Did Franklin Roosevelt's policies prolong the great depression?

[TheStinger]

The increase in tarriffs turned a recession into a depression. When the US put up barries so did europe and the British Empire. When your internal market collapses, reducing your export markest is the most stupid thing you could do.( well not quite, trying to balance your budget by cutting sopending as in the UK was pretty stupid too)

[Tingkai]

Originally posted by Fez
Tingkai, I don't believe in Keynesism and do not think it works in the long term. Sure the government can put some money in the private sector but infringing upon it is wrong.

When people say they don't believe in Keynesism, I figure they don't know anything about his theories.

Keynes argued that the war reparations that the Allies forced Germany to pay after WWI was an economic mistake. Is that something you don't believe?

He was the first economist to look at the effect of perception on economic forces, such as how the stock market will go down if people think it is going to go down. Is that something you don't believe?

Keynes played an important role in developing economic theory. Some of his ideas were later shown to be imperfect, but it was a necessary learning step.

As for government spending in times of deflation, there are times when it is useful, and times when it is completely counterproductive. You may disagree on ideological grounds, but that does not diminish the importance of his ideas.

[Tingkai]

Originally posted by TheStinger
The increase in tarriffs turned a recession into a depression. When the US put up barries so did europe and the British Empire. When your internal market collapses, reducing your export markest is the most stupid thing you could do.( well not quite, trying to balance your budget by cutting sopending as in the UK was pretty stupid too)

The British Empire had tariffs in the 19th century, such as the corn laws. That's why David Ricardo developed his theories about free trade.

[Giancarlo]

I do not advocate extensive or even moderate government interference with the economy. I will to an extent, but not fully and not to the extent Keynes suggested. That is what he recommend isn't it? More government interference?

I am not trying to diminish him or his ideas.

[Tingkai]

But do you understand why he advocated increased government spending?

[Giancarlo]

Originally posted by Tingkai
But do you understand why he advocated increased government spending?

Yes I do... correct me if I am wrong, but the reason he gave was to counter deflation or a recession?

[Tingkai]

Originally posted by Fez


Yes I do... correct me if I am wrong, but the reason he gave was to counter deflation or a recession?

The situation he mainly wrote about was a depression, although it could have applied to a recession.

But the question is why did he advocate government spending.

[Giancarlo]

Originally posted by Tingkai
But the question is why did he advocate government spending.

Definiton from my AP economics book (from last year): Keynesians argue that wage contracts are typically adjusted no more than once a year, and such influences as unions, tradition and a reluctance to threaten company morale effectively prohibit decrease in wages. If wages cannot adjust to match changes in price levels, deviatitons from full employment output might persist until the government steps in with monetary or fiscal policy to bolster or tame the economy. This in contrast with the classical economists' preference for laissez-faire (hands off) governmental policy.

Is that correct?

[The Templar]

Originally posted by Berzerker
They didn't help. If you and your neighbor are exchanging goods and I walk up and impose a 60% tax on your deals, would you guys continue exchanging goods at the same rate especially when you can avoid the tax by dealing with someone else? I'm no economist, but I do know high tariffs inhibit trade. Btw, the economy was messed up because the Federal Reserve constricted the money supply, i.e., the same government that increased tariffs from ~20% to ~60% created the problem in the first place.

Of course, if you neighbors have no money or goods with which to trade, a 0% tax on the transaction won't spur trade. If you have over 20% unemployment - those people won't be spending a hell of a lot. Nor will most of the rest who worry about joining the ranks of the unemployed. If underpriced foreign goods are undercutting domestic industries to too great an extent, then people won't have jobs. The tarriffs were implemented as a way of protecting jobs and raising revenue for interim solutions. Not a bad idea in itself.

Moreover, you can expand your money supply to kingdom come, but in the climate of a depression, you won't see a lot of investment no matter how much money is floating around. Nobody is going to risk what they have until things improve. But you will also increase inflation if capacity remains stable at low levels as in a depression and you increase the money supply. This will negatively impact anyone living off of savings and will encourage debt (for those who can obtain credit) since the real value of the debt will get progressively lower.

The great depression was not a monetary problem. It was a self reenforcing cycle of investor trepidation combined with deteriorating conditions brought about by lack of consumer confidence and rampant unemployment - each making the other worse. No invisible hand was going to right the situation. In fact, the war (not a market phenomena) put idle capacity to work without the necessity of investor risk to an extent greater than the new deal. Ergo, government action is responsible for ending the great depression.

[Tingkai]

IIRC, yes, Keynes did talk about downward price resistance (prices fall slower than they increase because people are more reluctant to decrease prices than to increase them).

I don't recall if Keynes said wages only change once a year. It doesn't sound like something he would say. Whether a Keynesian economist said something like that I don't know.

The problem that Keynes saw was that under classical economic theory, a fall in prices increase demand. So in theory, if interest rates drop, the cost of investment declines so business will start to invest. Similarly, the cost of borrowing money declines so consumers will borrow more money and spend it.

In the 30s, interest rates were dropping, prices were dropping, but spending was also dropping. So what was happening?

Keynes argued that people's expectations were the key. If people thought that prices were going to continue to fall then they would hold off spending in hopes of getting a better price tomorrow.

One way to counter this is through government spending. If a business gets a contract to build a road then it will invest money and hire people and buy equipment. The workers will start spending money because they believe their jobs are secure. Other businesses will likeliwise follow suit.

The problem with government spending is not Keynes' theory, but how it was applied. In the 70s, governments started spending money when unemployment was rising. But the problem then was caused by the inflation (which led to decrease consumption) and the inflation was caused by oil price hikes. It was a completely different situation then Keynes was talking about.

I should add the caveat that I did my economics degree 15 years ago so my memory is likely fuzzy.

Imran would be a better at providing a more accurate and thorough discuss of Keynes' theory.

But you should note that things are not always black and white in economic theory. Keynes' theories can be effective in certain situations, while being counter-productive in other situations.

[Kidlicious]

I think deflation was the significant cause though. The stock market crash contributed to the deflation though. I don't think that the trade barriers contributed, but the monetary supply may have.

[Tingkai]

Originally posted by The Templar
Moreover, you can expand your money supply to kingdom come, but in the climate of a depression, you won't see a lot of investment no matter how much money is floating around. Nobody is going to risk what they have until things improve. But you will also increase inflation if capacity remains stable at low levels as in a depression and you increase the money supply. This will negatively impact anyone living off of savings and will encourage debt (for those who can obtain credit) since the real value of the debt will get progressively lower.

I agree with what you wrote except for the above part.

If the government increases the money supply by borrowing money that is sitting idle in a bank and then spending it, wouldn't this create economic growth?

And in a depression, isn't there excess capacity that would absorb inflation effects?

[Imran Siddiqui]

Imran would be a better at providing a more accurate and thorough discuss of Keynes' theory.

You got Keynes right . He also believed that deficit spending wasn't the bad thing that classical economists believed it to be. He thought that it could 'prime the pump', which basically means it may be the engine of economic growth (after all, investment is investment, whether it be in factories or roads)... and not just in recessionary times either.

Keynesianism was effective for the Depression, but failed miserably later on (like the 70s). But it isn't always a bad idea, it just has to be constrained (IMO) to recessionary time periods... the only problem is that one the government starts a program, it is hard to get them to stop.

[Kidlicious]

The problem was that the Fed kept the supply of money tight and they let banks fail. Horrible policy. Increasing the money supply during the Depression wouldn't have helped but tightening the supply before the Depression certainly didn't help.

[mindseye]

Originally posted by Kidicious
Did Long do a radio show?

Not as a host (maybe you are thinking of Father Coughlin), however he was a noted public speaker. And like Limbaugh, he was a blow-hard populist who spewed feel-good tripe which found all too many eager believers among those looking for someone to blame.