Simple Graphs For Simple People...

Demonstrating the sort of subtle intellect he's become renowned for, Richard Murphy appropriates an embarrassingly simplistic graph from Huffington Post and uses it as "proof" that massive government spending is THE ANSWER. He thinks it is the sort of thing that will move adults to back the New Economic Institute's embarrassingly simplistic Green New Deal, which Dickie helped write.

Here's the graph:

 

It's worth noting that the author (one Paul Abrams) of the Huffington Post article uses the above graph to defiantly hurl the following dare at the non-Hopey/Changey:

Winning The Economic Argument: Show Opponents This Graph, Then Ask Them To Explain

It's also worth noting that were Mr. Abrams a college sophomore his graph and argument might, on a good day, rate him a B-/C+ in a typical Introduction to Macroeconomicscourse taught at a typical midwest land grant institution of higher learning. That Richard Murphy would slap this up on his web site and declare victory tells you all you need to know about his grasp of the dismal science.

Anyway, in answer to Mr. Abrams' challenge:

When I see Gross Domestic Product moving in lockstep with governmental (federal) spending over a substantial period of time, the conclusion I DO NOT REACH is that the New Deal ended the Great Depression. What the above graph suggests to me is that the federal government's spending has appropriated enough of the available credit to significantly depress private investment... thus prolonging, rather than shortening, the Great Depression. Private investment is, first and always, the only path to economic recovery and new growth.

Anyone interested in the finding the basis for my conclusion would be advised to read the following two books:

The Great Contraction: 1929-1933 by Milton Friedman and Anna J. Schwartz

Depression, War, and the Cold War by Robert Higgs

There are others, of course, but these two will give you what you need the fastest.

That someone with Murphy's educational and professional background would appropriate the sort of dreck Abrams is peddling is as disappointing as it is predictable.

It is worth noting that unfettered capitalism was not the root cause of the Great Depression... That honor must be shared by the Federal Reserve Board, Congress, and the Hoover and Roosevelt Administrations. I think there is an excellent chance that should this recession (largely caused by the Federal Reserve Board, Congress and the Bush Administration) deepen, it will largely be because of the Federal Reserve Board, Congress and the Obama Administration.

And for you Republicans out there, please understand that your "plan" is simply a different path to the same error being committed by the Democrats.

Comments

[Tim Worstall]

And, of course, if you did a graph looking at the contraction in money supply (and subsequent expansion) as against GDP growth then you'd get an even better fit. As Milton and Anna pointed out.

[Dennis The Peasant]

Exactly.

[jcw]

Another good book on the Great Depression is Murray Rothbard's The Great Depression. It looks at it from an Austrian point of view. It is also a free download on the Mises.org website.

[Alan]

So basically the private sector was willing to invest during the Great Depression but the darn government took all the money. Is that what really happened? Where is all the private investment going to come from today? Aren't we all pretty much tapped out, credit wise?

[just passin by]

The chart also shows GDP increasing in 1939, as the government began, belatedly, preparing for WWII.
"Although full-scale mobilization remained politically impossible, the government started the financial transition from parsimony to abundance. Appropriations came faster than the Army could absorb them, over $8 billion in 1940 and $26 billion in 1941, dwarfing the half billion dollars that had been allotted for expansion early in 1939. By the time of Pearl Harbor, Congress had spent more for Army procurement than it had for the Army and the Navy during all of World War I."
http://www.history.army.mil/documents/mobpam.htm

And yes, that is government spending. But at least we got tanks out of it.

[elliottg]

Wow,I'm feeling all warm and fuzzy towards you Dennis and then you let loose a howler like this. Sure, it's a simplistic argument, but you don't have to get complicated when you are disproving such obvious BS as the premise that government spending prolonged the Great Depression.

[elliottg]

Did you delete my comment. How about this quote from Friedman himself?

"The Keynesian view that the spending is stimulative assumes that the funds the government borrows would not otherwise have been invested in the private capital market, but came simply from cash held in hoards by individuals from under the mattress, as it were. In addition, it assumes that there are unemployed resources that can readily be brought into the work force by activating the excess funds held by individuals, without raising prices or wages.

That is a possibility in some special cases, such as the Great Depression in the 1930s, when there had been a major reduction in total output and prices were very far from their equilibrium level. More generally, however, theory suggests and experience confirms that government spending financed by borrowing from the public does not provide a stimulus to the economy. "

[Dennis The Peasant]

Elliot-

You're quite the paranoid. I use Typepad, so patience is the order of the day in all matters... including comments. Comments go up without moderation on my part.

See the Higgs book for an extensive analysis regarding the negative effect that New Deal spending had on private investment and recovery. Realize that I fully understand that there were other quite significant factors in the control of the Fed (and not the Roosevelt Administration) that contributed to delaying recovery, including interest rate hikes and ineffective bank lending interventions (both came after the intial Fed contraction of the money supply).

And the argument here isn't that government spending - in and of itself - prolonged the Great Depression. The argument is that the spending, combined with the contraction in money supply initiated by the Fed, crowded private investment out of the credit markets. I personally believe that had Roosevelt concentrated on making the funds spent on the New Deal available to the private sector, recovery would have been quicker than it was.

[Allen]

The graph and the Raj are related. Build a model on selective data and, "home, sweet home." Do they grade on the curve at those places you mentioned? Me, D at best; the graph has no relation to what they're espousing.

[badanov]

Dude: Go easy on Abrams. He's an idiot and a

If he could read a graph he wouldn't be "an entrepreneur who is currently a consultant in biotechnology, and chairs a bioremediation company. He was formerly President, CEO and Director of one publicly- traded, and another privately-held, biotechnology company, inventor on 12 US patents, co-editor of two scientific books and has published more than 35 peer-reviewed articles. He has been contributor to several journals on issues facing the biotechnology industry and entrepreneurs, an invited speaker at trade and financial conferences, and has testified before Congress on these matters.

He serves as a Board member of the Washington Progress Alliance, the Women's Bioethics Project, the Apollo Alliance (Washington State) and the Economic Opportunity Institute."

[Green Eagle]

You know that blogging rule that the first person who compares someone to Adolf Hitler automatically loses the argument? Well, along the same lines, anyone who, after Reagan and Bush, cites Milton Friedman to support his arguments instantly loses.

Don't get it? Believe me, us sane people out here do.

[badanov]

Milton Friedman sez all generalizations are false!

[Dennis The Peasant]

Green Eagle-

Anyone who contends Reagan had the opportunity to implement Friedman's ideas, or that Bush had even heard of Milton Friedman, automatically loses the argument.

I think you're confusing sane and silly.

[wayne fontes]

You know that blogging rule that the first person who compares someone to Adolf Hitler automatically loses the argument? Well, along the same lines, anyone who, after Reagan and Bush, cites Milton Friedman to support his arguments instantly loses.

Don't get it? Believe me, us sane people out here do.

Perhaps Green Eagle can explain what portion of Bush's economic program Friedman would have favored. I'm guessing the best were going to get is a reference to Naomi Wolf.

[Dennis The Peasant]

Wayne-

You're probably right on that score.

[wayne fontes]

Probably? Green Eagle demonstrated that he doesn't understand what Friedman stood for or have any grasp of what Reagan's policies were. Both of which don't address the fact that criticizing the Fed's monetary policy in the thirties doesn't equal an endorsement of Bush's policies which you explicitly criticized. He's a rabid partisan who read that Republican=Friedman on some website and immediately turned off his brain.

New rule Green Eagle, anyone who thinks Bush even attempted to implement Friedman's policies needs to do some research before they comment.

[angulimala]

Some abstract notion of "Free-Market" Capitalism didn't get us here. The sad reality of Crony-Capitalism did. I don't know what to do about that.

[markg8]

I do angulimala. Turn the crony-capitalists out into the street and never let them anywhere near the levers of power again.

You'll also notice in 1937 the GDP started sinking again. That's because FDR lost his nerve, reined in government spending and went back to trying to balance the budget again once GDP hit 1929 levels. The economy didn't fully recover until the biggest US government spending program the world had ever seen kicked in during W11.

We not only built a huge number of tanks and planes every truck in the Russian military was a Dodge. We fed millions of soldiers with Spam and k-rations. We sent cans of IA some really nasty fatty pig meat to the USSR that starving Russians loved. We moved all that stuff all over the globe on thousands of Liberty ships we built in 16 different shipyards across the country. When German U-boats were sinking ships faster than we could build them in 1942 we put B-24s in the air from the biggest aircraft plant ever built in Willow Run Mi. to sink them back.

In 1943 defense production made up more than 40 percent of the gross national product. Just a year later, the unemployment rate dropped to 1.2 percent, a record low. Before U.S. involvement in WWII, the unemployment rate was more than 14 percent. In 1939 17 percent.

And after the war instead of slashing taxes and spending we put money into housing in the form of GI loans and the FHA. The GI bill gave us the highest education rates this country has ever seen. We taxed the hell out of the elite with marginal income tax rates as high as 90% while we paid off our war bonds in the 1950s and 60s. They got richer still off a booming economy and those war bonds.

And we did all that by caring more about people, "promoting the general welfare" as the constitution calls it. Not by manipulation of the money supply, financial chicanery and the disastrously false promises the government deregulators fed us that unleashed disaster, instead of prosperity.

Friedman's theories don't work when Treasury bond yields are at zero and the biggest banks in America are insolvent. Anybody who thinks government spending is crowding out private investment these days is evidently hiding under the mattress with his money.

[Leo]

"And, of course, if you did a graph looking at the contraction in money supply (and subsequent expansion) as against GDP growth then you'd get an even better fit."

Right, but riddle me this -- how the hell do you increase the money supply when fed. rates are already effectively zero?

[wayne fontes]

"And, of course, if you did a graph looking at the contraction in money supply (and subsequent expansion) as against GDP growth then you'd get an even better fit."

Right, but riddle me this -- how the hell do you increase the money supply when fed. rates are already effectively zero?

The chart came from the 1930's Leo. The comment refers to the money supply in the 30's.

In the current situation Obama should have targeted tax cuts to business and individuals this this year and done infrastructure next year. When the economy picks up the money supply supply should be tightened.

[Leo]

"he chart came from the 1930's Leo. The comment refers to the money supply in the 30's."

Obviously. The question is how to apply it today. And Friedman, Obama, and apparently everyone on this blog agree that the key teaching is that the lesson is to expand the money supply to counter recession/depression.

"In the current situation Obama should have targeted tax cuts to business and individuals this this year and done infrastructure next year."

Wait a minute -- you think Obama should do targeted tax cuts and infrastructure spending as stimulus? Then what's your beef? Is it just where the tax cuts and infrastructure spending are targeted? Or perhaps you object to the aid to states?