For those who haven't been following, Wall Street Journal economics writer (she herself points out that she isn't an economist) has been engaged in a bit of a back and forth with noted economist and New York Times columnist Paul Krugman over the best way to deal with the recession.
They have been doing this by debating the merits of FDR's New Deal.
She argues that it prolonged the depression by preventing input prices (which includes wages) from falling.
The standard theory in economics prior to the depression was that the way to deal with depressions and recessions (which occurred frequently prior to the Great Depression) was to do nothing except let input prices (wages and resources) fall to the point where those with money would invest again.
The standard Keynesian counter argument is that the Great Depression showed this doesn't necessarily work and that government spending is required to get money circulating once again.
Her, and her conservative friends counter argument to this is that the standard pre Keynesian model of standing aside and letting private investment solve the crisis would have worked had Hoover 1.not raised taxes to try and balance the budget thereby taking the money away from those investors 2.not imposed tariffs, and had the Federal Reserve not limited the growth of the money supply in order to stay on the gold standard.
I'm not expert enough in all of this to counter all these counter arguments other than to make a few points:
1.Unlike hard science, economics like this is ultimately all based on untestable theories.
2.Countering the Shlaes side of the argument:
Letting input prices fall to their 'natural bottom' can take years to occur (wages especially are slow to fall) and the resulting declines in real wages (as opposed to all prices and wages falling equally) obviously means that many people, especially the average working person, will see a substantial decline in their real standard of living (or more simply put, most of us we'll be much poorer) using this method to get out of the recession.
3.Countering the Krugman side of the argument:
I think that Shlaes does make a fair point: possibly $1 trillion or more in government spending is an enormous amount of money and a substantial increase in the debt that will certainly have negative consequences including, if it doesn't work, ultimately prolonging the recession (turning it into a depression) by increasing long term interest rates.
While it's doubtful that long term rates would rise if business investment was still as low as it is now, in the medium term it could become a problem. Bill Clinton helped spur the economic take off in the 1990s by cutting the deficit which ultimately helped lower long term interest rates which increased private sector investment (of course, it also ultimately spurred the housing bubble which led to the current problems, solutions often bring new problems).
So, where I think Shlaes is right to be cautious in all this spending is that at a minimum the spending shouldn't be just 'throwing money off a truck' (or whatever the phrase is), the spending needs to be targeted at ultimately improving productivity. That means smart infrastructure investments in transportation, health care, energy and other basic government services that provide a pay back to the economy.
The positive thing is that the Obama economics team knows all these issues (and undoubtedly many more points that I haven't thought of) and knows it all with a much better grasp of the mathematics of economics than I have. The downside, as I pointed out earlier, is that all of this is theoretical, and untestable and ultimately even the most brilliant economist is just engaging in highly educated guesswork.