Wednesday, November 30, 2011

Never send a Nazi to do an American Keynesian's Job

xkcd muses that it's not enough to have Nazis design our rockets: they only started working when Nazis actually built them too.

Some have similarly argued that Nazis provided the clearest Keynesian experiment in the 1930s. To a certain extent, this is obviously true. Just as we must admit that Nazi rocket technology was ahead of its time, so we must admit that they implemented certain Keynesian ideas when other Treasuries were still wringing their hands.


However, the character that dispairs at the end of the comic over Nazi rocket building acumen need not draw the same lesson from macroeconomic policy! By the forties we were doing Keynesianism too, without the nasty Nazi baggage. Indeed, as Brad Pitt's character noted in Inglourious Basterds - aggregate demand and killing those very Nazis was virtually identical: "our business is killing Nazis - and business is booming". Why anyone would consider saving Europe and East Asia from the wave of fascism washing over it a waste of resources (as some critics of the idea that WWII got us out of the depression suggest) is utterly beyond me. As far as I'm concerned, taking the cards we were dealt as given, it's some of the best money we ever spent. Hitler practiced economic policy that aided the German recovery. Roosevelt did it better, and defeated the Nazis to boot. Truman did it better, and made a huge human capital investment in prime age males and physical capital investment in Europe to boot. Eisenhower did it better, and gave us an interstate highway system to boot. Perhaps it was wise to pluck marginally attached Nazi party members for use at NASA. But don't send a Nazi to do an American Keynesian's job.

13 comments:

  1. Makes me think of Pynchon.

    Hitler built the autobahns too.

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  2. Needless to say that while the strip was funny, it wasn't terribly accurate; much of the work of the Nazis (as von Braun readily admitted) was based on that of Goddard. Unfortunately Goddard was secretive; he got a significant amount of bad press in the 1920s; etc. If you look at the German rockets of the 1940s however you'll find that they owe a great debt to what Goddard had achieved.

    "Hitler practiced economic policy that aided the German recovery."

    From wikipedia (I honestly know very little about Nazi economic policy, but I had to start somewhere):

    Unlike Italy, however, Germany did not strive to achieve full autarky. Hitler was aware of the fact that Germany lacked reserves of raw materials, and full autarky was therefore impossible. Thus he chose a different approach. The Nazi government tried to limit the number of its trade partners, and, when possible, only trade with countries within the German sphere of influence. A number of bilateral trade agreements were signed between Germany and other European countries (mostly countries located in Southern and South-Eastern Europe) during the 1930s. The German government strongly encouraged trade with these countries but strongly discouraged trade with any others.[41]

    ...

    While the strict state intervention into the economy, and the massive rearmament policy, led to full employment during the 1930s, real wages in Germany dropped by roughly 25% between 1933 and 1938.[46] Trade unions were abolished, as well as collective bargaining and the right to strike.[47] The right to quit also disappeared: Labour books were introduced in 1935, and required the consent of the previous employer in order to be hired for another job.[47] In place of ordinary profit incentive to guide investment, investment was guided through regulation to accord with needs of the State. Government financing eventually came to dominate the investment process, with the proportion of private securities issued falling from over half of the total in 1933 and 1934 to approximately 10 percent in 1935–1938. Gargantuan tax rates - at times reaching levels such as 98 % - on profits limited self-financing of firms.[48] The largest corporations were mostly exempt from taxes on profits, but government control of these were extensive enough to leave "only the shell of private ownership." [49]

    "Roosevelt did it better, and defeated the Nazis to boot. Truman did it better, and made a huge human capital investment in prime age males and physical capital investment in Europe to boot. Eisenhower did it better, and gave us an interstate highway system to boot."

    That's one extremely simplistic way to look at it I guess. On the other hand, for example, there is plenty of evidence to show that the Marshall Plan did far more damage to economic recovery in Europe than it did good (and we're all aware of just how stupid the U.S. was with regard to wage and price controls in Germany prior to the Germans politely saying "piss off"). And there are plenty of reasons to remain skeptical of road socialism.

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  3. Peter,

    The autobahns were Nazi white elephants; they were powerful propaganda instruments however.

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  4. Dan a quick question:

    Russ Roberts said "the CBO is now using .5 for its lower bound estimate of the Keynesian multiplier, based on recent work by Valerie Ramey. (HT: Garett Jones) A multiplier of .5 means that for every dollar of government spending, there is a 50 cent reduction in spending by non-governmental sources (private consumption and investment)."

    That sounds wrong, but I don't know if it is or not. Opinion?

    Invisible Backhand

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  5. Invisible Scribbler,

    It is an example of the crowding out effect. Russ had a podcast with Ramey in late October.

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  6. How does government spending crowd out non-government spending that wasn't going to take place anyway?

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  7. the nazi's, and for that matter the japanese too, were just ahead of their time

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  8. @Anonymous:

    One channel for a multiplier < 1 is from the supply side. If the government or its contractors poach key skilled workers from the private sector (e.g., private-practice MDs and RNs hired by public-sector hospitals), then government-funded purchases grow while the private sector produces less.

    One unpublished result from my work with Rothschild (link to current paper in my name) is that well-educated workers at stimulus-funded organizations were quite likely to have been hired away from other jobs. That was less true for the less-educated. [FYI: The data are available on the Mercatus website]

    The best person for the job usually has one already--and our government, for better or worse, is reasonably good at finding the best person for the job.....That means a smaller multiplier from the supply side.

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  9. IB - No that's the right interpretation. Whether it's the right multiplier is a different question, of course.

    Anonymous - Well some non-government spending is obviously taking place, so clearly there's some of that spending around to be crowded out! I think your concern only holds when 100% of GDP is government spending - and if that ever happens we'll have much bigger problems on our hands than crowding out!!!

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  10. "That's one extremely simplistic way to look at it I guess. On the other hand, for example, there is plenty of evidence to show that the Marshall Plan did far more damage to economic recovery in Europe than it did good (and we're all aware of just how stupid the U.S. was with regard to wage and price controls in Germany prior to the Germans politely saying "piss off"). And there are plenty of reasons to remain skeptical of road socialism."

    Right. We have to thank Wilhelm Röpke and Ludwig Erhard that Germany could rise from the ashes of war. It is really a strange fate that right after Hitler a man like Erhard came to power...

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  11. Speaking of these ordoliberals, this paper on Eucken was recently brought to my attention: http://uni-muenster.academia.edu/CordeliusIlgmann/Papers/1044524/Walter_Euckens_Principles_of_Economic_Policy_Today

    It looks interesting.

    Why do you find it surprising, skylien? It seems obvious that Germany would be thirsting for the social market economy after Hitler and also simply after so many other failed attempts at thinking about the economy on the continent.

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  12. Thanks for the paper.

    I think that because one should think that during the rule of Hitler, any believe in the market was quite extinguished among the political class. And in fact I think it was except for Erhard.
    Even more surprising it gets that nearly every other country went the other way that time, especially Great Britain (who in the late sixties/seventies became the sick man of Europe). Also I read something about Erhard where he said, that absolutely everyone including the occupying forces dis-advised him on his plans to stop price controls and tariffs etc... (Unfortunately I don't find that yet).

    So for my point of view it is astounding. Most Germans have no idea today of how much they owe to these 2 (with Eucken 3 of course) men.

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  13. The most revolting thing? Yesterday's afternoon Marketplace edition aired an op-ed bemoaning the fact that we've bailed out Europe twice before, and they've defaulted before.

    Like Mr. Kuehn, I don't think that preventing defaults was the operating principle behind the Marshall Plan!

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