Letter of the Week

Hello everyone. I took a vacation. I’m back.
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Letter of the Week (Under a heading: The New Deal Revisionists: Will They Ever Learn?)

To the Editor:

Re "New Deal Revisionism: Theories Collide" (Arts pages, April 4):

You paraphrase two economists as arguing that federal spending cannot stimulate the economy because "government spending just crowds out private investment" and "the money supply is the only thing that matters."

Yes, federal spending can crowd out private investment — if it is financed through higher taxes or increased borrowing from the American public and accompanied by no expansion in the money supply.

But government spending can cut high rates of unemployment if it is financed by expanding the money supply. This means borrowing from the Federal Reserve System, which can create more money, either by issuing checks or by printing cash.

In this case, increased spending and monetary expansion are both parts of the same process. In fact, government spending stimulated the American economy during the early New Deal years and again during World War II.

Peter EcksteinAnn Arbor, Mich., April 4, 2009

The writer is a retired research director of the Michigan A.F.L.-C.I.O.

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COMMENT: This and other critical letters were provoked by a comment of Richard K. Vedder, of Ohio University [and supported by Anna Schwartz (widow of Milton Friedman and co-writer with her husband of a monetarist interpretation of the Depression) and Nobelist (in economics) Robert Lucas, among others, at a right-wing conference on the New Deal], in a story authored by Patricia Cohen on April 3.

These (nutcake) economists, including Friedman, were he alive, believe that a fiscal stimulus will not work, World War II spending and an unemployment rate of 1.2 %, in 1944, notwithstanding. Only monetary solutions will work, they say. Except they are not working now, as the Fed’s rate–the federal funds rate--is, and has been for a while, as close to zero as it can go. Nor did low rates get Japan out of its decade long slump.

Eckstein has it absolutely correct. I would only add that the reason this is not 100% clear to all, even the wingnuts, is that FDR (fearful of deficits and behaving like a traditionalist) raised taxes and cut spending in 1937 and caused a relapse, in 1937-38, just as we were approaching a full recovery. Unemployment rates had fallen from a high of about 25% to nearly 10%, when Roosevelt got cold feet. World War II spending gave us the recovery.

Right wing economists and right wing politicos, including many in Congress, are doing everything they can to destroy the recovery–whatever the human costs--so that Obama and the Democrats can be blamed and the Republicans can return to power. (The economists might actually believe their own nonsense.)