Is Eichengreen, et al, Paul Krugman’s own “fiscal fantasy?”

Does the recent paper by Barry Eichengreen, Miguel Almunia, Agustin Benetrix, Keven O’Rourke and Gisela Rua, deserve the praise it has been getting from Paul Krugman and other Keynesian fans of fiscal stimulus?  I have my doubts.  But before expressing them, let me make a few points.

I share many of Eichengreen’s views on the Great Depression.  We both argued that monetary stimulus (especially currency devaluation) was helpful.  We both have spoken out in favor of “competitive devaluations” during the current crisis.  He is more optimistic about the efficacy of fiscal stimulus than I am, but I would concede that the military buildups of the late 1930s probably boosted RGDP, at least by a little.  However, I was far from convinced by their most recent paper on fiscal stimulus during the Great Depression.  For instance, they start by admitting that in many of the most important economies the fiscal shocks were too small to produce statistically significant results:

Ritschl (2005) similarly finds that fiscal deficits were too small to have made an economically consequential difference in Nazi Germany. Not even in Sweden, a country where Keynesian ideas were circulating avant la lettre, were fiscal deficits big enough to make a significant difference (Schön 2007). Appendix 2 shows that what was true for the United States and Germany was true for other countries: in most cases budget deficits were
moderate, and even remained below the per cent threshold that has become familiar to European readers since the 1990s. The decade that saw the publication of The General Theory did not see the widespread adoption of Keynesian pump-priming measures.

So they use VAR estimation with panel data, which is something I intensely dislike for all sorts of reasons.  Let’s start with this assumption:

we have chosen to use the central bank discount rate as our measure of monetary policy.

That’s right; low interest rates mean easy money.  Now I will admit that on any given day a central bank rate cut is more expansionary that a rate increase, but their data set uses annual data.  There is a massive identification problem here.  Indeed in my work on the Great Depression I found the devaluation of 1933, which might have been the most powerful monetary shock in American history, had almost no contemporaneous impact on nominal interest rates or the money supply.  Because I am highly suspicious of VAR studies, I wanted to see the stylized facts that they believe best illustrate their hypothesis.  Here is the “money quote” that I have seen cited by pro-stimulus bloggers:

Individual country experience with large fiscal stimulus was rare in this period, but where it occurred the evidence points in the same direction. One of the biggest fiscal stimuli in this sample occurred in Mussolini’s Italy during 1936-7, as a result of the war in Ethiopia. Italy ran a deficit in excess of 10 per cent of GDP in 1936 and 1937. Italian GDP grew by 6.8 per cent in 1937, by a marginal amount in 1938, and by 7.3% in 1939. According to Toniolo (1976), the Italian economy moved to full employment during this period. In France, the budget deficit increased substantially beginning in 1935, and GDP grew by 5.8 per cent in 1936. The deficit exploded in 1939, during which year the economy grew by no less than 7.2 per cent.

This set off all sorts of alarm bells in my mind.

1.  1936 was the year that France left the gold standard and devalued the franc (I think by about 30%.)  Italy also left the gold standard in 1936, and I recall the devaluation was closer to 40% percent.  These are enormous monetary shocks that don’t necessarily show up in the lower interest rates.  Even if rates did fall, the change in interest rates would dramatically understate the size of the monetary shock.

2.  Those real GDP growth rates are actually very disappointing for the year after a major devaluation in a severely depressed economy.  The US grew much faster in the period immediately after the dollar was devalued in 1933.  And the US had to contend with an adverse wage shock.  On the other hand France was also hit by a wage shock in 1936, and contemporaneous observers attributed the weak French performance in 1936-37 to the fact that their wage shock preceded devaluation, whereas in the US it followed devaluation.

If you want to know why this is so important, read some old Krugman posts.  Over the last few months he has had to continually address fiscal stimulus critics who pointed to various small countries that were able to recover nicely despite some sort of fiscal austerity program.   And each time Krugman dismissed them as being irrelevant, as they were able to offset the contractionary effects of fiscal austerity with currency depreciation.  (Although in at least the Canadian case, the timing of the currency depreciation was all wrong for Krugman’s argument.)  Reading Krugman’s posts, one began to wonder how anyone could be so stupid as to argue that these were examples of successful fiscal austerity.  OK, but Krugman is doing exactly the same thing by hyping this Eichengreen, et al, study.  Their showcase examples occurred right in the midst of large currency devaluations, something we already know from the American context were highly expansionary in a deeply depressed economy.

Their regression did include a dummy for whether or not countries were on the gold standard, but that doesn’t really address the problem.  It would have been much better to include a variable for the change in the exchange rate.   But even that wouldn’t address the much more fundamental identification problem here.  This entire project rests on the implicit assumption that “the” multiplier is some sort of deep parameter that is waiting to be discovered.    It rests on the assumption that the following is a scientific question that should have an objective answer:

What is the fiscal multiplier when there is an exogenous fiscal shock?

But there is no answer to that question, because it all depends on how monetary policymakers respond.  Did the French fiscal expansion of 1935 cause the French government to devalue the franc in 1936?  VAR can’t answer that question, and thus can’t tell us the independent impact of a fiscal shock in a world where central banks can, in principle, determine the path of NGDP.   And it certainly can’t provide any useful information about fiscal multipliers in a non-gold standard economy where the central bank seems determined to peg inflation at about 1%.

Krugman might say none of this matters if rates are stuck at zero.  But we have just seen that Italy and France found ways to enact powerful monetary shocks in a near-zero rate environment.  So zero rates don’t magically take money out of the equation, at least when estimating multipliers using interwar data.  One can argue that modern central banks would not behave the same way, but that’s completely beside the point.  The issue here is whether the interwar studies are reliable.

Now I will ask a really stupid question, to give Keynesians readers a chance to ridicule me.  Why is the multiplier estimated by looking at the impact of spending on real GDP?  (Heh, I never claimed to understand Keynesianism.)  I thought in the Keynesian model higher government spending impacted AD, i.e. NGDP, and the impact on RGDP and prices depended on the slope of the SRAS.  Wouldn’t it make more sense to see how NGDP changed in response to a fiscal shock?  Higher NGDP is the proximate goal, isn’t it?  Obviously you’d hope to also increase RGDP; indeed if the AS curve were vertical there would be no point in even having any fiscal stimulus.  But the proximate goal of demand stimulus is higher NGDP, so it seems to me that we should be estimating the impact of stimulus policies on NGDP.

You might recall that I view NGDP growth expectations as the only sensible indicator of the stance of monetary policy.  All other monetary policy indicators (such as r and M) are profoundly unreliable.  If you follow my logic, you might begin to understand why I view the entire fiscal multiplier debate as being about as meaningful as the question of how many angels can dance on the head of a pin.  The question is not whether fiscal stimulus can change RGDP, it is whether fiscal stimulus can trigger monetary stimulus.

Update:  I just noticed that Bob Murphy did a similar post.



26 Responses to “Is Eichengreen, et al, Paul Krugman’s own “fiscal fantasy?””

  1. Gravatar of TA TA
    13. July 2010 at 17:21

    I thought I was with you until that last sentence. Now, maybe I’m not getting you correctly. Would you start with that last sentence and work back up a little? (Some of us didn’t do doctorates in economics.)

  2. Gravatar of ssumner ssumner
    13. July 2010 at 17:56

    TA, Don’t worry, my ideas might well be the problem, not your understanding. I define monetary policy in the same way as Lars Svensson, relative to the policy goal. Thus if you want 5% NGDP growth, then an expansionary policy is one expected to produce more than 5% NGDP growth, and a contractionary policy is one expected to produce less than 5% NGDP growth. So I don’t equate “easy money” with low interest rates, or a rising money supply, but rather with high NGDP growth expectations. So if fiscal stimulus boosts NGDP growth expectations, in my book it is actually causing the stance of monetary policy to be more expansionary. I understand that most people don’t think of monetary policy in terms of NGDP growth expectations, but I find the other indicators (such as interest rates) to be extremely misleading.

    Here is another way of putting it. I consider easier money to be either more money or more velocity. Fiscal stimulus, if it is to work at all, must boost M or boost V–probably V.

  3. Gravatar of John Salvatier John Salvatier
    13. July 2010 at 18:04

    More news on the Fed: looks like the Hawks are pushing back

  4. Gravatar of hishamh hishamh
    13. July 2010 at 18:59

    Scott, can you tell me why you don’t like the VAR approach? I understand it can be atheoretical and akin to data-mining (plus there’s the dimensionality problem), but are there more reasons than that?

  5. Gravatar of JimP JimP
    13. July 2010 at 20:02

    And a story from the WSJ

  6. Gravatar of Doc Merlin Doc Merlin
    14. July 2010 at 01:33

    This is expected as they believe interest rates carry the monetary information wearas Chicago believes that monetary aggregates carry the information.
    This is at the heart of the problem between the NK’s and the Chicago school.
    Because of the writer’s biases they naturally say that monetary stimulus didn’t work.

  7. Gravatar of W le B W le B
    14. July 2010 at 01:39

    For two years now boosting M or V or both has been the urgent but unachieved task.
    You say in your reply above, “Fiscal stimulus, if it is to work at all, must boost M or boost V-probably V.”
    Surely by financing more of any fiscal stimulus through Government borrowing from the Private Bank Sector (do you call this monetising the debt?) and less through the bond market, Government would increase AD, V and the money supply.
    Expectations are influenced by communication in narrative forms – credible story telling.
    If today NGDP expectations are 2% (made up of individual expectations of negative demand pull and positive cost push inflation and declines in RGDP), we need a credible story of why an expectation to 5% NGDP is credible.
    A narrative that explains that policy makers are going to finance a greater proportion of G by increasing Private Bank Lending to the Public Sector until we see a movement towards the target of +5% NGDP would be a start.
    As expectations move towards the target NGDP, private sector borrowing from private bank sector would take over as the engine of money creation and the story would change to one where the authorities say they will do what it takes to reach and hold to that target.

  8. Gravatar of Doc Merlin Doc Merlin
    14. July 2010 at 01:47

    @W le B
    ‘Surely by financing more of any fiscal stimulus through Government borrowing from the Private Bank Sector (do you call this monetising the debt?) and less through the bond market, Government would increase AD, V and the money supply.’

    1. Monetizing debt is when the government borrows from the federal reserve on a permanent basis. Or the federal reserve buys other assets (or increases lending) to increase NGDP far beyond RGDP.
    2. A significant part of the bond market is the private banking sector.

  9. Gravatar of marcus nunes marcus nunes
    14. July 2010 at 03:56

    This is an interesting result and avoids the identification problems

  10. Gravatar of W le B W le B
    14. July 2010 at 04:05

    Thanks Doc, obviously not the right term.
    The process I was describing was when a Government pays the wages of a public servant, say a nurse, with a cheque drawn on its account at the central bank. The nurse then cashes the cheque through her/his private bank and spends the money. That private bank then presents the cheque to the central bank and its assets are increased by that amount. Or even better when Government pays a private sector firm to build a WiMax system for a city and pays for it in the same fashion.
    I believe that back in the ’70s this process was describe by the IMF’s Domestic Credit Expansion equation which showed the Public Sector Borrowing Requirement’s relationship to linked changes in money supply, changes in private lending to the government, and changes in private bank lending to the public sector.
    It was used then during a time of rampant inflation as the logic for reducing public expenditure funded in the way described above because it directly increases the money supply.
    Surely now we need to use this process to increase M with the added bonus that it also increases V as the nurse spends a part of her/his income.
    Over here I would say that the main ‘stories’ driving expectations are:
    1. The next move for interests are up, so I’ll further delay my spending/investment project.
    2. Unemployment is set to rise, may be it’ll be me/my customer so I’ll put off that purchase/we’ll not make that sale so I’ll keep stocks low.
    3. Prices are set to fall so I’ll wait ’til they do/my customers expect prices to fall so I’ll wait.
    4. This austerity package is going to hurt, better all hunker down, keep saving/paying off my debt.
    Scott’s policy requires the expression by leaders of an equally compelling narrative.

  11. Gravatar of StatsGuy StatsGuy
    14. July 2010 at 04:38


    It doesn’t completely avoid the identification problem, but more concerning is their interpretation – assuming the effect is causal, the reduction in private capex does not measure total spending or wages (or even total xapex) – it’s quite possible that such a large amount of federal money increases the wage rate, shifting private capex out, but that local citizens are still better off (or even that there’s more total capex in some cases). It’s also possible that public spending tends to concentrate on low capex service sectors (which may or may not be high skills).


    Similarly, with the GD – even with VAR models – I don’t see how one really separates war spending/fiscal from monetary, given the role of expectations. Maybe someone should build some sort of hidden markov model with expectations mediating… But the issue is that the coming war created a situation where the residual doubt about whether monetary policy would be reversed at the next election was _gone_. It became unpatriotic to argue the government should not print money and spend everything it could on the way, and this changed the political expectation.

    In the current situation, many doubt the govt. can sustain enough fiscal spending for long enough to force prices up.

    One general thought about fiscal spending that I think gets left out – we still don’t think enough about private vs. public debt levels in thinking about AD, but one would think it matters. Certainly, in WWII, we saw a massive transfer from private to public debt. Private individuals in debt face risks that the national govt. does not (since they lack a printing press). Thus, the transfer of private debt to public debt may somewhat alleviate the demand to hold liquidity. Sure, there’s future tax liability, but individuals, looking to the future, may perceive that if debt is private, there is greater uncertainty over future monetization, but that if debt is public, future monetization is more likely. Or, they may not really think about future taxes.

    Certainly, post WWII, MUCH of the real govt debt was inflated away, and it had to be obvious this would happen (who was going to stand up in congress and scream that inflation was worse than Hitler?)

  12. Gravatar of Indy Indy
    14. July 2010 at 05:45


    WWII is just a unique era, in terms of money-and-prices, in our History. It’s hard to dis-aggregate the various effects of what was, essentially, a command-economy – mobilizing and removing millions of the labor force, security barriers to shipping, embargoes between formerly-trading enemies, essentially exporting the vast bulk of production into expendable war materiel used abroad, creating shortages in all sorts of commodities, etc..

    And then there was explicit attempts to control prices apart from monetary policy – with the Emergency Price Control Act and Office of Price Administration (one of the largest civilian agencies during the war!). Eventually, OPA controlled the prices and rationing of almost everything in the economy; commodities, rent, wages, everything.

    Let’s look at Depression-WWII-post WWII era inflation <a href=";?here.

    The phases:

    1. Deflation continues throughout 1939 until early 1940.

    2. Low inflation continues in 1940 and picks up in 2Q 1941, gradually accelerating to 10% by the attack on Pearl Harbor.

    3. Inflation stays at an average of 11% throughout 1942.

    4. The OPA intensifies its efforts and in 1943 and 1944 shows deceleration and disinflation back to low rates. Part of the reason is the war-funding effort. War bonds paid 3%, and were hard to sell in a high-inflation environment. When inflation decreased, and people believed things were finally “under control”, and they would get all their money back, liberty bond sales exploded (as the Debt-to-GDP ratio went to 100%).

    5. 1945 is steady and low, at around 2.3%, all the way to Victory in Japan and the surrender on the Missouri, Sept. 2.

    6. Then, in July 1946, as the OPA is starting to wind-down its controls, inflation jumps above 4% and stays in double digits for about two and a half years, until December 1948 – inflating a full 30% in that period – no Hitler or Korean War to worry about. The Fed just sits by and lets it happen – dramatically reducing the real liabilities of the US in short order.

    7. Then, in 1951, now during the Korean War, inflation once again rises, staying at about 8% all year (and at the end of which just as the first WWII war bonds come due, devalued in real terms by about a third). This despite the quasi-revival of the OPA in the Office of Price Stabilization.

    So, it’s just a really complicated inflation history. But, Like Prof. Sumner says – it presents a real identification problem too. WWII got us out of the depression, ok, but what part was the deficit spending, and what part inflation and devaluation (and relief from real government debt liability) both during and especially just afterwards? And what part technical progress and effective world domination? Hard to tell.

  13. Gravatar of scott sumner scott sumner
    14. July 2010 at 05:56

    John, Thanks, That’s a very informative post.

    hishamh, I should do a post on VAR, but the bottom line is that VAR studies of monetary policy suffer from the identification problem. Monetary shocks are misidentified as changes in policy interest rates or the money supply. The basic problem is that VAR buys into the standard economic view of policy lags, which I think is wrong. We should be looking at the effect of monetary policy shocks on inflation expectations, not actual inflation, and there is no time lag between a change in monetary policy and a change in inflation expectations. Hence VAR cannot tell us anything useful.

    JimP, That is an incredibly depressing article. I am ashamed of my profession.

    Doc Merlin, They did find some stimulative effect from monetary policy, but the estimates of the size of the effect are worthless.

    W le B, It is not obvious to me why it makes a difference whether the Government borrows from the banks, or from the public.

    marcus, Thanks, That was interesting.

    W le B. If you mean monetizing the debt, yes, that would probably be expansionary.

    Statsguy, You said;

    “Certainly, post WWII, MUCH of the real govt debt was inflated away, and it had to be obvious this would happen (who was going to stand up in congress and scream that inflation was worse than Hitler?)”

    It may have been obvious, but surveys showed that most people (and I believe economists as well) expected deflation after WWII, just as deflation had followed all previous wars in American history.

  14. Gravatar of Joe C Joe C
    14. July 2010 at 06:38

    As someone who uses VAR in my forecasting, for completely different data, I should say that I think of VAR as the lazy man’s model as opposed to a structural model where you are forced to make more clearly defined assumptions…what Im trying to say is that, I fear, VAR models are often used to support viewpoints rather than honestly exploring the issue.

    I read a study a while back that found VAR models tend to overstate fiscal multipliers.

  15. Gravatar of David Stinson David Stinson
    14. July 2010 at 07:02

    Nothing like more empirical studies to clear up academic debate (irony alert). The attachment of the economic mainstream to complex empirical work, particularly of the econometric nature, never ceases to amaze me. The assumption is that we can just run out and get some “facts” and that will solve everything. Good thing that facts are so easy to establish.

    Anyway, in the Italian case, I am assuming that, in a fascist economy, particularly in a time of war, there is likely to have been lots of price controls and significant central government influence over deployment of economic resources, perhaps combined with currency controls (I am pretty sure that were currency controls in Germany at the time). In that environment, prices won’t reflect or direct an economically efficient allocation of resources. How is it possible therefore to have confidence in estimates of GDP valued at such prices? For example, if a fascist government wants lots of war production and establishes artificially high prices for war or miilitary output while prices for consumer output are subject to controls and consumer goods rationed (either explicitly or de facto through continuing inadequate supply), measured “GDP” may rise significantly but what does it prove?

    It seems to me that the notion of GDP as a sound measure of economic well-being and output is reliant on the assumption that prices properly value output, i.e., that they are free to move and reflect consumer preferences. Therefore, as a general point, any valid fiscal multiplier would have to be derived from situations in which prices were set by relatively free markets and what was being measured was largely the response of the private sector to stimulus. Isn’t that right? If so, wouldn’t that disqualify the analysis that Barro did awhile back relating to the US WWII experience?

  16. Gravatar of Joe C Joe C
    14. July 2010 at 07:07

    After reading some of the referenced study; I would add that a VAR model on only 15 observations is somewhat tenuous.

  17. Gravatar of marcus nunes marcus nunes
    14. July 2010 at 07:10

    Vicky Chick argues that more stimulus reduces Debt/Y

  18. Gravatar of Morgan Warstler Morgan Warstler
    14. July 2010 at 07:25

    Krugman is wrong. There is an obvious way to drop money from the helicopter and have it stimulate AD.

    The Fed should unwind it’s MBS and sell the underlying assets at deep discount in auctions only available to private citizens with 30% down.

    This is effectively printing money because the Fed’s balance sheet suddenly loses all the steeply overpriced assets, and the private sector gains the windfall of cheaply acquired non-undervalued assets. The helicopter drop. One that rewards those who have dry powder. And reduces rents for those that don’t. Putting spending money into the system.

    This action will have the immediate effect of correcting prices in the real estate market, and ALL HOME OWNERS will need to then determine if with the new lower value on their home, they are going to stay in the loan, or walk away.

    Banks will now finally be facing the herd thinning they have been trying to avoid… a good thing… to ensure we do not have a repeat of 2008, the Fed will announce that it will backstop interbank lending and work with the FDIC to quickly unwind those banks that insolvent with the new lower priced assets behind their MBS.

    The beauty of this, is that it forces banks into submission – the place they should have been originally.

    Now we have a smaller percentage of our national incomes servicing debt on real estate / paying rent, and banks that need cash will have to dilute their shareholders to survive.

    This is a politically feasible solution. The Tea Party will love it. Main Street will love it. The elderly who have paid off their house, not so much. New York City not so much.

    The Fed can ALWAYS print more money, before it even considers it, it should liquidate the hard assets now acting as a storehouse of false value, so everyone can really see what their home is worth and make an honest choice.

  19. Gravatar of Morgan Warstler Morgan Warstler
    14. July 2010 at 07:29

    make that “the private sector gains the windfall of cheaply acquired NOW undervalued assets.”

  20. Gravatar of Joe C Joe C
    14. July 2010 at 07:43

    Marcus Nunes:

    Just read the link you put up: All I have to say is huh? Even if the spending multiplier were say 2, just for argument sake, and the govt took say half of the additional dollar of income created in tax revenue to pay down the debt, how could govt debt go down? I believe debt would only go down with cuts in govt spending; which, by their theory, would lessen economic growth…this is why I have a problem with the whole fiscal stimulus argument in the first place.

    ps thanks for that link

  21. Gravatar of John Papola John Papola
    14. July 2010 at 08:02

    Why can we not all agree that the production of weapons and war machines, while being technically included in “GDP” as the good times it’s made-up price, is not actually a positive thing for human prosperity. It is waste. And when it’s a war machine of evil aggression, it’s not even like one can argue for the idea that it’s some investment in the future by preserving the free world or whatever.

    Building tanks to blow them up ain’t “recovery”. As far as I’m concerned, that’s all “nominal”.

  22. Gravatar of StatsGuy StatsGuy
    14. July 2010 at 08:31


    “deflation had followed all previous wars in American history.”

    That would seem to be a general argument in favor of a direct fiscal effect on the price level… OTOH, with Debt/GDP of 100%, one can argue that WWII was exceptional.

    However, I should have been a bit more clear on the point: in 1939, when the war was coming, did this create expectation of future monetization?

    The alternate argument can bypass expectations by simply claiming that price level rose because the government spent SO MUCH that government demand (plus residual private demand) exceeded short term supply. Call this “really crude keynesianism” – no expectations required. This would mean that government demand alone blew right past that kink in the SRAS. In WWII, believable – there were shortages.

    But how much demand would that need to be today, when the US can draw on global resources (by going into debt), and even the domestic economy is running at ~75% capacity utilization?

  23. Gravatar of JimP JimP
    14. July 2010 at 08:34

    Japanese politicians are tired of the BOJ’s love for deflation:

    Maybe American politicians will become tired of Ben. He is due to testify before Congress soon. Obama’s fellow Democrats might at least mention a few ideas for Ben to consider. Let the Republicans shout inflation inflation. It would be a real fun contest to watch.

  24. Gravatar of ssumner ssumner
    15. July 2010 at 09:15

    Joe C, That would not surprise me.

    David, Those are good points. In the case of WWII, government spending rose massively, and private consumption fell. I don’t see it as proving much one way or another.

    Joe C, Yes, it’s mostly one business cycle.

    marcus, Yes, but do they cantrol for monetary policy? And how do they establish the stance of monetary policy.

    Morgan, If the Fed sells assets the money supply falls.

    Joe C. Yes, I agree. That is a sort of Laffer curve argument for fiscal stimulus–but the Keynesian model has no supply side effects, so it really shouldn’t happen.

    John Papola. Yes. I.e the very reason why GDP rises is why it is bad. If government made something useful, private purchases of that useful thing might fall. But if they make something useless, measured GDP will rise, but not welfare.

    Statsguy; You said

    “That would seem to be a general argument in favor of a direct fiscal effect on the price level… OTOH, with Debt/GDP of 100%, one can argue that WWII was exceptional.”

    It is hard to say, as monetary and fiscal policy were entangled in those cases.

    I agree with your last point–we won’t be able to spend enough to actually test Krugman’s ideas.

    JimP, Ironically, all this happened right after they made the BOJ independent.

  25. Gravatar of usfutures usfutures
    15. July 2010 at 21:37
    It is hard to say, as monetary and fiscal policy were entangled in those cases.

    I agree with your last point-we won’t be able to spend enough to actually test Krugman’s ideas.

    JimP, Ironically, all this happened right after they made the BOJ independent.

  26. Gravatar of The Empirical Case against Government Stimulus – Robert P. Murphy – Mises Daily « UOA Economics Group The Empirical Case against Government Stimulus – Robert P. Murphy – Mises Daily « UOA Economics Group
    20. September 2010 at 14:51

    […] Ironically, they point to the 1930s as evidence of how well deficit spending “worked.” For example,Christina Romer points to the 1933-1936 period as a Keynesian success story, which was only thwarted when FDR chickened out and tried to shrink the federal budget deficit in 1937. […]

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