http://www.forbes.com/opinions/2008/12/03/new-deal-debate-oped-cx_df_1203furchtgottroth.html
The Economic Fight Of The Year Diana Furchtgott-Roth, 12.03.08, 02:30 PM EST
In Shlaes v. Krugman, columnists duke out the impact of the New Deal.
As President-elect Obama prepares to take office, his paramount challenge is to end the recession and get the American economy expanding again.
How to do that is emerging as a great debate in which both sides invoke the history of the 1930s, a decade of depression and President Franklin D. Roosevelt's New Deal. At the worst moment, unemployment hit one in four men, as Mr. Obama has repeated.
In one corner stands Amity Shlaes, senior fellow at the Council on Foreign Relations, Bloomberg columnist, and author of The Forgotten Man, a history of the Great Depression. She points out that federal spending during the New Deal did not restore economic health. Unemployment stayed high and the Dow Jones Industrial average stayed low.
In the other corner stands Nobel laureate Paul Krugman, a professor at Princeton University and a columnist of The New York Times. He believes that the New Deal didn't spend enough.
Shlaes' book, published in 2007, chronicles the sincere yet ineffective efforts of New Dealers to lift America out of the economic depression. The book might even be entitled The Forgotten America or The Forgotten Economic Depression, so at odds are her findings with the economic catechism on the success of the New Deal taught at many American universities.
Krugman argues that Roosevelt precipitated the recession of 1937 by cutting back on public works spending and raising taxes. In other words, FDR mistakenly listened to the fiscal conservatives. Krugman's advice: spend boldly to lift the country out of a recession. Comment On This Story
The New Deal's answer, as Shlaes illustrates, was to raise taxes on the wealthy, attack big business and pillory "economic royalists," as Roosevelt called them. The New Dealers also started new federal programs, spending unprecedented billions of dollars and employing millions of Americans. The emphasis was then, as now, on--you guessed it--infrastructure.
These efforts, together with deposit insurance and Social Security, became known as the New Deal and are similar to policy prescriptions being suggested to Mr. Obama now. Yet that recovery stayed away.
Some think the New Deal did not go far enough. One such person is Krugman, whose blog is appropriately titled, "The Conscience of a Liberal." His primary lament is that the New Deal failed to spend enough money to achieve full employment. Krugman argues that World War II, with its massive government spending and borrowing, did that.
Some of the issues the debaters raise may be obscure to most Americans. The school Krugman favors is that of the iconic British scholar John Maynard Keynes, who believed that a government in an economic depression could spend its way to economic health. Over the past quarter-century Keynes and his mode of analysis have lost their monopoly on economic wisdom.
Keynesianism did not work in America or Europe in the 1930s, nor in Japan in the 1990s. This has led Shlaes and many others, such as George Mason University professor James Buchanan, Arizona State University professor Edward Prescott and University of Chicago professor Robert Lucas--all Nobel laureates--to propose alternatives.
None of this would matter had Shlaes not written several recent articles suggesting that both the departing Bush and the incoming Obama administrations might be mindful of the failures of the New Deal. Yet rather than open the academic forum collegially to new material, the response from the pro-New Dealers has been to attack the messengers.
The fight is not big government versus small government. Most skeptics aren't even advocating small government, merely a more sober view of the New Deal. Krugman too believes there is value in learning from the New Deal, but he draws different lessons and argues that government spending must take up the slack that has resulted from contractions of consumption and investment spending.
Ultimately, the battle now is broader than academic spats. It is about whether we have a useful discussion in this rough downturn. To move forward, the new president needs to listen to many voices.
Diana Furchtgott-Roth is a senior fellow at the Hudson Institute and former chief economist of the Department of Labor.