Posted by: Jeff | September 1, 2010

Fiscal Policy Matters

Matt Yglesias has been thinking about economic comparisons between the current recession and the Great Depression – and why FDR may have had more tools at his disposal for stimulating economic output.

Governments don’t control the economy, and Presidents don’t fully control the government, but the Great Depression wasn’t just about a “bottoming-up” followed by a “rebound” – policy choices mattered. In particular, soon after taking office FDR took the United States off the gold standard thus initiating a round of expansionary monetary policy. Then in 1937, he initiated fiscal retrenchment and the Fed initiated monetary contraction—the economy fell back into recession. Then in 1939-41 monetary conditions reversed again and the US began a fiscal ramp-up to prepare for war and the economy grew again.The link between abandoning the gold standard and exiting the Depression is not a coincidence:

20090326-ni25ke6b5u5fxp51kqe2bhh3qs.render 1

The graph in particular is interesting to me, since there are a number of people within the Tea Party that think going back on the gold standard in order to stabilize money supply will also somehow stabilize the economy.


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