Friday, September 26, 2008

The cart before the horse

Cautionary Lessons from the Great Depression; Joe Biden may have gotten a few factual details wrong when he urged President Bush to act like Franklin D. Roosevelt did when he sought to counter the Great Depression. But the basic sentiment that we should now follow FDR's example and take swift, decisive action in the current crisis is one that is widely shared.

In considering this view, it's worth recognizing that many of the massive, decisive government interventions that FDR and the New Deal Congress enacted actually made the situation worse. As I discuss in in this article, the administration and various interest groups used the crisis of the Great Depression to enact sweeping legislation that benefited themselves at the expense of the general public, sometimes in ways that made the crisis worse than before. In these efforts, they were abetted by voters' sense of desperation and widespread ignorance of economics and public policy. This made it easy to portray measures that benefited narrow interest groups at the expense of the general public as "emergency measures" needed to address the crisis.

Ilya Somin makes some very valid points, but is putting the cart before the horse. All of Franklin Delano Roosevelt's mistakes occurred well after the money supply had contracted and the Great Depression had already started. To prevent a depression Congress needs to act before the money supply contracts. Imperfectly preventing a contraction of the money supply is preferable to allowing the money supply to contract because the means to doing so is imperfect.