Thursday, September 30, 2010
Wednesday, September 29, 2010
So The Question of the week is a battle of facial hair rather than ideas (pun on the Commanding Heights for Sherri)
If Carl Menger's beard got in a brawl with John Maynards Keyne's mustache which side would be victorious?
Please vote below through commenting action but note that due to public choice this results in intransitivity which makes this whole process irrational (Who knew?)
Examples for Josh...you know why! Menger is the sporting the Austrian look. While JMK is presenting the latest fall Keynesian number.
So the institutions (governments) place a series of choices in front of a given people, with absolute control over the options, the number of options, the order of the options, the level at which people can interact with those options, everything. The people get to make an uninformed decision on which options suit them best given massively imperfect information, and then hand the poor choice back to the institution for interpretation of the meaning of the chosen option. Furthermore, there is a statistical inevitability that your vote will not matter, especially if your institution has strange and complicated processes of arbitrage (like an electoral college). Amazingly, people continue coming back to the polls to repeat the process, again and again, while institutions continue to provide the opportunity.
So in spite of democratic appearances it would seem that institutions wield nearly absolute power. However, there is one caveat that Matt Mitchell failed to address, perhaps institutions are as irrational and as uninformed as society. Institutions and society are made up of the same material (idiots) and are subject to the very same cycles of rationality and irrationality. The assumption that institutions are acting rationally at all times is absurd, in fact it my be the case that institutions are in fact more irrational in their behavior then society at large: it may be that institutions are quite consciously irrational. They undoubtedly want to create prosperity for their society, and their very existence depends on the increasing prosperity of their societies, yet at nearly every opportunity they make the possibility of actually obtaining prosperity that much more unattainable. This is probably done with the best of intentions, and unintentionally at worst; sure there may be a clever weasel of a bureaucrat pulling the strings of a public figure, manipulating the system in their favor. Yet for all their brilliance and strategy, they are still surrounded by the very same people that make up the imbecile hive mind of a nation, the deeply uninformed and the perpetual irrational.
Tuesday, September 28, 2010
The micro-economics that can be applied to the sociology of public choice are quite useful as basic logical constructions but start to fall apart when extended beyond core situations. In Mitchel's troop voting example he pointed out that transitional preferences are very useful at their core but become irrational when measured in th aggregate. In most applied settings aggregate measurement is all that is going to matter. Whether it is a government official trying to cater to various interest groups or businesses trying to set up an advertising scheme. When doing this results are inconsistent, even random and might as well be associated to an expensive and costly game of pin the tail on the donkey.
It solves the age old question of why different people live in different ways. Why is the murder rate in Colombia higher than in Costa Rica? Why were you more likely to die a violent death in 13th century England than in 20th century England. Why do South Koreans have more money than North Koreans? Why won't those damn kids stay off my lawn.
Basically it boils down to three things, it's either that the people are different, the institutions are different, or the place is different. (I'm having a hard time nailing down what that last one means. The landscape? The realm of possibilities?) The speaker used the example of craving beer. Why do some people have beer while other people don't have it? (I think this is a bad example, but it's his so I'll use it.) Well, it's either that some people want beer and other people don't, or there are some institutions that are pro-beer (Germany anyone?) and others that aren't, (You don't see many Yemeni Lagers or Iranian Pale Ales on the market.) or it could be that some places have grain, water, yeast, and hops, and others don't. It might even be a combination of all three.
The primary focus of the speaker was on institutions: government specifically. He started with a list of things that governments do that a vast majority of economists agree are 'bad'. He then asked the questions: Why does the government continue to do these things? Why don't they listen to the economists? This point of the show seemed to be a little circular. Things are they way they are (different in different places) because of the institutions, and the institutions are the way they are because of the institutions? Meh - whatever.
People respond to incentives, unless they don't. Personal preferences determine how people act, unless they are overridden by the institutions. My ex wife didn't cheat on me because she is a morally bad (bad bad bad) individual, she soiled the nuptial sheets because she is surrounded by institutions that incentivize acting like a strumpet. The good news is that I'm not bitter, not because that's my personal preference, but because I'm surrounded by institutions that encourage low self-esteem, apathy, passive aggression, and not throwing a woman down a flight of stairs.
It sounds like I'm joking, and I probably am, but think about how things would have been different if I were able to avail myself of some good old Wahhabi institutions. The community would have introduced my ex to some high velocity geology.
The take home message for me was as follows: Not only are people "rationally ignorant", but they are most likely "rationally irrational" as well. Not only does the combination of personal preference, institutional climate and physical environment, not incentivize the act of information collection, those things also remove the incentives for me to rationally think about the things about which I'm rationally ignorant. Say that last sentence out loud.
At our meeting this week, ask me about rational dishonesty. I might tell you some lies about it.
Thursday, September 23, 2010
Wednesday, September 22, 2010
With such risk people would be forced to learn. This is the difference between what some of my peers have referred to as the Austrian "You’ve just got to let it cure itself" mentality and the reality that Austrians have learned that intervention will only perverse the system. In prudence individuals will have to think before they act. Hopefully looking to past failures for guidance.
To apply this to the province of macroeconomics, occasionally a systemic disturbance may propagate throughout the entire economy, yet the simple underlying rules and the decentralized nature allow for a rapid and proportional response to any shock that does not completely destroy the system. It is the beauty and the precision of that response that I believe most interests the Austrian Economists, regardless of where it falls on the business cycle. When economies are in difficult or transitional times, their true functioning nature as a self-sustaining complex system emerges. In fact it is the hardships that keep the system healthy and nimble. In contrast, the Keynesians are completely obsessed with arresting complex systems right in the middle of their moment of self-healing glory, they stop the massage before one can really relax, and well before the happy ending. Keynesians cannot predict business cycles, nor can they react as effectively as the natural economy, yet they will bet the wealth of an entire nation on premise that they most certainly can. And as our lecturer mentioned, set off an entirely new cycle of artificial growth with an accompanying (and entirely natural) economic crash.
So it’s a mutually exclusive choice being offered: being unable to predict a business cycle but being confident that it will simply take care of itself (try that line on your constituents); or being unable to predict a business cycle and being able to react only like an idiot, yet setting up your response to ensure that idiots now have a very necessary role to play in future decision making.
Tuesday, September 21, 2010
I thought it was interesting that in the podcast the speaker groups the those that don't agree with the Austrian business cycle as the Non-Monetary theorists and the Keynesians and those that support the ABCT are the monetary theorists, the Austrians, and the Neoclassical Economists. I though this was an over simplification as there are ton of well known economists in each of these groups that don't view the ABC as he presented them. I did a little research and one of these economists is one of the most well known American economists of the twentieth century. Funny enough he is the father of the Monetarists, Milton Friedman.
What does Milton have to say?
When interviewed about the Austrian business cycle in 1998 Friedman states the following:
"I think the Austrian business-cycle theory has done the world a great deal of harm. If you go back to the 1930s, which is a key point, here you had the Austrians sitting in London, Hayek and Lionel Robbins, and saying you just have to let the bottom drop out of the world. You’ve just got to let it cure itself. You can’t do anything about it. You will only make it worse. You have Rothbard saying it was a great mistake not to let the whole banking system collapse. I think by encouraging that kind of do-nothing policy both in Britain and in the United States, they did harm."
PS-"More Caffeine" bad example I like the coffee :-) If anything this make this me say yay this is fun lets yes lower the discount rate :-( to me these are very different I'm not a fan of this commonly used example.
On one hand, the Austrian's have an intuitively satisfying theory about how the business cycle fluctuates. State manipulation of the interest rate distorts the capital structure, creates malinvestments and causes recessions, and more State intervention will only exacerbate the problem. It's easy to grasp and provides an appealing explanation about how we got into our current mess. On the other hand the ABCT suffers from some odd theoretical assumptions about the behavior of entrepreneurs and investors, and largely lacks the empirical validation necessary to stand as a respectable alternative to neoclassical business cycle theories.
Any economist would agree that expansionary monetary policy decreases the short term rate of interest, stimulating investment in more roundabout projects. The question ABCT doesn't explain very well is why these investments tend to become malinvestments. Bryan Caplan made this observation over a decade ago. Obviously the lower rate of interest will cause people to reevaluate the profitability of current investment projects, and some projects that wouldn't otherwise be undertaken now will be. However when the Fed announces that they're targeting lower interest rates you can't seriously expect those artificially low rates to deviate from the natural rate forever. What any sensible entrepreneur will do is invest in projects that they expect to be profitable within the expected time frame between the credit expansion and the subsequent readjustment. To assume otherwise is to assume that entrepreneurs consider only current interest rates in their investment calculations and ignore other variables like long term interest rate trends, expectations of future tax rates, expectations of government policies, etc.
H.L. Mencken once said that "For every problem, there is a solution that is simple, elegant and wrong". So too for theories of the business cycle I guess.
So instead, I'll just leave some random brain droppings here: You've probably heard the expression, "if you can measure it, you can manage it." In fact, a search of the US Patent & Trademark Office's web database shows that the phrase "If you can measure it, you can manage it" was registered under trademark protection by the Kinex AHA Corporation in March of 2000. I'd like to sue these guys, not for trademark infringement, but for 'logic infringement'.
It seems more likely to me (assertion without evidence, economics is full of them) that if you CAN'T measure something, you CAN'T manage it. Just because this negative relationship is true, it doesn't automatically make it true the other way around.
One nice thing that economics has given us, and Keynesian economics in particular, is the ability to more accurately measure various facets of the economy. This ability coupled with high self-esteem and ignorance, has led many people to believe that they are able to manage the economy. (Specifically the NON EXISTENT business cycle) I'd be surprised if they are able to even manage their own impulses, much less the entire economy. (Which is, if you think about it, the aggregated impulses of 6.7x10^9 people.)
But seriously, the business cycle doesn't exist.
It's a ghost in the machine.
An artifact of data collection.
A figment of reporting.
A fart in the hallway.
A quarter in my hand at our SWEET scholar's meeting.
Alas, having grown up in the Keynesian school of thought, I can’t help but cringe at some of the points attempting to be made in this lecture. And after having heard the Austrian perspective I can now say that I truly have no economic home. Seeing as most of our group appears to be leaning much further right than myself, and having a background in Keynesian thought, I suppose I have a voluntary duty to put my head on the block again this week.
I suppose the first weakness in this argument that I should make is the most potent. The foundation of Austrian economics is that growth is derived from savings whereas Keynes argues that savings is a luxury good and comes as a trade-off to consumption. I have to say there is no winner here. Of course we know that with a zero percent savings rate there is no money for investors to borrow. This is obviously dampening to output as borrowing money for capital can increase productivity immediately and lead to real sustainable growth. One could argue that without investment, there would be no production at all. On the other hand, it should not be hard to imagine that a one-hundred percent savings rate leaves no money for consumption at all. Therefore, it must be true that there exists some maximizing level of savings between the two extremes. And for that reason, blanket statements such as increased savings equal increased production is clearly fallacious. Although true at some points, the same can be said about the opposite case.
I should also point out that the PPF demonstrated in the slides is fundamentally no different than a Keynesian cross. However, there is a huge error in interpretation within the model shown. We can definitely say that consumption and investment are trade-offs. However, the PPF described does not reflect full employment by any stretch of the imagination. To "consume" investment goods does not require the labor inputs that consumption goods do. Unfortunately, that realization unravels most of the argument made later.
Although there is much more to be said, I think I will just touch on one more subject, The Federal Reserve. The thrust of the Austrian argument is that monetary policy creates booms and busts. The zeitgeist that has been created is that the Fed somehow is inherently evil and manipulates some agenda so that artificial growth makes people feel good. In fact, the Federal Reserve was created to stabilize an already chaotic financial system (which faced 27 recessions before the Fed was created) and was made independent of the rest of the government for the purpose that it could not be used to manipulate the money supply in order to make politicians look good by artificial means. The Fed answers to the Congress, its members appointed by the President and its profits belong to the US treasury. It is required to testify to the Congress on its actions and that they fall in line with its legal responsibilities of trying to accomplish three noble goals, for the good of the people.
Those goals are sometimes impossible to achieve simultaneously, but to violate these goals is to face prosecution. The first goal is to attempt to maintain “full employment”, which does not mean that everyone in the country must work. It means that everyone trying to find a job has the opportunity to find one. It is not even 100% of workers working that is the target. It allows for the frictional unemployment created by leaving one job for another, which allows the economy to correct inefficiencies. So this goal is actually what is called “the natural rate of unemployment”. That is a good goal. It means that we don’t want people that are willing and able to work to be starving on the streets. That means that this goal reduces the amount of money that society would feel obligated to pay in welfare to rid itself of the guilt from being lucky while others starve by random chance.
The second goal is price stability. This goal is the most lenient, but still important. Changing prices affect price expectations and prices never change in unison. The chaos in prices would exasperate the problems, that is to say they are a negative feedback loop. Although it may be true that the market clearing adjustments create a better outcome on paper, the real impacts on people’s lives are much more devastating and impossible to quantify.
And finally, the Fed has a legal responsibility to attempt to maximize sustainable economic growth. That is why the Fed moves the money market in counter-cyclical motions, not continuous injections of “caffeine”.
The bottom line is that people respond to the incentives that they face. No economist I know would ever argue with that. To believe that requires a belief in people weighing their expected values from a trade, which is exactly what “Animal Spirits” are; the producer’s confidence in an investment being profitable versus the fear that it won’t and the consumer’s faith in having an income, as well as expectations of future prices. As those expectations change, the economy moves up or down, without any change in the money supply. All I am saying is let’s not be so quick to think we have it all figured out.
PS: Best line ever = "can we ruin the economy? YES WE CAN!"
Thursday, September 16, 2010
From the information or the lack there of that Malamute provided the one point that I liked was that about the gold standard. It was probably the best and only point that Malamute actually explained. It was definitely the only point that helped him justify an action that the government took and how it affected the economy in a positive way. His last comment was perhaps the worst in the history of “two old white guys debating about economics.” Malamute actually brought up the fact that the Supreme Court ruled the New Deal unconstitutional as his closing statement! It was like providing his opponent with an AK47 while trying to protect cute bunnies.
Another point that Malamute made really bothered me. He kept stressing about how FDR just walked into this situation, and that aspects of the New Deal were ready for him, the just needed to be put in place. It sounded like Malamute was giving excuses for why some of the policies that were criticized. He never even went into why they shouldn’t be criticized!
The second speaker, Dr Reed, made some very good points. I especially liked how he gave numbers, statistics and quotations to prove his point. I really gave some substance to his views, and it also helped that Malamute justified his viewpoint by saying, “but it worked”. Dr Reed talked largely about the “lunacy” behind FDR’s decision making skills. He spoke about how FDR was a, “man who knew so little about economics.” Firstly, I would like to point out that the President is usually just the person who enforces policy, he/she has advisors who actually do the thinking for them. If most Americans thought that the quantity of knowledge about economics was a priority to voting they would probably vote in an economist as President. The fact is that maybe to Reed FDR was a lunatic, however, some how people reelected FDR. Also Reed did not give reasons why this was lunatic of FDR? Reed thought that progressive tax policies were negative, and the audience was so biased that he did not even have to explain why this was a bad thing.
Wednesday, September 15, 2010
We all learned in our history classes the idea of people withdrawing their money quickly from their banks, thus making the horrible extent of the depression inevitable, etc. However, I would be very interested to see what people's actual viewpoints were regarding the Emerging Banking Act. If I were conducting a study, for instance, I would not just conduct a survey following the passage of the act, but would see how quickly deposits were regained in the banks as well. If I had been so unfortunate to be living during this time, I would have seen it as a major relief. I would be willing to say that this was a likely success of the New Deal.
If I were mIaking the argument that the New Deal solved the primary issue of unemployment, I would lose worse than our poor friend Malamud. The statistics clearly show that the New Deal did not solve this problem, so unless someone wants to make this case, I am going to leave it at that. I will not, however, say the depression was prolonged as a result. I simply do not know. If someone were to tell me that our presiden't stimulus package were prolonging the current recession, I could give them a number of reasons why government interference isn't necessarily the reason for that.
In a typical debate format one will state their belief on the relevant material and briefly explain their reasoning before allowing for a rebuttal. Malamud only seemed to follow a fairly disorganized set of talking points in a candor that I will kindly refer to as “less than succinct”. He seems to try and fill time by repeating topical information in as many permutations as he can muster. I would not have an issue with this if he was to illustrating examples of the merits of his ideology, but he is not.
What Malamud is actually describing I will term as Historical Pandering. Malamud spends all of his time trying to inform the audience about the great depression while inserting snippets of his own beliefs against fear, deflation and unemployment. This direction does nothing to defend his point and only works to build a house of cards to be scathingly disassembled by Reed.
It seems the weakness at the core of Malamud’s talking points is a clear faith in his ideology. He generally seems to assume the audience will not find issue with what I believe to be his core idea that economics should be used to create wealth rather than efficiency. When Reed speaks he points out the reasoning behind his beliefs and offers several relevant examples to reinforce them. Malamud alludes.
What surprised me most in the end was that Reed did not attack Malamud for his use of fallacies. This is the crux of the issue for me. Creating inefficient or pointless jobs will not help a country grow or operate. Keynesians seem to have a habit of ignoring human action and motivation. People respond to incentives. The idea of a 100% employment rate is ridiculous. If someone does not have a risk of losing their job they will not be an effective worker. Think of a system of gears and motors. If one of many motors in a collection gives way the system will redistribute the energy to push along the broken gear. However the more this happens the less the system works. If a decent portion of the gears stop moving on their own and have to be hurried along the whole system will eventually stop. The “Fear” that Malamud talks about is one of the most important driving forces of humanity. Uncertainty has taught us how to deal with scarcity and all of its effects. A lack of fear is an example of stagnation, or more pointedly the later years of the Great Depression.
Tuesday, September 14, 2010
It feels like the Cato institute hired the Pro-FDR guy and paid him to stink it up, big time. He actually got applause from his audience after he gave the line about some of FDR's programs being unconstitutional. His response? Well they may have been unconstitutional, but they WORKED! The great depression was on when FDR became president, and it had ended by the time his administration was over. If I was listening correctly, his entire argument was a correlation = causation fallacy.
I loved the response given by Cato "Russell" Hayek, or whatever the anti-FDR guy's name was: "Of course American agriculture was in deep depression, we wiped out a third of their markets with Smoot-Hawley. You have the Fed contracting the money supply. You've got government all over the place. And so you've got unsold goods, plummeting prices... What do they decide to do? Destroy perfectly good fields of corn, wheat, and cotton, perfectly healthy cattle, sheep and pigs. In an effort to reduce supply and raise the price. Even if it had helped the farmer, it could have done so only at the expense of everybody else. Something like 2/3 or 3/4 of Americans were not farmers, and yet they were the ones who would have to pay the higher prices. The AAA did something else, it levied a new tax on agriculture, millers and refiners and processors in particular. Just what you would expect a devastated economy to need right? Another tax on top of this terrible situation, with the idea that somehow this whole thing is going to create prosperity. It didn't, and it couldn't have. From the very beginning.
He was on fire!
Seriously though, by any standard of historical human health and well-being, the great depression was a non-event. Average life expectancy continued to rise throughout. Times were tough, but they were better in 1930's America, then they were for the vast majority of history. I would have gladly traded World War II for another decade of economic depression. Let's talk about that on Thursday.
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 :-)
Monday, September 13, 2010
We probably couldn't have started the Fall program with a more divisive subject to tackle though. How an economist feels about FDR's policies during the Great Depression is an ideological litmus test of sorts. Depending on which side of the political spectrum you lean FDR either saved the economy or destroyed it. From where I stand I can certainly see that there were aspects of the New Deal that hindered recovery, but I can't deny that others seemed to provide at least modest relief. The macroeconomic theories behind the causes and consequences of the Great Depression aren't really my area of expertise though, so I can't pretended to know enough about the New Deal to guess which programs did what for sure.
I will say two things about the debate though:
1) That macro-economists still can't reach a consensus about whether the New Deal ended or prolonged the Great Depression and that the divide between opinions on the matter are, at least in my experience, still divided primarily along ideological lines, hints at a fundemental dysfunction in the way macroeconomic problems are approached. I would like to think that economists could set aside their politics long enough to take a more objective look at what the New Deal did or didn't accomplish. But in a field as dominated by public policy prescriptions and partisan politics as macroeconomics is, I guess that's just asking too much.
2) Differing opinions on proper macro policy aside, Malamud's assertion that most economists would agree that World War II ended the Great Depression repeats what Russ Robert's recently, and rightly called "the biggest and most dangerous economic myth of all time", i.e. the idea that war is somehow good for the economy. That's an idea I think stands as one of the most persistent, and dangerous of all Broken Window Fallacies. Not even Nobel laureates are safe from confusing unprecedented levels of government spending on instruments of death and destruction with productive investment in true economic development and growth.
Did the War achieve full employment? Probably, but of course forced conscription tends to do that. Were those 10 million people that were drafted for military service made better off as a result? Malamud seems to think so, but I would argue that even in the midst of a Depression labor would prefer remain idle than dead. Malamud seems to think that employment is employment, and that stimulus is stimulus, end of story. Whether people are employed manufacturing cars or tanks, or whether the stimulus pays for building hospitals or blowing them up seems to be irrelevant in his crude Keynesian model.
Now I'm probably not so hostile towards the General Theory to deny, as Reed does, that government spending can have no positive stimulative effect. But to praise WWII for achieving full employment is like praising a tsunami for leveling a city that has to be rebuilt.
The good that did come from the new deal took place in the financial sector, namely the creation of the Federal Deposit Insurance Corporation and the movement away from the gold standard. Restoring faith in the banking sector is a tough thing to do when banks are collapsing all around you. With the entire population withdrawing and holding any funds they could (in the form of gold), the government had no control at all over the money supply. The newly formed and well intentioned Federal Reserve was put to the test, which they failed miserably. The general population had no faith in the new economic system involving monetary policy; the very foundations of economics were far from understood. But the bank holiday imposed by FDR and the assurance that the banks that did re-open were backed by the federal government, that was the perfect move to make to restore faith. How else could he validate his claim “there is nothing to fear, but fear itself”? Creating the FDIC drove that point home. The confidence in the system that allows money to circulate was well worth the moral hazard it created. The foundation of the Security Exchange Committee fit perfectly into the correct government position, the enforcer of the rules. Even the Social Security Act was a positive move in its infancy; a forced retirement plan for all those suffering from money illusion and present value bias. But the biggest and boldest move was to remove the currency peg to the value of gold. Only then could the Federal Reserve really meet the conditions for which it was created. A free floating currency, free from the uncertainty of another market, is a prerequisite for controlled stability.
So was the New Deal a good one? I’m afraid not. That is why most of the policies were later removed. Did they work? Well, maybe. Unfortunately it is impossible to say. We can speculate, based on historical evidence that the markets would have corrected in the absence of any government “help”. What we can’t say is if the recovery would have taken longer or not. We also can’t tease out how much of the drawing out of the depression was due to fiscal policy and how much from monetary policy mistakes. The Federal Reserve was still relatively young and inexperienced. They didn’t really understand the impacts of changing the interest rates or the injection of new currency. One thing that is certain is that there was incongruence between the two policies which undoubtedly prolonged the depression beyond its natural life and without the social benefits of reduced unemployment or poverty.