The View From 1776

Pump-Priming Futility

It failed for presidents Hoover and Roosevelt in the 1930s Depression, just as it continues to fail for Obama.

All of Obama’s economic stimulus endeavors - the $800 billion 2009 stimulus, mortgage refinancing, home buyer credits, cash-for-clunkers, and his current so-called jobs creation program - are just one-shot dribs and drabs of the sort that failed for President Franklin Roosevelt in the Depression.  The metaphor then was pump-priming: the concept that dumping a bit of water into the pump and exercising the pump handle would restart the economy and end the Depression.  None of it worked.

In Paul Krugman’s terminology, the economy failed to gain traction.  High unemployment stretched out for 12 dispiriting years.  We are now traveling the same path for the same reasons.

The following is an op-ed article appearing in the September 25, 2011, online edition of the Wall Street Journal.

SEPTEMBER 26, 2011

Stimulus and the Depression: The Untold Story
The U.S. doesn’t need another war to revive the economy. We need a policy turnaround like the one in the late 1930s.


About one-half of President Obama’s proposed $447 billion American Jobs Act consists of payroll tax holidays designed to boost spending and increase hiring. But these temporary policies will do little to jump-start the economy, much as earlier temporary economic Band-Aids, such as the 2009 stimulus, did little to improve the economy.

Proponents justify stimulus spending in part based on the widely held view that government-fueled increases in “aggregate demand” during FDR’s New Deal ended the Great Depression and brought recovery. Christina Romer, former chairwoman of Obama’s Council of Economic Advisers, has argued in op-eds that government should continue to spend for this reason. And in a 2002 speech as a Federal Reserve governor, current Fed Chairman Ben Bernanke claimed that monetary expansion and the turnaround from the deflation of 1932 to inflation in 1934 was a key reason that output expanded.

But boosting aggregate demand did not end the Great Depression. After the initial stock market crash of 1929 and subsequent economic plunge, a recovery began in the summer of 1932, well before the New Deal. The Federal Reserve Board’s Index of Industrial production rose nearly 50% between the Depression’s trough of July 1932 and June 1933. This was a period of significant deflation. Inflation began after June 1933, following the demise of the gold standard. Despite higher aggregate demand, industrial production was roughly flat over the following year.

The growth that followed the low point of the Depression was primarily due to productivity.

Productivity is considered a supply-side factor by many economists: It is determined by the technology and regulatory structure of the economy and therefore is largely independent of spending policies.

The growth rate of real per capita output is the sum of the growth rate of per capita labor input and productivity growth. Increasing aggregate demand is supposed to increase output growth by increasing labor input. But between 1932 and 1934, the period that Mr. Bernanke cited in his speech, per capita real gross domestic product (GDP) growth was entirely due to productivity growth, as per capita total hours worked