Monday, December 01, 2008

Why Is the New Deal Back in Style?

Paul Krugman writes "Right now there’s intense debate about how aggressive the United States government should be in its attempts to turn the economy around. Many economists, myself included, are calling for a very large fiscal expansion to keep the economy from going into free fall. Others, however, worry about the burden that large budget deficits will place on future generations."

What are the unintended consequences of a huge growth in Keynesian public spending Future inflation and new expectations of future inflations; business lobbying for bailouts and special programs for their favored projects (i.e rent seeking).

My moderate proposal here would be to return to "Rubin Economics" of balanced budget and public investment in deep R&D so that we can keep our technological edge and keep our universities great.

Historians should explain to us how the New Deal has come back in Vogue. Is it FDR's classy style?

"John Hawkins: Switching gears again here, in your opinion, what caused us to pull out of the Great Depression? Was it Roosevelt's policies, WW2...

Milton Friedman: Roosevelt's policies were very destructive. Roosevelt's policies made the depression longer and worse than it otherwise would have been. What pulled us out of the depression was the natural resilience of the economy + WW2.

You know, it's a mystery as to why people think Roosevelt's policies pulled us out of the Depression. The problem was that you had unemployed machines and unemployed people. How do you get them together by forming industrial cartels and keeping prices and wages up? That's what Roosevelt's policies in the New Deal amounted to. Essentially, increasing the role of government, enhancing the monopolistic position of labor, and creating as I said before the equivalent of price fixing cartels made things worse. So most of his policies were counterproductive."

Rajan's Thoughts on rules versus Discretion

Prescott Nobel Prize and rules versus discretion redux