Economic Interventionism, Old and New
What — or Who — Started the Great Depression?
NBER Working Paper, August 2009
Herbert Hoover. I develop a theory of labor market failure for the Great Depression based on Hoover's industrial labor program that provided industry with protection from unions in return for keeping nominal wages fixed. I find that the theory accounts for much of the depth of the Depression and for the asymmetry of the depression across sectors. The theory also can reconcile why deflation and low levels of nominal spending apparently had such large real effects during the 1930s, but not during other periods of significant deflation.
The Long Pedigree of Interventionism
J. Bradford Delong
The Economists' Voice, July 2009
"At this stage in the worldwide fight against a depression, it is useful to stop and consider just how conservative the policies implemented by the world's central banks, treasuries, and government budget offices have been. Almost everything that they have done - spending increases, tax cuts, bank recapitalization, purchases of risky assets, open-market operations, and other money-supply expansions - has followed a policy path that is nearly 200 years old, dating back to the earliest days of the Industrial Revolution, and thus to the first stirrings of the business cycle...Ever since, whenever governments largely stepped back and let financial markets work their way out of a panic out by themselves - 1873 and 1929 in the United States come to mind - things turned out badly. But whenever government stepped in or deputized a private investment bank to support the market, things appear to have gone far less badly...The discretionary power of executives, in past crises, was curbed by new interventionist institutions constructed on the fly by legislative action...Yet, today's crisis has not (yet) led to the establishment of such financial institutions. So I wonder: why didn't the U.S. Congress follow the RFC/RTC model when authorizing George W. Bush's and Barack Obama's industrial and financial policies?"
Do Powerful Politicians Cause Corporate Downsizing?
Lauren Cohen, Joshua Coval & Christopher Malloy
Harvard Working Paper, June 2009
This paper employs a new empirical approach for identifying the impact of government spending on the private sector. Our key innovation is to use changes in congressional committee chairmanship as a source of exogenous variation in state-level federal expenditures. In doing so, we show that fiscal spending shocks appear to significantly dampen corporate sector investment and employment activity. These corporate behaviors follow both Senate and House committee chair changes, are partially reversed when the congressman resigns, and are most pronounced among geographically-concentrated firms. The effects are economically meaningful and the mechanism — entirely distinct from the more traditional interest rate and tax channels — suggests new considerations in assessing the impact of government spending on private sector economic activity.
President Eisenhower and the Development of Active Labor Market Policy in the United States: A Revisionist View
Presidential Studies Quarterly, September 2009, Pages 519-548
Revisionist analysis indicates that Dwight D. Eisenhower's administration was not hostile to the American welfare state, and even extended it in areas such as social security. However, one area of the welfare state — active labor market policy — has received minimal attention from scholars. This article analyzes the Eisenhower administration's efforts at advancing active labor market policies. The analysis bears out Eisenhower's active engagement in this policy arena and contributes to the revisionist literature. The analysis also challenges the prevailing orthodoxy on active labor market policy as a two-stage process — the Employment Act of 1946 and the Kennedy-era legislation on manpower training — which ignores the Eisenhower era.
TARP Investments: Financials and Politics
Ran Duchin & Denis Sosyura
University of Michigan Working Paper, June 2009
We investigate the determinants of capital allocation to financial institutions under the Troubled Asset Relief Program (TARP). Our main finding is that connections to House members on finance committees, greater representation in Congress, and connections to the Federal Reserve via board members are positively related to the likelihood of receiving TARP funds. The TARP investment amounts are positively related to size-adjusted lobbying of the Treasury and bank regulators. Overall, the study provides evidence about various channels through which political activism affects government spending. We also find that the effect of political influence is stronger for poorly performing banks, thus shifting capital allocation towards weaker institutions.
Chronicle of a Deflation Unforetold
Journal of Political Economy, August 2009, Pages 591-634
Suppose that the nominal money supply could be cut literally overnight. What would happen to prices, wages, and output? Such an experiment was carried out three times in France in 1724, resulting in a cumulative 45 percent cut. Prices adjusted instantaneously and fully on the foreign exchange market. Prices of commodities and of manufactured goods and industrial wages fell slowly, over many months, and not by the full amount of the nominal reduction. The industrial sector experienced a contraction of 30 percent. When the government changed course and increased the nominal money supply overnight by 20 percent, prices responded more, and industry rebounded.
Rural Economic Development in the United States: An Evaluation of the U.S. Department of Agriculture's Business and Industry Guaranteed Loan Program
Economic Development Quarterly, August 2009, Pages 229-241
The U.S. Department of Agriculture's Business and Industry (B&I) Guaranteed Loan Program guarantees loans made by rural banks to rural businesses. The author evaluates B&I's effectiveness in increasing employment using basic ordinary least squares (OLS) and propensity score matching models. The
author finds a robust association between loan reception and increased employment growth. A loan of $1,000 per capita is accompanied by a 3% to 6% increase in employment-per-capita growth and a 3% to 5% decrease in earnings-per-worker growth over the 2 years after the loan, leaving the effect on total county earnings indeterminate. The author concludes that the B&I loan program subsidizes loans associated with increased employment growth, although the jobs created are lower paying than average.
The Current Economic Crisis: Its Nature and the Course of Academic Economics
Cambridge Journal of Economics, July 2009, Pages 759-777
The current crisis has triggered significant debate concerning economic theory and policy. Largely absent from this debate is an informed discussion of the methods used by economists in analysing the economy and formulating their proposals. But method matters. Here I argue that current academic research practices need to be transformed before real insight can be achieved. Specifically, I indicate why and how a more grounded framework than that presupposed by current research practices facilitates a potentially more fruitful approach to understanding the crisis.