Krugman Schools Will?

As my students know, I believe that being an economist is almost a holy calling and earning a Nobel Laureate makes an holy man a prophet.  Paul Krugman, this year's winner disappointed in an a 1 minute 17 second exchange with George Will on an ABC news show.  Dubbed, "Krugman Schools Will" on many blogs the exchange is  downloaded to YouTube.  Will has an excuse, he is a columnist, not an economist.  Krugman has no excuse.  

Krugman did not school Will.  He agreed with Will's initial premise that net investment during the thirties was negative, and with his end point that the economy was not restored to full employment until WWII began.  In between, he offered an alternative hypothesis as to why net investment remained low for so long--that Roosevelt mistakenly tried to balance the budget. 

Will begins by observing that one of the ways that the government turned a depression into the Great Depression was by tinkering with property rights.  Krugman is wrong when he flatly objects and would be judged misinformed by a jury of his economic peers.  For example,  Schumpeter, one of the greatest economists of the last century wrote in Capitalism, Socialism and Democracy, (which I nicked form Robert Higgs, Regime Uncertainty).

The subnormal recovery to 1935, the subnormal prosperity to 1937 and the slump after that are easily accounted for by the difficulties incident to the adaptation to a new fiscal policy, new labor legislation and a general change in the attitude of government to private enterprise all of which can...be distinguished from the working of the productive apparatus as such...[S]o extensive and rapid a change of the social scene naturally affects productive performance for a time, and so much the most ardent New Dealer must and also can admit.  I for one do not see how it would otherwise be possible to account for the fact that this country which had the best chance of recovering quickly was precisely the one to experience the most unsatisfactory recovery.

Krugman dissembles on the government's role in expanding and prolonging the Great Depression.  Certainly markets deteriorated beginning in 1928 into 1929, punctuated by the October stock market crash.  But the government at all federal levels responded with policy that deepened and prolonged a depression, morphing it into the Great Depression.  Friedman evaluated the role of the Federal Reserve, and the Nobel Prize committee noted in the press release announcing his award, that

His major work, A Monetary History of the United States,1867 - 1960, is regarded as one of Friedman's most profound and also most distinguished achievements. Most outstanding is, perhaps, his original and energetically pursued study of the strategic role played by the policy of the Federal Reserve System in sparking off the 1929 crisis, and in deepening and prolonging the depression that followed.

The Smoot-Hawley Tariff Act of 1930 passed by the Congress and signed by President Hoover dealt a body blow to the economy by restricting trade.  The Wikipedia entry in part states,

Although the tariff act was passed after the stock-market crash of 1929, many economic historians consider the political discussion leading up to the passing of the act a factor in causing the crash, the recession that began in late 1929, or both, and its eventual passage a factor in deepening the Great Depression.

Krugman then offers a second hypothesis that an attempt to balance the budget prolonged the Great Depression not the messing with property rights.  Many economists dispute this notion.  Price Fishback on Freakonomics writes,

John Maynard Keynes published an open letter to Franklin Roosevelt in major American newspapers saying more spending was not enough; the government needed to run larger deficits. As Keynes’s arguments were fleshed out after the 1930’s, various scholars ranging from Abba Lerner to E. Cary Brown to Claude Pepper have re-examined the New Deal budgets. They all agree that the New Deal cannot be described as a Keynesian stimulus program. We can only hope that the word will finally spread widely enough now to correct the myth.

Both Will and Krugman claim the Great Depression ended with the Japanese fleet appeared off Hawaii initiating a giant public works program.  In an upcoming post, I will dispute that opinion.