Amity Shlaes may be picking on a weakling in this response to Paul Krugman?s Labor Day column extolling government-stimulus silliness. But it?s still well worth your time, because Amity takes you through some critical details about how the later stages of the New Deal economic program played out. A key passage:
In 1938, the political tide began to turn against Roosevelt. In the
spring of 1938, lawmakers gutted his undistributed profits tax and
dropped the graduated corporate income tax in spite of Roosevelt?s
objections. Their bill became law without his signature. In the midterm
Congressional elections of 1938, Democrats lost 81 seats, not enough to
lose control of the House, but enough to chasten them. Bored and
frustrated with the New Deal, FDR turned to foreign policy, an area to
which he was better suited in any case. The Supreme Court ruled against
sit down strikes, limiting the scope of union power. Washington?s war
on business was suspended, in part because the president knew he would
now need the same industrial giants he had prosecuted if he was going to
arm the U.S. and Britain. Treasury Secretary Henry Morgenthau, who had
personally sicced attorneys on his predecessor Andrew Mellon, now put a
sign on his desk to signal friendship for business. The sign read ?Does
it contribute to recovery?? The policy mix of the late 1930s was far
from ideal, but the direction was enough to cheer everyone.The
real question is not how war spending ended the Depression. It is why
the Depression lasted so long. Spending, in any case, didn?t have much
to do with the Depression?s end. As Dr. [Christine] Romer herself summed up in that
1991 paper, ?it is hard to argue that changes in government spending
caused by the war were a major factor in the recovery. The recovery was
nearly complete before the war had a noticeable fiscal impact.?
