Tuesday, September 14, 2010

Fear and Value Culminations in the Political Economy

I am just curious if I am the only one in the group who had this experience in the realms of their education about the New Deal and World War II. In all of my American History classes in middle and high school I clearly remember sitting in American History courses and hearing the teacher say the same story. The story is this there was a "credit bubble" which popped and resulted in the "Great Depression." At this point in the course there would be some romanticism about the government work acts such as the CCC and WPA "creating jobs" and "priming the pump." I distinctly remember my Advanced Placement American History teacher stating the Depression wasn't ended until World War II occurred as according to him it strengthened production and thus it strengthened the economy. The reason why I would like to know if others share this experience in their American History courses is because it was not until I started studying Econ in college that I was presented that there were two sides to this story. Until this point I had no idea that there was a debate.

Since obviously it is a huge debate and economists will probably always be arguing about whether or not the new deal was a raw deal, I found this podcast particularly interesting. Reed and Malamud have different perspectives but they both use some of the same tools in arguing their points which make me antsy. This is the use of emotion while Malamud spends most of his time on the floor painting the picture of how awful the Depression was and trying to give us a sense as to why the political economy needed to step in. Reed however is guilty of the same approach as he tries to incriminate FDR as just being a really economically stupid president. I am unsure if I like both of these approaches as they weakened my own sense of credibility for the speakers.

For the most part though I felt like on majority of the points I could identify with Reed. Mostly because he understands that you can't create long term jobs by throwing money around.

In this post I would like to direct myself to two particular issues discussed and would like to ask a couple questions about them.

1.) This idea of fear being toxic to an economy. I think this is the best argument that Keynesians have as it makes logic sense. Uncertainty leads to a stagnating economy. Why would you want to invest in a particular industry if you were filled with uncertainly and didn't know about tomorrow? As a politician I would find it hard to respond a huge drop in the economy by saying “ok I am going to do nothing just hold tight ok”. I would want to throw some expansionary policy out there (of course Smoot Hawley act from the FDR administration was contractionary ek!). Do the Ted Stevens thing and nab some pork!!!!  My question is: Can we really expect to have the political economy react to negative or uncertain economic expectations of individuals facing a depression by doing nothing? (I don't know it sounds like alternative universe to me)

2.) The other thing I wanted to touch base on is this "creation on jobs" bit which is thrown around. I understand and really like the principles of the broken window fallacy. However I think as long as there is a United States of America there will be public works projects. I feel though that there is a scale that people don't touch base on when they try to measure the value from these projects. With that strand of logic in mind it is very hard to determine the number of jobs that the private sector loses out on because of the investment in public works programs. There in a problem with empirically determining value of the projects. Reed would like to argue them as being stupid and Malamud would say they put the economy back on track. However, no one really breaks them down like individuals of the noneconomic spectrum. I think that there is a scale of created (or noncreated…I know not a real word) long term value that can come out of these projects. For instance I would like to say the Hoover Damn was a good idea and the current stimulus project in Alaska that is spending $26 million to pave about 26 miles of the Dalton Highway is a bad idea. The value that comes out of these kinds of projects spans various amounts of time. The Dalton Highway is not a useful road after it is no longer economically feasible to drill oil in Prudhoe Bay, but the hydropower produced by the Hoover Damn has a greater longer term value to more individuals. The problem though since most federal projects are the outcome of representatives squabbling for dollars that they are often are not put to any logical use. Some things like money invested in scientific research even create more of the questionable value problem as it is hard to identify which studies will have break troughs and which won't. As well to know which studies will find knowledge that will be important and which find knowledge will be unused in the future. If we had a formula to figure out which of these projects would produce long term value and which would not, it would just be too good, as the private sector could just jump in with certainty and invest in the works projects. My question is: If the democratic decision making of public workings projects was expanded to all American citizens rather than just their elected politicians would we then focus on public works projects of more rather than less value on the scale? (ie cut out the riffraff)

I have a feeling that I have been rambling so I'll stop with the statement that I am unsure if the last paragraph I wrote will may any sense to anyone (sorry guys :-)


  1. I am sure we will talk more about it on Thursday, but I would like to address your point on job creation. I wish I could tie this to Richard's post as well. The whole point of the broken window fallacy, the point that gets missed by a lot of people, is that moving money from one place to another provides no net benefit. However, it's all about timing. If there is idle labor, there is room for actual job creation, this is not fallacious. In fact this is observed in the private and public sectors. We can talk more later.

  2. This timing point is a good one to think about thanks for bringing it up.