The Corner

New Deal, Again

Amity Shlaes:

FDR stimulated the Dow back up, and unemployment down, saving America and democracy. Massive wartime spending solidified the recovery in the 1940s, proving that when it comes to stimulus, more is better.

So, celebrating the $787 billion stimulus bill Obama signed yesterday depends on ramming through this version of history — and dismissing dissent. That is what Obama did at a news conference when he said those who criticize FDR’s New Deal are “fighting battles that I thought were resolved a pretty long time ago.”

In fact, this battle is far from resolved. Economists are arguing more now about the quality of the Roosevelt programs than they were a decade or two ago.

Consider key components of that old narrative.

The overpriced-stock-market argument is perhaps the oldest. Nobel Prize winner Edward Prescott suggests that it can do with review.

Repricing the ‘20s

Prescott and a colleague at the Minneapolis Fed, Ellen McGrattan, reevaluated stock data from the late 1920s in light of the productivity gains from events such as the Internet revolution. Rather than look at price-earnings ratios alone, they also considered share prices in relation to other measures of corporate well-being, such as the value of advertising and research and development.

They found that stocks in 1929 were, in fact, underpriced.

Nor did FDR’s maneuvering cause a speedy bounce-back. The Dow waited until the mid 1950s to regain its 1929 peak. You can’t imagine Obama suggesting that his New Deal would be successful if it got the Dow back to its autumn 2007 high in 2030.


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