As noted in the previous post many fine conservative economists are now quite busy revising the history of the Great Depression in order to prove that, aside from the $700 billion bailout of their friends in the financial industry and perhaps a few more tax cuts for rich people, no further action is needed. The economy will set itself to rights like it always does and, besides, government spending did not get us out of the Great Depression.

The main points of this argument go something like this:

• The New Deal was no big deal. Here Wonks Anonymous is in full agreement as are most other economists. The WPA and other jobs creation programs were small, designed not to conflict with private employers and - in a drive to keep southern Democrats happy - kept out of some of the most depressed areas of the country. Roosevelt continually tried to balance the budget, which was what all responsible economists of the time told him to do. Whenever some hint of recovery was seen he cut back on spending or raised taxes. Net fiscal stimulus was negligible.

• Friedman proved that the economic recovery was driven by increases in the money supply. Which is not quite true. In The Monetary History of the United States Friedman and Schwartz documented an association between increases in the money supply during the 1930's and increases in economic activity. However it is also true that banks increase the supply of money whenever they make a loan. They take the cash that they have been holding onto and let it out to circulate in the economy. It goes to other banks and increases their reserves and - if things look good - this leads to more loans and more money. See a more detailed explanation of this here. Any increases in borrowing, driven by government deficits or recovery of demand will lead to an increase in the supply of money unless the Federal Reserve chooses to stop it. Which leaves us with the essentially unanswerable question: Which came first? The money or the recovery?

• Real recovery was driven by European demand for arms caused by WWII. This had nothing to do with government spending. Except that the European demand for arms was financed by something called Lend Lease in which the US Government paid for the arms to be shipped while pretending to give long term loans to England and the Soviet Union. Which Wonks Anonymous supposes is not technically government spending except that it really is.

• Full employment during the Second World War was not recovery because consumption did not rise. Yet somehow our naive parents and grandparents failed to understand this since they were not enlightened by the truths of Chicago School Economics.
  

And this last point is most important. Indeed it is likely that the current recovery - if it is to lay the foundations for future prosperity - must follow the WWII model. We do not need to consume more, we need to work and save more. Demand must come from public and private investment in a more prosperous future. We do not have a world war but god knows we have plenty to do: Our major industry - auto manufacturing - is dependent on consumption of oil that no longer exists. We need to convert it and our transportation system to operate in harmony with our current resources. Our education and health care are a disgrace. There is plenty to do before we reward ourselves with a new flat screen TV.

And this last argument speaks volumes about the general attitude of the Chicago School of economics. These people are recruited from among the more morally challenged children of privilege. They are trained up in a doctrine that holds consumption to be the highest good, in fact the sole goal of human existence. Indeed to deal with anything - children, patriotism, charity, you name it - they must first mentally convert it to a form of consumption. To the Chicago School kids are just another sort of SUV.

It is not therefore surprising that the thinkers from Chicago should consider WWII, a period when people were fully employed, doing something that they believe in and accumulating assets that they could use for future consumption and security, as bad times because consumption was down. Those fools should have been borrowing and buying more stuff or at least grumbling about taxes and government interference, like their betters.