And since it is not yet on electronic paper, you just have to toddle along to the newsagents and buy a copy there. Never regret buying the FT. Wolfgang Munchau is excellent on the Greek crisis, and there is a beautiful letter from Sushil Wadhwani about the naivity of relying on a straightforward relationship like “Cut the deficit and the Pound will fall”. To which the answer is: oh yeah? I suspect that Osborne is not relying on this any more.
I had 800 words, cut down to 700, to describe and critique this book, so there are inevitably short cuts. In brief, Norberg has written an answer to the essay question: “Try to describe the financial crisis using the idea ‘Government action is always pernicious and never helps'”. He writes well, and in parts his argument holds up too – nobody interested in financial stability would invent Fannie Mae, nor embed privately motivated ratings agencies into the regulatory framework.
But I was practically offended by the brevity with which he treats government action to deal with the Depression. My first draft said this:
The weakest arguments are reserved for macroeconomics. Libertarians like Norberg somehow blame the Depression on Herbert Hoover’s supposed zeal for intervention. We are informed that 25% unemployment was caused by the President forcing wages up. The silly notion that millions of ragged workers were just demanding too much money has been thoroughly refuted by the evidence. Nor does he discuss how the ‘hyperactive’ Hoover actually ran a balanced budget over 1929-31, years of record recession. Norberg casually uses scepticism about the New Deal and its institutional creations to produce a timeless warning against government intervention. It is not very convincing.
Only the bits in bold survive the edit. If I had 2000 words I would have expanded greatly on the dodgy arguments that were used to justify government inaction being better for the Depression. Off the top of my head, they were:
- Hoover made wages go up and this caused the unemployment. No he did not, and Mark Thoma destroys the argument here:
If Hoover’s inviting businessmen to the White House could push the unemployment rate up from 4% to 23%, simple extrapolation would then suggest that Roosevelt’s labor-market policies ought to have pushed unemployment up to 118%–and unemployment in post-WWII Europe ought to have averaged 384%. It simply does not appear as if Hoover’s exhortations had much effects. Average wages in manufacturing stood at $0.55 in 1930, at $0.51 in 1931–an 8% cut–and $0.44 in 1932–a 20% cut.
- Extrapolating from “what worked in 1921” to what should have worked in 1929 – cutting government spending and taxation. Here the ‘historian of ideas’ wants some of the timelessness of ideas to apply to context-reliant macroeconomics, and screws up. The 1921 recession followed demobilisation, high government spending, and inflation. The correct approach is far different from a recession touched off by deflation – which in the case of agricultural prices had gone on for a whole decade
- Given how far unemployment had risen, FDR getting it downto ‘only’14% was proof of how poor fiscal action is as a tool for countering Depression. Nonsense. Look at what happened from this website. Over 1934-1937, GDP rose 11%, 9%, 13% and 5%, before an unwise attempt to balance the budget brought a “mini-Depression” in 1938. Has the world’s largest economy ever performed like that?
I was also slightly annoyed to find him quoting Auerbach selectively, as saying “there is little evidence that these effects have provided significant contribution to economic stabilization”. The Auerbach I have read presented a paper at last year’s Jackson Hole symposium. His major conclusion about the Depression was that fiscal policy was scarcely attempted, on the modern scale of things (p37). This explains the “little evidence”. Furthermore, Auerbach writes that if there was ever a time when fiscal policy was appropriate, it was the beginning of 2009.
A 160 page book will always be selective, but for the informed reader this was a little annoying – because much of the remaining analysis rested on the premise that the Great Depression showed the folly of government action. It. Did. Not.
I still regard this book as a useful contribution to the huge Crunch literature canon. But it would have benefited from less idea-fetishism, and more workaday macroeconomics.
UPDATE: Now it is online. Buy the FT anyway.