This is a review of two books and a discussion of some of their controversial subjects.

The Forgotten Man: A New History of the Great Depression, by Amity Shlaes

Rethinking the Great Depression, by Gene Smiley

Part One:  Overview  (book review)

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Amazon Reviewer Professor Donald Mitchell:  “The main benefit of this book is that you'll get to know the supporting cast from those times (especially those who were initially very impressed by the Soviet Union) much better than you would have otherwise. That will enrich your appreciation of the mental set and tenor of the times.”

3. Amazon Reviewer Arnold Kling: “The struggle over economic policy in the 1930's was really an episode in the long, historical conflict between business participants in the market and anti-business academics. Roosevelt gave free rein to the professors, until the start of the Second World War led him to realize that he would need the tycoons to help mobilize to defeat Hitler. I suspect that one reason that Roosevelt and the New Deal come off so well in the conventional wisdom is that history books are written by professors, not by entrepreneurs.”

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The stock market has lost much of its value.  Unemployment has skyrocketed and economists don’t agree on our economic prognosis.  We now have a strong Democratic majority in the House and a super majority of Democrats in the Senate, and new Democrat president who is a charismatic speaker and who has some radically liberal ideas for dealing with the economic crisis.  This sounds like today, but this description could also describe 1933.

After having recently read Gene Smiley’s “Rethinking the Great Depression,” (RGD) I have just completed Amilty Shlaes’ “The Forgotten Man: A New History of the Great Depression” (TFM).  While both of these are books about the Great Depression, there wasn’t too much overlap in content. Gene Smiley is an economics professor and his book covers economic theory and policies of the time and contains lots of dates and numbers.  It also gives some background on macro economics. 

Amilty Shlaes’ book covers the people and politics of the era.  Economic policies are covered, though this book gives insight into the minds some of the key people of this era.  After reading this book, I now have a feel for the personalities of Coolidge, Hoover, Roosevelt, and several members of Roosevelt’s brain trust of advisors.  Amity Shlaes is a syndicated financial columnist and is a contributor to “Marketplace,” the public radio show. I thought that both were fascinating books and I would highly recommend both of them.  Interestingly, both of these books were completed before our current economic crisis.  TFM was first published in 2007 and RGD was first published in 2002.  Until I read these books, I had no idea of the extent which the federal government was attempting to micromanage our economy.

In my opinion, reading one book will help you to understand the other.  At no time did I feel that I was wasting my time reading redundant material.

Controversies

I’m not sure why Shlaes is getting the brunt of the vitriol, and not Smiley.

Being Critical of Roosevelt

Neither book points out any of their conclusions as controversial, though there are a definitely a few areas which have ruffled some feathers.  Both books paint an unflattering picture of federal government policies during the Great Depression.  Neither Hoover nor Roosevelt gets a pass in either book.  Hoover has received significant criticism since the time of his presidency, so a critical narrative of his policies is nothing new to many people.  However, Roosevelt has historically been credited with heroic leadership whose policies helped to get us out of the depression.   A conclusion of both books is that Roosevelt’s policies almost certainly prolonged the depression.  This has produced a flurry of charges.  An internet search of the words “shlaes rewriting history” will return with lots of hits.  “Smiley rewriting history” returns fewer hits, though they both have the same conclusion.

While being critical of Roosevelt, I appreciated the fact that neither book portrayed him in an overly personal and negative manner.  The events of the time were portrayed in a matter of fact manner, and they let the facts speak for themselves.  The depression in the US lasted much longer than for most other countries, such as Canada   Smiley and Shlaes state that U.S. federal policies are most likely to blame.  Both books give specific examples of policies that were implemented during this time, and they explain how they were detrimental to the economy.  The facts in either book could easily be proven wrong if they were incorrect, though I have yet to see a convincing example.  I’ll try to keep my eyes and my mind open.

Note: New Deal was much more than just government spending programs. NRA and AAA included lots of government controls over businesses. 

Some notable examples of Roosevelt’s actions and policies include:

• Letting the country founder after the election until he took office
• Problem of over production and under consumption.
• Supreme court stacking
• Straight Killing: 
• Hair Cuts

http://eh.net/encyclopedia/article/parker.depression

However, as shown by Brown (1956), Peppers (1973), and Raynold, McMillin and Beard (1991), fiscal policy contributed little to the recovery, and certainly could have done much more.

Cause of the Depression within a Depression

http://eh.net/encyclopedia/article/parker.depression

The NBER business cycle chronology shows continuous growth from March 1933 until May 1937, at which time a 13-month recession hit the economy.

The first stock market crash occurred in 1929.  Afterwards, the economy remained dismal, but made a partial recovery beginning in 1936, but in 1937, the market tanked again.  This second drop is often referred to as the “depression within a depression.”  Both Smiley and Shlaes give specific examples of Roosevelt’s policies as reasons for the depression of 1937, such as

• The new tax on corporate tax on undistributed corporate profits. While this encouraged bonuses and higher wages to those who had a job, this discouraged investments for growth.
• Increased labor costs with the new Social Security taxes that were to be paid by the employers.  Regardless of whether or not the Social Security System itself is a good idea or not, the implementation of new taxes had a detrimental effect on the economy.
• Increased labor costs as a result of the union drives during this time period. While this drove up wages for the workers who had jobs, this drove up unemployment.
• Increased reserve requirements at the banks (contracted money supply)
• Increased reserve requirements for the banks (need to check on this.  Is this really considered to be Roosevelt policy?)

However, proposing that Roosevelt is responsible for the depression of 1937 is somewhat controversial.  For example, David Sorota recently wrote an article at Slate.com disputing this point.  http://www.salon.com/opinion/feature/2009/01/02/sirota_fdr_depression/  Here are some selected quotes from his article:

If you're like me, you sometimes find yourself speechless when confronted with abject insanity….

So if you're like me, you probably understand why I was momentarily tongue-tied last week after running face-first into conservatives' newest (and most ridiculous) talking point: the one designed to stop Congress from passing an economic stimulus package.

Sure, the vast majority of Americans think the New Deal worked well. But are conservatives right? Did the New Deal's "massive government intervention prolong the Great Depression?"

Ummm ... no.

On deeper examination, I discovered that the right bases its New Deal revisionism on the short-lived recession in a year straddling 1937 and 1938. But that was four years into Roosevelt's term -- four years marked by spectacular economic growth. Additionally, the fleeting decline happened not because of the New Deal's spending programs, but because Roosevelt momentarily listened to conservatives and backed off them. As Nobel-winning economist Paul Krugman notes, in 1937-38, FDR "was persuaded to balance the budget" and "cut spending and the economy went back down again."

Sorota’s opinion is reflected in many other libreral media sources.  Let’s look at two specific points:

1. The US experienced “four years of spectacular growth” when FDR took office and implemented his policies.  This implies that FDR’s policies were working.
2. The drop in economic performance in 1938 was caused by conservatives who pressured FDR to balance the budget, thereby inhibiting the implementation of needed FDR policies.

However, according to the facts and figures of these two books, “four years of spectacular growth” is a gross overstatement for the years leading up to depression of 1937.  RGD and TFG make a case that the nation began to recover after the Supreme Court ruled against the New Deal in two cases where excessive government control was significantly obstructing business.  RGD and TFG then make a case that it was Roosevelt’s policies that hurt business that were responsible for the decline of the economy.  The two court cases had to do with government regulation of business, and didn’t really affect government spending. 

The facts presented by Smiley and Shlaes make a pretty good case that Roosevelt’s New Deal was responsible for the depression within a depression.  Maybe some new facts would convince me otherwise, but Sorota’s op ed piece appears to be partisan sniping. 

Amity Shlaes versus Paul Krugman

Paul Krugman is a professor of Economics and International Affairs at Princeton, and also a columnist.  He is also a recent recipient of the Nobel Prize in Economics for his contributions to international trade theory.  (Reason Magazine has a nice summary of Krugman’s academic work in this area.  http://www.reason.com/news/show/129435.html)

Krugman is also known for his combative personality and far Left political views.  He is a firm believer in Keynesian economics and the New Deal, and has criticized President Obama for not spending enough with his stimulus plan. It is not surprising that he has attacked Shlaes’s TFG as well as some of her columns. 

One notable Krugman NYT column titled “Amtiy Shlaes Strikes Again”  (Nov 19)

http://krugman.blogs.nytimes.com/2008/11/19/amity-shlaes-strikes-again/

sounds angry, but the meat of his argument is mostly about the semantics of the word Keynesianism.  He alleges that she uses “misleading statistics” in one of her Bloomberg columns.

In another column “Changes in money-wages and Amity Shlaes,” he states that “she has no idea what Keynesian economics is.”

http://krugman.blogs.nytimes.com/2008/11/29/changes-in-money-wages-and-amity-shlaes/   (Nov 29)

Shlaes responds in a column “Shlaes Back to Krugman” 

http://blogs.cfr.org/shlaes/2008/11/24/shlaes-back-to-krugman/     (Nov 24)

in which she defends her employment statistics for the New Deal era.  Unemployment statistics weren’t tracked in the same manner as they are today.  She used numbers determined by an employment scholar (Lebergott) who used numbers from the Bureau of Labor Statistics.  She mentions another set of estimates published by another scholar (Darby) which are lower and would make the New Deal look better.  However, she states that these numbers aren’t that much lower.  She also argues that Darby underestimates unemployment by considering relief workers on short-term emergency government projects (“make work projects”) to be employed.  She also states that the Darby numbers aren’t really that much lower than the Lebergott, so it doesn’t make much difference anyway.  I find it interesting that Smiley’s books uses the same numbers as Shlaes, though hasn’t been criticized for it. 

Shlaes also defends her use of the term “Keynesian” in this column as well. 

Shlaes also responded in a Wall Street Journal article “The Krugman Recipe for Disaster.”

http://online.wsj.com/article/SB122792327402265913.html  (Nov 29)

Her defense against Krugman’s charges sound very reasonable.  I haven’t seen an effective refutation against her defense, though maybe it’s out there and I haven’t seen it.

->    Short term “make work” jobs were really the equivalent to receiving unemployment money, except that you had to do some work for it, where the work was often near meaningless, such as road word using a picks and shovels instead of using heavy equipment.

Whose Depression Era Unemployment Numbers are Correct?

Government Spending for WWII got us out of the Depression?

It has been largely accepted that government spending for the war was responsible for ending the depression in the United States.  This has been given as proof by some that more government spending is needed now, even if it means deficit spending.  However, both Smiley and Shlaes challenge this to some degree.  Shlaes doesn’t spend too much time on this, but she does make a case that it wasn’t so much the government spending that made a difference, but that it was the governments retreat from anti-business tactics that was responsible when the government began working with companies as part of the war effort.  Smiley takes this concept even further and suggests that depression may not have really ended until after the war ended.  For instance, he looks at such figures as the

Other good reviews:

http://eh.net/bookreviews/library/0587

http://www.fff.org/freedom/fd0212g.asp