gorton-Metrick proposal to reform banking. GM would in essence extend deposit insurance to the shadow bank system, i.e. instead of separating commercial and investment banking, Gorton and Metrick would erase the distinction entirely by making all credit creators regulated commercial banks. (I exaggerate, but only slightly). If you don’t like that idea then consider Larry Kotlikoff’s limited purpose banking. Kotlikoff, in essence, goes the full Rothbard–separate lending from money warehousing (i.e. transaction-cost reducing money services) (Tyler offers some criticisms here).
Now whether you think the Gorton-Metrick or Kotlikoff proposals are good ideas, and I am not arguing for either, these ideas at least addresses the important issues. In contrast, Glass-Steagall would merely shuffle around organizational boxes in the less important regulated banking sector. Indeed, why would anyone think that 1930s policy is the solution to a 21st century problem?
Addendum: Here are previous MR posts on Glass-Steagall. FYI, my paper on the public choice aspects of Glass-Steagall showed that the public reasons for the original Glass-Steagall were not the private reasons. Is something like this going on today?
Is Japanese stagnation demand-side or supply-side?
Here is an excellent post by Noah Smith on that topic.
Here is one bit:
It seems to me that the standard New Keynesian sticky-price story just cannot explain Japan. The “short run” for Japan is over and done. We are not looking at a “short-run” fluctuation caused by sticky prices.
This has implications for policy. It means that we can’t expect the “first arrow” of Abenomics – quantitative easing – to boost the real economy through the kind of channel described by a New Keynesian or AD-AS model. It might do so through some other channel, but how exactly that will work is not clear.
Here is another bit:
But I don’t think Japan is living in an RBC world either. Because in an RBC world, keeping interest rates at zero for decades, and printing a bunch of money (as the Bank of Japan did in the mid-2000s), should cause inflation (without helping growth). Instead, we see persistent deflation. So an RBC model of the common type can’t be describing Japan’s world either.
Here is his conclusion, with which I very much agree:
I’m not sure I know any model that describes Japan; maybe we don’t have one. But my guess is that it’s a world in which “Aggregate Demand” and “Aggregate Supply” are not as distinct entities as they are in Econ 102. In an AD-AS framework, either the AD curve or one of the AS curves shifts on its own. But in Japan, it may be that what look like supply shocks (falling productivity) and what look like demand shocks (deflation) may actually be due to the same cause.
And whatever world Japan is living in may have multiple equilibria. It may be that Japan is trapped in a “bad equilibrium”, and it will require a “big push” to kick it back to the “good equilibrium”. In fact, that seems to me to be the implicit premise of Abenomics.
In any case, we shouldn’t be thinking about Japan solely in terms of our standard textbook models. The real world appears to be much weirder than those toy environments.
Income Inequality and the Servant Boom
Inequality is likely to drive increased jobs in the service sector as appears to be the case in London:
The number of domestic servants is booming across central London: wherever the multiple between the wages of the rich and the poor grows, so does the number of servants. Much of the time, the towering Georgian and Victorian terraced houses of Belgravia now have only servants living in them – their masters and mistresses are drifting around the world, from yacht to schloss to Park Avenue apartment, in search of pleasure or tax avoidance. Drive round the area at night, and it’s often only the lights in the attics and the basements – the servants’ quarters – that are on.
But it’s not just in the gilt-edged parts of Britain that the service industry is flourishing. According to the Work Foundation, there are now more than two million part-time or full-time domestic workers across the country. All told, 10 per cent of households now employ some sort of domestic help.
The Economist concurs:
According to Britain’s Office for National Statistics (ONS), household expenditure on domestic service hit a low point in 1978, since when it has quadrupled in real terms. It estimates there are as many domestic workers in London now as in Victorian times.
The idea of working as a personal servant strikes many people as distasteful. Indeed, there is much to be said for working for a faceless corporation or for selling directly to the impersonal market. Many jobs in the personal service sector, however, do offer significant autonomy and room for creativity–for example, personal chefs, gardeners, high-end nannies, pilots, publicists and tutors. Service workers today are also less likely to be tied to a single employer, either a ready market is available to switch employers or they are already selling to a range of customers. Compared to jobs in manufacturing and in impersonal service, personal service jobs are also likely to be more immune to competition from the robots.
Hat tip: Tim Harford.