American Elephants


Unlearning Keynesian Economics: by The Elephant's Child

Economist Russ Roberts writing at CaféHayek.com, December 20.

When I was younger, everyone knew that the New Deal had saved the US economy from the ravages of the Great Depression. Everyone knew that Keynes was right—look what had happened when Roosevelt implemented his ideas—the Great Depression ended! Eventually, everyone knew that story was false. The New Deal wasn’t that big and the Great Depression didn’t really end when the New Deal was implemented.

Now everyone knows that World War II ended the Great Depression. Of course, private consumption fell during WWII and the vaunted Keynesian multiplier seemed to only work for the defense industry. Someday, perhaps, people will understand that when a war takes over most of the industrial sector, you don’t get much stimulus. And it’s not hard to reduce unemployment when you force a huge chunk of the male working-age population into the army.

When the war ended, all the Keynesians predicted disaster and a horrible depression because of the cuts in government spending and men coming home from Europe and the Pacific. Well, when that didn’t happen, people should have known that there isn’t a simple relationship between government spending and prosperity. But somehow, people didn’t learn that lesson.

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Have a Happy Christmas everyone!

Comment by Doug Cotton

“When the war ended, all the Keynesians predicted disaster and a horrible depression because of the cuts in government spending and men coming home from Europe and the Pacific. Well, when that didn’t happen, people should have known that there isn’t a simple relationship between government spending and prosperity. But somehow, people didn’t learn that lesson.”

There’s actually an interesting story here: Keynes didn’t seem to think it:

“Walter Salant and Don Humphrey, who sat opposite Keynes at the inside of the U-shaped table, argued strongly that increased fiscal restraint was not then needed in America as it would inhibit further progress in reducing unemployment…

…Finally Keynes, obviously somewhat displeased, pushed his chair back from the table and brought the debate to an end as he said, rather sharply, “On this point you are more Keynesian than I.” It was an electrifying moment, never to be forgotten!”

http://ecologicalheadstand.blogspot.co.uk/2011/11/my-dinner-with-maynard-on-this-point.html

It is indeed true that, at that level of state expenditure, cutting back will ‘release’ the private sector (the destroyed competition and winning a war probably didn’t hurt, either). However, Keynes remained committed to his primary goal of low long term interest rates, which ensured a vibrant private sector recovery in both the UK and US, as well as many other countries involved in the BW framework he was involved in creating.

Comment by Unlearningecon

The austerity of the wartime years — what wasn’t rationed, you couldn’t buy anyway — meant that people saved their money. There was a lot of pent-up demand for new appliances, new cars, all the stuff that had been unavailable during the war years, and unaffordable during the Depression. The women who had been working in the factories and shipyards were sent home to make room for returning soldiers. The WASPS were disbanded, I met some who had been test pilots during the war, and wanted to keep flying. A few headed for Alaska where they could be bush pilots. Lee Ohanian (UCLA) and I think, Harold Cole (also UCLA) did some work to show that the Depression was not ended by the War, that making all sorts of war materials didn’t mean a return to prosperity because they were quickly used up; created to be destroyed.
Nice story, thanks.

Comment by The Elephant's Child




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