13 replies on “How effective (in principle) was fiscal policy during the 1930s?”
As my son said to me recently (maybe he got it from Onion magazine or The Simpsons): We have nothing to fear but fear itself – oh yes – and a crippling decade long depression that will culminate in a World War with millions dead.
@Paul MacDonnell
There’s a cheerful thought for a Wednesday afternoon.
The decade long depression (certainly in Ireland) I buy – but what’s going to cause the World War? And please don’t say “America” because that’s too obvious an answer!!
@Joseph. OK. Israel then.
@Joseph..I think it was a send up of FDR..
@Joseph..I’m only kidding. I’m one of about 6 Irish people who’s pro-Israel….
” Paul MacDonnell Says:
November 11th, 2009 at 3:27 pm
@Joseph..I’m only kidding. I’m one of about 6 Irish people who’s pro-Israel….”
To quote another American: Nobody’s perfect 🙂
@ Kevin O’Rourke
Thank you for that, very useful. 3 initial thoughts re the current debate in Ireland on the direction of fiscal policy:
* The authors’ assessment that, “Previous studies have not found an effect of fiscal policy in the 1930s, not because it was ineffectual, but because it was hardly tried…”
* The assessment, confirmed in other studies, the fiscal multipliers are increased when access to credit is constrained and/or interest rates are already low (‘near the zero bound’). Both these conditions apply currently, potentially making any fiscal multiplier effect hyper-effective
* The welcome examination of the actual responsiveness of the global economy and its constituent economies begining with an empirical examination of the data. Ths contrasts with the economic models which are primarily contructed from flawed REH ideas.
@Garo
You surprise me.
@Joseph
Make that one of 5.
Thank you. An excellent and thought-provoking tilt at the “conventional wisdom”. We continuously hear that, since Ireland is an SOE, fiscal stimuli are ineffective – low multipliers, leakage, etc – and that a stimulus focused on capital expenditure would be similarly deficient and, in addition, that there are insufficient “shovel-ready” projects. The current fiscal deficit, although unsustainable in the medium term, is supporting domestic consumer expenditure and should feed into an anaemic resumption of GDP growth. A reduction in the level of this deficit and some change in the composition of spending is unavoidable, but it must make sense to consider some counter-cyclical intervention to counteract this contraction.
I am not advocating a massive expansion of borrowing to finance large-scale investment in infrastructure, etc. (my preference is for privatisation of semi-states and recyling of some of the proceeds), but is there any evidence, given the extent of the integration of the Irish economy with those of its major trading partners that any leakage from an Irish investment stimulus would enhance growth in its trading partners leading to increased demand for Irish exports? I realise the impact on the larger economies might be very small, but I simply can’t believe that all the alleged leakage from Ireland would be “lost”.
The question is a fascinating one… How effective was fiscal policy during the 1930s? Does the paper answer that … even “in principle”?
There are extensive charts and data sources, and clearly a good deal of work. The authors provide us with an impressive battery of statistics and econometrics (by the way, the Greeks don’t appear well in my pdf, but maybe that is just my pdf).
The challenge in answering such a question is the absence of much of a stimulus in the 30s, and the analysis and information presented in the body of the text – unless I am missing something – does not convince me otherwise.
Readers could be reassured on that score by seeing the raw data – or even just charts – and judging for themselves
The sources for the fiscal data are all – with one exception – not easily available to me. That one exception is library.northwestern.edu (and a link that does not work by the way). I was able to track down “Armaments Year-book for France” e.g. http://digital.library.northwestern.edu/league/le0282av.pdf
If the sources are of this kind, it would indeed be quite some work to make them amenable to econometrics.
The authors state at different points in the paper, “Previous studies have not found an effect of fiscal policy in the 1930s, not because it was ineffectual, but because it was hardly tried…” Hard then to answer the question “How effective was fiscal policy during the 1930s”, it would seem to me. Also there is no reference to those “previous studies”. The only possible previous (published) studies *listed in the bibliography*, and relevant to such a judgement, would be the books by Bernanke or Temin.
.
I was particularly intrigued by the following Figures and sources
Figure 11. Government Budget Surpluses, Now vs Then
Source: IMF World Economic Outlook, October 2009, and the data sources listed in Appendix 1. … Seems to give Gold and exchange controls
Figure 13. Interwar Government Budget Surpluses, by Exchange Rate Regime Source: see Appendix 1.
Appendix Figure 1. Budget deficits, by country
Source: see Appendix 1. … Seems to give discount rates
Maybe I am missing something entirely, but I didn’t find anything of relevance to budgets.
.
The conclusions are effectively fascinating. All the more so if the links to the analysis in the body of the text were shown to be stronger.
.
The different comments above do not suggest anyone has tried to read through the paper, but suggest instead that we are looking for some immediate relevancy to little Ireland today. Quite a leap.
Thanks Ciaran, we will fix the Greek problem. For some reason it came out fine here:
I stand guilty as charged – even if I did read the paper – and am probably even more culpable for clutching at straws. In – very limited – mitigation I would plead a desire to explore options that would alter the composition of the current fiscal deficit to secure the achievement of more productive ends and to reduce the reliance on direct government borrowing.
smallish fiscal multipliers, although the paper is quite nuanced. Notably a collapse in multipliers since the pre 1980 period. And you don’t have to be an SOE to throw good money after bad.
“in economies open to trade and operating under flexible exchange rates, a
fiscal expansion leads to no significant output gains .
Further, any gains will be, at best, short-lived in highly indebted
countries. Since, over the last decades, many
emerging countries have become more open to trade
and moved towards greater exchange rate flexibility
(typically in the context of inflation targeting regimes),
our results suggest that seeking the holy grail of fiscal
stimulus is likely to be counterproductive, with little
benefit in terms of output and potential long-run costs
due to larger stocks of public debt.”
13 replies on “How effective (in principle) was fiscal policy during the 1930s?”
As my son said to me recently (maybe he got it from Onion magazine or The Simpsons): We have nothing to fear but fear itself – oh yes – and a crippling decade long depression that will culminate in a World War with millions dead.
@Paul MacDonnell
There’s a cheerful thought for a Wednesday afternoon.
The decade long depression (certainly in Ireland) I buy – but what’s going to cause the World War? And please don’t say “America” because that’s too obvious an answer!!
@Joseph. OK. Israel then.
@Joseph..I think it was a send up of FDR..
@Joseph..I’m only kidding. I’m one of about 6 Irish people who’s pro-Israel….
” Paul MacDonnell Says:
November 11th, 2009 at 3:27 pm
@Joseph..I’m only kidding. I’m one of about 6 Irish people who’s pro-Israel….”
To quote another American: Nobody’s perfect 🙂
@ Kevin O’Rourke
Thank you for that, very useful. 3 initial thoughts re the current debate in Ireland on the direction of fiscal policy:
* The authors’ assessment that, “Previous studies have not found an effect of fiscal policy in the 1930s, not because it was ineffectual, but because it was hardly tried…”
* The assessment, confirmed in other studies, the fiscal multipliers are increased when access to credit is constrained and/or interest rates are already low (‘near the zero bound’). Both these conditions apply currently, potentially making any fiscal multiplier effect hyper-effective
* The welcome examination of the actual responsiveness of the global economy and its constituent economies begining with an empirical examination of the data. Ths contrasts with the economic models which are primarily contructed from flawed REH ideas.
@Garo
You surprise me.
@Joseph
Make that one of 5.
Thank you. An excellent and thought-provoking tilt at the “conventional wisdom”. We continuously hear that, since Ireland is an SOE, fiscal stimuli are ineffective – low multipliers, leakage, etc – and that a stimulus focused on capital expenditure would be similarly deficient and, in addition, that there are insufficient “shovel-ready” projects. The current fiscal deficit, although unsustainable in the medium term, is supporting domestic consumer expenditure and should feed into an anaemic resumption of GDP growth. A reduction in the level of this deficit and some change in the composition of spending is unavoidable, but it must make sense to consider some counter-cyclical intervention to counteract this contraction.
I am not advocating a massive expansion of borrowing to finance large-scale investment in infrastructure, etc. (my preference is for privatisation of semi-states and recyling of some of the proceeds), but is there any evidence, given the extent of the integration of the Irish economy with those of its major trading partners that any leakage from an Irish investment stimulus would enhance growth in its trading partners leading to increased demand for Irish exports? I realise the impact on the larger economies might be very small, but I simply can’t believe that all the alleged leakage from Ireland would be “lost”.
The question is a fascinating one… How effective was fiscal policy during the 1930s? Does the paper answer that … even “in principle”?
There are extensive charts and data sources, and clearly a good deal of work. The authors provide us with an impressive battery of statistics and econometrics (by the way, the Greeks don’t appear well in my pdf, but maybe that is just my pdf).
The challenge in answering such a question is the absence of much of a stimulus in the 30s, and the analysis and information presented in the body of the text – unless I am missing something – does not convince me otherwise.
Readers could be reassured on that score by seeing the raw data – or even just charts – and judging for themselves
The sources for the fiscal data are all – with one exception – not easily available to me. That one exception is library.northwestern.edu (and a link that does not work by the way). I was able to track down “Armaments Year-book for France” e.g. http://digital.library.northwestern.edu/league/le0282av.pdf
If the sources are of this kind, it would indeed be quite some work to make them amenable to econometrics.
The authors state at different points in the paper, “Previous studies have not found an effect of fiscal policy in the 1930s, not because it was ineffectual, but because it was hardly tried…” Hard then to answer the question “How effective was fiscal policy during the 1930s”, it would seem to me. Also there is no reference to those “previous studies”. The only possible previous (published) studies *listed in the bibliography*, and relevant to such a judgement, would be the books by Bernanke or Temin.
.
I was particularly intrigued by the following Figures and sources
Figure 11. Government Budget Surpluses, Now vs Then
Source: IMF World Economic Outlook, October 2009, and the data sources listed in Appendix 1. … Seems to give Gold and exchange controls
Figure 13. Interwar Government Budget Surpluses, by Exchange Rate Regime Source: see Appendix 1.
Appendix Figure 1. Budget deficits, by country
Source: see Appendix 1. … Seems to give discount rates
Maybe I am missing something entirely, but I didn’t find anything of relevance to budgets.
.
The conclusions are effectively fascinating. All the more so if the links to the analysis in the body of the text were shown to be stronger.
.
The different comments above do not suggest anyone has tried to read through the paper, but suggest instead that we are looking for some immediate relevancy to little Ireland today. Quite a leap.
Thanks Ciaran, we will fix the Greek problem. For some reason it came out fine here:
http://www.econ.berkeley.edu/~eichengr/great_dep_great_cred_11-09.pdf
@Ciarán O’Hagan,
I stand guilty as charged – even if I did read the paper – and am probably even more culpable for clutching at straws. In – very limited – mitigation I would plead a desire to explore options that would alter the composition of the current fiscal deficit to secure the achievement of more productive ends and to reduce the reliance on direct government borrowing.
just read…
http://www.cepr.org/pubs/PolicyInsights/PolicyInsight39.pdf
How big are fiscal multipliers? Oct 2009 CEPR Policy Insight 39
by Ilzetzki et al
smallish fiscal multipliers, although the paper is quite nuanced. Notably a collapse in multipliers since the pre 1980 period. And you don’t have to be an SOE to throw good money after bad.
“in economies open to trade and operating under flexible exchange rates, a
fiscal expansion leads to no significant output gains .
Further, any gains will be, at best, short-lived in highly indebted
countries. Since, over the last decades, many
emerging countries have become more open to trade
and moved towards greater exchange rate flexibility
(typically in the context of inflation targeting regimes),
our results suggest that seeking the holy grail of fiscal
stimulus is likely to be counterproductive, with little
benefit in terms of output and potential long-run costs
due to larger stocks of public debt.”