Here's my position on what ended the Great Depression: I don't know. There are a whole lot of theories out there, but with an "n" of 1, no overwhelming evidence in favor of any of them. There are a few that I think most economists agree are not true, like that the spending portion of the New Deal ended the Great Depression through the magic of fiscal stimulus; a few percent of GDP in stimulus are not, at any reasonable multiplier, enough to produce high single-digit economic growth, which is why economists from Friedman to Tobin generally concluded that the decisive moment was either the monetary expansion of the late 1930s, while others credit the massive fiscal stimulus of World War II. But which of those two theories is correct? No idea. The stimulus story and the monetary story both track the time frame reasonably well, and much depends on a counterfactual we can't test about what would have happened if America hadn't gotten into the war in 1941.
I also think it's possible that nothing
the government did ended the Great Depression. It may be that, like Topsy, it "just growed". Though global events like this are rare, financial crises aren't, and the fact is that eventually they do end, and are replaced by very very rapid growth. The economy grows very rapidly because financial crises push output far below productive capacity, so after the initial shock, the return to trend presents itself as growth near or over 10% a year. If your economy drops by 33%, it takes four and a half years at 10% annual growth just to return to where you were before the crisis; meanwhile, your labor force and productive capacity have presumably grown somewhat, so you need to go even further to close the output gap.
I post about these things as, hopefully, something close to a matter of science. It is an empirical question whether the multiplier for government spending is greater or less than one. It is an empirical question whether the multiplier for the spending we just did is greater or less than one. It is an empirical question whether the sorts of crises we are now in produce liquidity traps such that fiscal shock therapy can result in a permanently higher level of growth.
I do not say that we will know the answer to these empirical questions; I daresay we won't, at least not to a certainty. But there *is* an answer out there in the ether, yet most of the public debate about these questions is not much tied to empirics. They are being debated as emotionally as if the topic were the relative virtues of the debaters' spouses.
Once again, I am driven to quote the immortal Charles Murtaugh: the universe is not here to please you. Fiscal stimulus will make the economy grow faster, or it will not make the economy grow faster, without regard to whether taxation is theft or universal healthcare is an immediate moral imperative. I doubt I'm the only one who is wearied by the way so many of the participants in the debate seem to already know the answer they want, and are merely looking for a set of questions that will get them there most expeditiously. Was there ever a time when people didn't think that tricky economic conundrums could, or should, be used to "prove" that their personal values about the level of taxation and spending are a scientific fact? Probably not. Still, given how important this question is, I wish more people would treat this as a problem to be solved, a question to be answered, rather than a battle to be won.
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is a columnist at Bloomberg View
and a former senior editor at The Atlantic.
Her new book is The Up Side of Down