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a-history-lesson-for-keynesians

Writers at the Guardian seem to have skipped out on history and economics class. As an American economics student I was appalled to read the headline: A history lesson for George Osborne: In 1937, Franklin Roosevelt abandoned New Deal spending and cut the deficit. The result? A disastrous double-dip recession.

The article picks random facts about FDR’s administration and economic indicators to draw false conclusions. One conveniently overlooked fact was the Judiciary Reorganization Bill of 1937. Nearly every New Deal policy was declared unconstitutional in the early1930’s. Then, FDR forced the “switch in time that saved the nine.” Afterwards, every New Deal welfare and regulatory policies were constitutionally upheld. This caused a massive increase in economically detrimental policy.

The article also misinterprets statistics. The unemployment rates throughout the 1930’s never dipped below about 13% and were at no point healthy, nor was the budget. Also, Keynes did in fact have direct influence on the FDR administration. There are records of advice from the early 1930’s.

What really hurts the article’s credibility is its claim that the depression ended ultimately due to WWII. This is a subscription to the broken-window fallacy. The saving grace of the Great Depression was not more government-induced destruction, but responsible fiscal policy.

What’s most ironic is the absence of Britain’s history in the period. Britain’s recession from The Great War was extended throughout WWII. Whereas in the US, president Coolidge’s administration halted the early 20’s recession with slashing spending and taxes.

It’s very dangerous to tell false history. The article is correct on one thing: Keynesian economics still influences public policy. Thankfully, Osborne seems to have taken a page out of Friedman’s book.