The Battle for History: Robson on the Great Depression
William Robson, President of the C. D. Howe Institute, mounted a rear-guard defence of the conventional wisdom against Keynesian fiscal policy in yesterdayâ€™s Globe and Mail. He argues that we should leave the economy to central bankers and monetary policy instead of calling on governments to use fiscal policy. There are at least four problems with his op-ed:
1.) Far from acknowledging that the free-market policies he champions contributed to the economic crisis, Robson writes, “Ottawa should recall the things that brought Canada into 2008 in such good shape, and build on them.” In other words, we should ignore the fact that we are standing on the precipice of what might be the worst economic crisis since the Great Depression: “Canadians should be thinking about the next expansion.”
2.) Robson argues that fiscal stimulus would be inappropriate. Like Milton Friedman, he blames the Great Depression entirely on a lack of liquidity from central banks and contends that there was no lack of spending from governments.
Robson claims that President Herbert Hoover tried to prevent the Great Depression by ramping-up public spending, but that this policy failed: “U.S. government spending . . . stood 7 per cent higher at the trough in 1933 than it had in 1929.” Even taken as presented, this evidence is not particularly compelling. Average spending increases of 1.75% per year hardly seem like a decisive fiscal policy response to the Great Depression.
In fact, the dollar value of U.S. government spending did not even increase that much. It rose less than 3% from 1929 to 1933 (or an annual average of 0.7%). This period includes the beginning of President Rooseveltâ€™s administration and the New Deal in 1933. From 1929 to 1932, under Hoover, the dollar value of government spending was flat.
American public spending increased “in real terms” only because prices were falling. But maintaining spending amid declining prices hardly constitutes Keynesian-style fiscal stimulus.
Annual expenditures increased significantly only later in the 1930s and never exceeded annual revenues by more than $1.1 billion before the US entered World War II. In other words, Keynesian fiscal policy could not stop the Great Depression because it was implemented too late.
(The secondary headline of a recent Andrew Coyne column was, “Deficit spending didnâ€™t even work for FDR: war, not the New Deal, ended the depression.” In fact, the US did not undertake major deficit spending until the war.)
US Federal, State and Local Consumption Expenditures and Gross Investment
|Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â||1929Â||1932Â Â Â||1933Â Â||1937Â Â Â||1941Â Â Â Â||1945Â Â Â Â|
|Spending ($ billions)Â Â Â Â Â Â||10.8Â Â||10.9Â Â Â||11.1Â Â Â Â||15.8Â Â||30.4Â Â Â||102.8Â Â Â|
|Spending (Index)Â Â Â Â||7.0Â Â Â Â||7.8Â Â Â Â||7.5Â Â Â Â||9.7Â Â Â Â||19.5Â Â Â||67.0Â Â Â Â|
|Budget Balance ($ billions)Â Â Â Â||2.6Â Â Â Â||(0.7)Â Â Â Â||(0.5)Â Â Â Â||2.2Â Â Â Â||4.1Â Â Â||(27.4)Â Â Â Â|
3.) Even if one accepts a focus on monetaryÂ as opposed to fiscal policy, the C. D. Howe Institute has been on the wrong side of that debate. Its Monetary Policy Council, chaired by Robson, advocated tighter monetary policy than the Bank of Canada delivered.
There were eight scheduled interest-rate announcements in 2008.
ï»¿- July: The Council called for a rate hike, which the Bank of Canada (rightly) did not implement.
– March, April and December: The Council proposed smaller rate cuts than the Bank enacted.
– January, June and September: The Council recommended what the Bank announced.
– October: The Council proposed a larger rate cut than the Bank made.
So, the C. D. Howe Instituteâ€™s Council advocated tighter monetary policy four times, the same monetary policy three times, and more expansive monetary policy once. This track record does not make Robson a credible proponent of expansionary monetary policy to mitigate the economic downturn.
4.) Robson attributes the phrase, “We are all Keynesians now,” to Richard Nixon in 1971. In fact, this Friedman quote was the title of a 1965 TIME magazine cover story. (A quick Google search would have led Robson to this article.)
Robson’s piece is strange on many fronts, not least that monetary and fiscal policy are treated as alternatives rather than as complementary. While monetary easing was and is necessary to deal with deflation, it will not induce significantly increased household consumption or business investment in isolation. We need higher public investment to drive increased aggregate demand… possibly financed directly by the cnetral bank as advocated by more and more orthodox economists..
Andrew, you nail it and most of those on the right don’t get this point. Aggregate demand is toast right now. And will be for some time, this is a result of the seismic final collapse from a 30 year culturally barbed war against workers under the guise of market forces. Agregate demand, at least in the sense of its main component, in the form of wages, has been under assault for so long now that precariousness has become a fixture in the ways and means of a whole lot of workers. No more housing bubbles will save demand under the current system.
That is why in Canada we need a new leader that not only contests market forces, similar to Obama, but will take us in a direction that real substantive positive change for wages is on the horizon. Harper has got to go and so do his free market, outdated economic policies. You can bet heavily that his spots are not going to change any time soon.
Happy new year to all those on the PEF, it has been another enlightening year of blogging with you all. I have learned much and finally actually took out a membership, so all those online please sign up or renew your membership.
Hope to happily stir up some critical thought with you all soon.
Robson is signaling what his constituency wants. More reserves for the banking system through generous monetary policy: buy bad mortgages from the banks, then sell them treasury bills, then deposit the proceeds with the chartered banks.
There are some bad loans out there for sure. Ignoring the demand problems will not help, but Robson is more concerned that Bay St. gets the money to backstop impending losses. Apparently loans outstanding to the Canadian parts of the Detroit three amount to a big chunk of bank capital reserves.
Business does not want to give up its hard won wins over labour through restoring unemployment insurance which is what fiscal stimulus means. P 3’s yes, public investment, nyet.
The silly reliance on the collapse of the money supply caused the depression argument is intended to confuse people. Referring to the failure of Keynes is Robsons way of invoking a bogeyman. After all these years of dumping on macroeconomics, he is not about to admit that when someone loses a job, it may not be because they did not want to work for less, but that expected profits were not there.
It would be amusing to watch him carry on if it were not for the fact that he represents business thinking on what is needed, and what is not acceptable. I would like to know what John McCallum thinks of the issue, as I fear that he is with Robson, and the Liberals may be there as well.
This is not about finding the best policy for Canada, it is about doing the best for the banking system. Same difference, eh? Yes, for the CD Howe, the Ontario old fashioned Conservatives, and those Liberals who seek their to win their supporters away from Harper, rather than join a coalition with the NDP.
I have been waiting to use a quote from the London Review of Books, 20 November 2008, by Haukur Mar Helgason writing about the situation in Iceland:
….”It’s official: capitalism is monstrous. Try talking about the benefits of free markets and you will be treated like someone promoting the benefits of rape.” I’m not an economist, but I love reading economic policy arguments! Cheers, Leanne
I think the expression “we are all Keynesians, now” actually dates back to Roy Harrod’s influential article in Encounter in January 1964. (See Harrod, Roy, “Are We Really All Keynesians Now?”, Encounter, January 1964).
Of course, the notable thing about Friedman’s comment, even if it was borrowed from a greater economist, was that it came from the non-Keynesian camp. However, Robson no doubt is well aware, at least, of Friedman’s comment. I suspect his preference for Nixon’s remark over Friedman’s is merely tactical: quoting Friedman (or Harrod, even more so) evokes years of steady Keynesian-inspired growth in the 1960s, whereas quoting Nixon, however wrongmindedly, evokes stagflation and the decline of the Bretton Woods arrangements. Yet, he is able to do so, so blithely, because Canada’s progressive economists have yet to produce a thorough history of Canadian economic policies in the post-Bretton Woods era. I know, you have all been fighting more immediate and technically important battles, or producing useful and accessible books (such as Jim Stanford’s Paper Boom and Economics for Everyone, or John Smithin’s Revenge of the Rentiers and the Threat to Prosperity), but, as far as I know, no notable economist has taken up the task of doing, for the last decades of the 20th Century, what W. A. Mackintosh or Irving Brecher did for the interwar years. Frankly, Owram and Norrie’s history of the Canadian economy just doesn’t cut it. Perhaps Mr. Stanford would be willing to take on the task for his next book?
This is from Mark Thomas’s blog citing Paul Krugman (NYT Jan. 5/09) that pretty well sums up why where Robson is coming from and why not to take him seriously as an analyst of what to do now:
“The fact is that recent economic numbers have been terrifying, not just in the United States but around the world. Manufacturing, in particular, is plunging everywhere. Banks arenâ€™t lending; businesses and consumers arenâ€™t spending. Letâ€™s not mince words: This looks an awful lot like the beginning of a second Great Depression. …
We werenâ€™t supposed to find ourselves in this situation. For many years most economists believed that preventing another Great Depression would be easy. In 2003, Robert Lucas … declared that the â€œcentral problem of depression-prevention has been solved, for all practical purposes, and has in fact been solved for many decades.â€
Milton Friedman, in particular, persuaded many economists that the Federal Reserve could have stopped the Depression in its tracks simply by providing banks with more liquidity…
It turns out, however, that preventing depressions isnâ€™t that easy after all…, the Fed has been supplying liquidity like an engine crew trying to put out a five-alarm fire… Yet credit remains scarce, and the economy is still in free fall.
Friedmanâ€™s claim that monetary policy could have prevented the Great Depression was an attempt to refute … Keynes, who argued that monetary policy is ineffective under depression conditions and that fiscal policy â€” large-scale deficit spending… â€” is needed… The failure of monetary policy in the current crisis shows that Keynes had it right… And Keynesian thinking lies behind Mr. Obamaâ€™s plans to rescue the economy. ”
Note, that I do think Robson has to be taken seriously for his political influence. Canadian officials will likely get the stimulus package wrong. Ignatieff is fence sitting, so Harper gets a free hand to cut corporate taxes and call it a stimulus.
I do regard Robsonâ€™s op-ed as part of a big and important debate about the economic lessons of the Great Depression, which is why I immodestly titled my post, â€œThe Battle for History.â€
Itâ€™s excellent to read Krugman effectively fighting this battle south of the border.