What's really interesting to me is, if you read closely, Shlaes and Krugman, respective hacks for completely opposite positions, agree on quite a bit. Krugman says deficit-hawk fiscal policy caused the recession of 1938; Shlaes starts out her article by agreeing that both monetary and fiscal policy were tightened just before the recession. Then, one of her three points are that taxes were raised, which is a component of tightening fiscal policy. She does go on to talk about wages (Wagner Act) and uncertainty, but doesn't specify exactly how big of a role each of these played. She suggests that wages should be emphasized more. Of course, nothing like a Wagner Act that raises the bargaining power of American workers is in the works today, so this would seem like a moot point. Finally, she argues that the recovery of 1939 required no stimulus, which is true, but skirts around Krugman's argument about WWII. (Krugman said nothing about 1939; so basically they dance around each other, instead of directly disagreeing)
Overall, Shlaes' argument seems to be that fiscal deficits are stimulative, but if government doesn't raise taxes, wages, or uncertainty the economy will naturally boom on its own just as in 1939. The tax argument is an argument for supply side stimulus. This is what Obama is now proposing, ironically. It'll be interesting to see if the Republicans come back with anything, especially since this is what they've been arguing for for the last 18 months. I still think it has less marginal impact per dollar of cost than direct spending, but that's a rather academic question that I don't have the answer to, really.
I find the uncertainty argument unconvincing because uncertainty declined sharply by early summer when PPACA passed and it became clear the Democrats weren't going to get any additional major legislation through Congress, yet this was not accompanied by a sharp uptick in growth.
The wages argument may have something to it, but there is no modern day version of the Wagner Act; a German style short-work program would seem to be the logical conclusion if you thought the problem were wage stickiness. The program has had empirical success over there. But no Republicans have shown an interest.
Here is an
even more wonky Chicago Fed paper that tackles fiscal policy, monetary policy, and the change in wages. Overall, it finds that monetary policy was the biggest factor, followed by fiscal policy, followed by wages.
It's WWII that is really the most convincing though, because it's the most dramatic. GDP grew by 15 percent for three years in a row, and unemployment dropped below 2 percent, even as consumer spending basically evaporated.
