I've written on this before and I actually tried to post this on politico first (but gave up because I couldn't figure out how to put in paragraph breaks). The politico story is here: http://www.politico.com/...
It is also on the Kos frontpage.
I'm posting this here because I've added new information on the subject since my first post on it.
Amity Shlaes is correct in her argument that history is indeterminate, in that the alternative histories (what ifs) are unfalsifiable. It seems to me though that she goes from that to arguing that the 'failure' of the New Deal proves that the alternative of essentially 'do nothing' would have been superior.
That is a logically inconsistent position.
As to her arguments of whether the New Deal was a success or not, it depends on the metrics of how one defines a success. If by 'success' one means that the New Deal led to greater economic output than in 1929, it was a failure, if one means that it led to a large rebound in output that put millions of people back to work, then the New Deal was a great success.
I think Amity Shlaes over complicates things by saying we need to look at the new research coming from various economic fields, we have a ton of raw data already, the problem is, as I said, unless the only metric of success is 'did the New Deal lead to greater growth than in 1929', most of the data contradicts her claims.
1.Here are the Real GDP per capita from 1929 to 1939 (Real GDP means net of inflation, per capita means per person) source: www.measuringworth.com
(to be sure, there can be some dispute over the rates used to factor out inflation)
1929 $7,099
1930 $6,418
1931 $5,960
1932 $5,152
1933 $5,056
1934 $5,567
1935 $6,021
1936 $6,761
1937 $7,065
1938 $6,769
1939 $7,256
So, as we see Real GDP per capita rebounded at nearly 10% per year from 1933 to 1937.
Of course, some will argue that it was easy for the economy to rebound quickly, it was merely recapturing lost productivity. The problem is, that is wrong. Unemployment was around 4% in 1929 but still around 14% in 1937, yet Real GDP per capita was basically the same in 1929 and in 1937.
Essentially, the only way that can happen is if productivity increases.
2.This gets to the real questionable part of Amity Shlaes' claims. Her claims are that 'private sector investment went on strike'. There are only two ways productivity could increase to account for the data I've presented, either the New Deal spending boosted productivity (I don't know what Amity Shlaes argues on that) or that private sector investment boosted productivity. Amity Shlaes does claim that essentially the private sector capital went on strike as a response to the New Deal, the problem is, that just isn't true.
GDP is comprised on the spending side by C+G+I+X-M (consumer spending + government investment + business investment + exports - imports). This website breaks down the numbers: http://www.sjsu.edu/...
The inflation adjusted business investment figures are (the numbers are different from measuringworth.com's numbers because they use different base periods):
- $92.4 billion
1930 59.8
1931 37.6
1932 9.9
1933 16.4
1934 31.5
1935 58.0
1936 75.5
1937 94.0
1938 61.3
1939 79.5
So, essentially we are left with the question of why unemployment remained so high. Partly this was the result of productivity increases killing more jobs than they created and a large increase in the work force due to high birth rates at the beginning of the century.
As to her Amity Shlaes' contention that the best metric (along with unemployment) to measure the success of the New Deal is the growth of the stock market (or more specifically the growth of the NYSE index), I think most economists would find that laughable. Clearly, real GDP or better, Real GDP per capita is the standard metric that is used.
So, finally we are left with the unknowable argument, what would have happened if the government had done nothing and simply left the economy to itself (classical economic theory). (The best part of her book is where she shows that Hoover didn't do nothing, but both raised taxes and signed Smoot-Hawley, both of which almost certainly harmed the economy). Well, it's unknowable, but it seems extremely hard to believe that it would have led to an economic turnaround that almost got GDP back to its previous high in just 4 years.
As I've written on in a previous diary on this subject, it is unknowable exactly what would have happened had 'classical economics' been followed. The 'classical economics' idea is simply to do nothing and let all prices fall to the point that people with money decide to start investing again, and things start to turn around. There has been a lot of research by Keynesian economists showing that especially wage rates are very 'sticky' (slow to fall), so that any turnaround using 'classical economics' theory would have taken many years and a great deal of lost productivity, not to mention human suffering would have occurred in the interim.