Monday, November 22, 2010

A look at the New Deal and new deals

I spent the summer of 2010 attempting to run the final stretch of achieving my masters degree: writing my exit paper. This paper could be of any topic of my choosing, as long as I had a faculty member at Miami that was willing to advise along the way. I knew from the get go that I would like to do something which took an empirical look at a historical event; I figured that given my interest in history, a topic such as this would save me from begrudging doing the research and data aggregation which was usually required in writing a paper such as this one. After weeks of putting together a dataset, which I found was no small task - I now appreciate historians who make their living poring through reams of antiquated data and documents - I was able to begin the analysis. The question was: Was the New Deal effective in its efforts to reduce the suffering associated with the Great Depression?

I am a firm believer that researchers should not structure their studies with a desired outcome in mind. As certain climate scientists and political documentary creators have shown, it's quite simple to lie with facts, so long as you portray them in the right way, and are convincing and clever in telling your story. With that in mind, I did not want, nor did I let my political views or presuppositions influence the study. Given that I would consider myself an fiscal conservative, and an opponent of massive increases in government spending as a response to economic downturns, it would be a convenient story for me to tell that Franklin Roosevelt's New Deal had no effect in its stated goals of relief, recovery, and reform. But facts and the truth aren't always convenient ( I think I may be onto a good title here).

A study like this, while seemingly straightforward, becomes difficult for a few reasons. First of all, it differs from the more common question of did it contribute to RECOVERY. This question can be answered, or at least approached, by using readily available macroeconomic indicators such as the unemployment rate, inflation, GNP growth, etc. Relief however, is more difficult to measure. The study used infant mortality rates, the rate at which babies die in their first year of life, as a measure of economic suffering during this time. This wasn't my idea, but it's what many economists have used to measure socioeconomic outcomes, at least during this period.

Secondly, there's a problem of simultaneous causality. Meaning it's hard to measure a causal effect, because the causes are running in both directions. A good example of this is stock prices to economic conditions; it's hard to say how much deteriorating economic conditions cause falling stock prices, because low stock prices in and of themselves cause the economic situation to falter. In the same way, Relief spending in the Depression could have both caused better economic conditions, and was a response to poor economic conditions. IE, if in one state 99 out of every 100 babies were dying, the government in its infinite wisdom may direct more relief spending to that state. A simple analysis would now indicate that relief spending was CAUSING this high death rate. This mistake, while seemingly obvious, causes one to come to the exact wrong conclusion.

This concern is addressed by an econometric technique called instrumental variables regression, which I will not try to explain, for fear of loosing the attention of my daily 0.06 readers. In the end, I found that the New Deal was in fact causing relief throughout the country, to the extent that areas receiving more federal relief monies were seeing lower rates of infant mortality. I cannot therefore, stand up for the argument that the New Deal was a total waste, or as some say, hurting the country. Whether it was effective in causing the country to recover from the Great Depression is another matter, but I do believe that it helped babies who couldn't help themselves. A baby born which otherwise would have died most certainly has long term effects:  these were the future parents of baby boomers, Korean War veterans, wage earners and producers (and also Social Security recipients though.... yikes).

In context of our current situation, we should view its success by asking, what long term good are we creating? Is Obama's fiscal stimulus creating long term growth for the economy? OR is it just creating temporary government jobs and programs? Building a high speed railway from Cincinnati to Cleveland is all well and good, but once the rails are laid, the overpasses built, and the workers have gone home, have we created something of long term value, or just an underutilized money pit for the taxpayers to support for decades to come?

Let's always remember to ask these questions.

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