Thursday, June 2, 2011

1937 All Over Again?

In 1937, Roosevelt succumbed to pressure to scale back government deficit spending which, from the time he took office had done wonders to put people back to work and to get the economy moving again.  This caused a second dip in the Great Depression.  Over at The New York Federal Reserve blog, Gauti Eggertsson writes
What we call “the Mistake of 1937” was, in broad terms, a decision by the Fed and the administration to implement a series of contractionary policies that choked off the recovery of 1933-37 and brought on the recession of 1937-38, one of the worst on record. What is particularly noteworthy is that the inflation fears that triggered the Mistake of 1937 were largely driven by a rally in commodity prices. These circumstances invite direct comparison with our own time, when a substantial recent rise in commodity prices (which now seems to be abating somewhat) stoked inflation fears and led some commentators to call for an increase in the federal funds rate.
It's a fascinating read and highly recommended. My only challenge to his conclusions is when he states
It is unlikely, however, that a modern economist put in the same position would respond to the commodity price rise in the same way.
I'm not sure that the dominant Austrian / Chicago macroeconomic paradigms that our Galtian overlords cleve to would allow them the flexibility to extend the necessary government spending to expand our economic recovery.  But them I'm a cynic.

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