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.)