“We have a powerful potential in our youth, and we must have the courage to change old ideas and practices so that we may direct their power toward good ends.” These compelling words from Mary McLeod Bethune’s last will and testament were written nearly 70 years ago, but the truth of them is just as relevant today.

Bethune, born in South Carolina in 1875, was the daughter of former slaves. In her early years, her life was centered around cotton fields; she could pick 250 pounds of cotton a day by the time she was nine. Everything changed when she became the only child in her family to attend school. She would later say, “the whole world opened to me when I learned how to read.”

Mary McLeod Bethune lived an incredibly inspirational life. She graduated from Scotia Seminary in North Carolina in 1894 and then Moody Bible Institute in Chicago. She became a teacher in Georgia before moving back to South Carolina. After getting married in 1898, she moved to Florida with her husband and son. When her husband left her, Bethune didn’t let it stop her from fulfilling her dream of starting a school. In 1904, she founded the Daytona Literary and Industrial Training Institute for Negro Girls with “$1.50, vision, an entrepreneurial mindset, resilience and faith in God.”

Black families in Daytona in 1904 faced immense obstacles. The public schools were segregated, and the ones for black children were dilapidated and the children received fewer instructional hours than white children. Having benefitted from attending private schools, Bethune set out to create a better option.

Bethune’s vision was a school that focused on both practical skills and academics—for the dual purposes of survival and uplifting. “This is a new kind of school,” she said. “I’m going to teach my girls crafts and homemaking. I’m going to teach them to earn a living. They will be training in head, hand, and heart. Their heads to think, their hands to work, and their hearts to have faith.”

Over time, the curriculum expanded to include more business and liberal arts courses along with training for teachers and nurses. In 1923, the school merged with Cookman Institute of Jacksonville. The merged school was initially called the Daytona-Cookman Collegiate Institute, but it was changed to Bethune-Cookman College in 1931. Today, there are 2,600 students enrolled at what is now Bethune-Cookman University.

Bethune faced tremendous odds when she started her school, but it thrived thanks to her vision and determination. Today, teachers, community leaders, and education entrepreneurs can follow her lead in a friendlier environment, thanks in part to Florida’s tax credit scholarship and education savings account programs. There’s even an effort to re-name all of the state’s school choice programs after Bethune in recognition of her impact.

In addition to her education efforts, Bethune worked tirelessly to advance the rights of women and black Americans. She was honored earlier this week with a statue in the U.S. Capitol’s National Statuary Hall, where each state is represented by two statues. Bethune’s statue represents Florida, making her the first black person to represent a state in Statuary Hall.

Mary McLeod Bethune understood education has the potential to completely change people’s lives—she’d experienced its power herself. While schools are no longer allowed to racially segregate, the continued practice of assigning children to schools based on their addresses rather than their needs means many still aren’t receiving an education that works for them. Like Bethune, today’s education entrepreneurs and those who work for expanded school choice are moving us closer to a world where every child has access to an excellent education.

Thanks to the Roosevelt Recession, in the spring of 1938 the New Deal’s “Keynesians” finally found themselves in the saddle, displacing the planners, reformers, and trust-busters whose legislative efforts had petered out some months before. The Keynesians’ rise was symbolized by the $3 billion spending program FDR announced during his fireside chat that April.[1]

But the crisis that gave Keynesians the upper hand also proved fatal to the Roosevelt administration’s more ambitious plans, Keynesian or otherwise. Thanks to it, voters sent many Democrats, and New Deal democrats especially, packing that November. Although Democrats retained a strong majority in Congress, the election’s real winners consisted of a combination of Republicans and Southern Democrats that came to be known as the “conservative coalition,” which was to dominate Congress for the next three decades.

While some historians have since labeled the Keynesian ascendancy a “Third New Deal,” the Keynesians themselves saw their preferred policies as far less radical, if more expensive, alternatives to the more aggressive sorts of interference with private enterprise their predecessors favored. In that important respect, although they were certainly in the New Deal, they weren’t truly of it. Even so, their large-scale spending plans were hardly likely to sail through the new Congress. On the contrary: the conservative coalition first showed its mettle in June 1939, by scuttling the $3 billion-plus Works Financing Act—some Newsweek wag dubbed it FDR’s “Great White Rabbit”—that was supposed to continue the administration’s 1938 spending program. The New York Times’s Arthur Krock therefore had every reason to report, after the elections, that “The New Deal has been halted.”

Far Off

Though the New Deal may have been halted, the depression hadn’t. At the start of 1939, six-and-one-quarter million workers, or about 12 percent of the labor force, were unemployed; another three-and-one-quarter million, or roughly 5 percent of the labor force, were on work relief. Adults were working only four-fifths as many hours as they had in 1929; industrial production was still 10 percent below its 1929 peak; and real private nonresidential investment languished at two-thirds its pre-depression level.

Of course, the situation in March 1933 had been far worse. But if “recovery” meant returning to anything like the state of employment throughout most of the 1920s, or that decade’s trajectory for industrial output, the U.S. economy still had a very long way to go. “Despite the New Deal’s exertions and innovations,” David Kennedy (1992, p. 166) writes, “and contrary to later mythology,” it and the Depression had been “Siamese twins, enduring together in a painful but symbiotic relationship that stretched to the end of the decade.” That most other formerly depressed economies, with the notable exception of France, were by then faring much better than the United States, only gave Americans further grounds for aggrievement.[2]

Nor were the New Dealers themselves, FDR included, unaware of their failure. Observing, in his 1939 State of the Union address, that the United States continued to “suffer from a great unemployment of capital,” while Europe’s dictatorships had “solved, for a time at least, the problem of idle men and idle capital,” the president wondered whether the United States could “compete with them by boldly seeking methods of putting idle men and idle capital together and, at the same time, remain within our American way of life.”

Over the Hill

Perhaps the most weighty acknowledgment of the New Deal’s failure to achieve recovery came from the American Keynesians themselves, including Harvard’s Alvin Hansen, who was by now their most influential spokesman. The confession was implicit in Hansen’s “secular stagnation hypothesis,” a hybrid of British-style Keynesianism and the version of Frederick Jackson Turner’s “frontier” thesis Stuart Chase had popularized in the work that gave the New Deal its name.

According to Turner, American enterprise depended for its unique vitality on continued westward expansion. The “closing” of the western frontier therefore threatened to put paid to American prosperity. Between them, WWI and the Roaring Twenties put Turner’s thesis on ice. But the depression, and Chase’s book, gave it a new lease on life. The prosperity of the ’20s, Chase wrote, was a mere “flash in the pan”: not only had the frontier passed, but population growth was grinding to a halt, leaving markets for everything from shoes to automobiles at their “saturation points.” As for technological progress, instead of helping, it would only bring that much more unemployment: Chase (p. 82) even though it might “be a jolly good thing to declare a moratorium on inventions for at least a decade.” But, moratorium or no moratorium, American progress had run out of steam.

For the first time in our national history since the opening of the West, we have to deal with a roughly static rather than an expanding structure. There is no prairie, no mountain, no forest to which we can escape; there are no elastic real estate values to muffle the impact of our industrial blunders. Our luck has run out; we have at last to face real things in a real world (p. 74).

To his credit, Hansen rejected Chase’s jaundiced view of technological progress. “There can be no greater error,” he said in his December 1938 American Economic Association presidential address, “than that which finds in the advance of technology, broadly conceived, a major cause of unemployment.” But in other respects, he shared Chase’s outlook. “We are passing,” he said, “over a divide which separates the great era of growth and expansion of the nineteenth century…into no one knows what.” Between them, the exploitation of new territory and population growth had supplied outlets for roughly half of the capital formation during the former era. Now those outlets were “rapidly being closed,” leaving only the outlet “created by the progress of technology.” But technological progress only helped if it gave rise to whole new industries, and there was little prospect that the future would see anything “as rich in investment opportunities as the railroad, or more recently the automobile.”

Hansen’s secular stagnation or “economic maturity” thesis implied that “pump-priming” and other strictly countercyclical policies could no longer be counted on to achieve economic recovery. Instead, eliminating unemployment would require nothing short of a massive and permanent increase in government spending on public works, or relief, or both. It followed that the New Deal’s recovery schemes were, not just failures, but exercises in futility. The heart of American private enterprise could no longer be expected to ever beat hard enough on its own. It needed a Big Government pacemaker.

War!

Despite the conservative coalition, a pacemaker is just what the U.S. economy got, though it was only a makeshift. On the first of September, 1939, Germany invaded Poland. The war the world had been dreading ever since Hitler came to power began at last. Although the United States wouldn’t join the conflict until December 1941, it began to mobilize in earnest, and to ship arms and other materials to Britain, after France fell in June 1940. According to Robert G. Gordon and Robert Krenn, by the time the Japanese attacked Pearl Harbor, the United States economy had been running at full capacity for several weeks. The number of unemployed workers had fallen from 7.7 million to just 3.4 million, while U.S. industrial production was 25 percent higher than its 1920s pinnacle. Before long, material and labor shortages had the government placing limits on “non-essential” construction and production.

The claim that World War II, and the government spending that went with it, ended the depression, has long been conventional wisdom. Still, it hasn’t gone unchallenged. Christina Romer, whose work we noticed earlier in this series, claims that fiscal policy “contributed almost nothing to the recovery,” not only throughout the 1930s, but until1942. For their part, Brad DeLong and Lawrence Summers (1988, p. 467) claim that, by the time the war began, “more than five-sixths of the Depression decline in output relative to trend had been made up.”

But such revisionism has itself been revised in turn, by Gorden and Krenn, and also by J.R. Vernon (1994). Vernon argues, I think convincingly, that at the start of the last quarter of 1940 the recovery was no more (and probably less) than half complete, and that it took a big dose of fiscal medicine to complete it. Gordon and Krenn take Vernon’s argument a step further, by showing that federal government spending began to play a decisive role as soon as France fell. Contradicting DeLong and Summer’s claim (1988, p. 467n46) that it didn’t change, they note that the federal government’s share of GDP doubled between then and December 1941, with defense expenditures alone growing almost tenfold, from $1.5 billion to $14.3 billion.[3] During the same period the number of active military personnel increased from just 335 thousand to more than 1.8 million. Compared to later wartime figures, these magnitudes pale. Still, Gorden and Krenn show that, by the close of 1941, the government’s contribution was already large enough to account for almost 90 percent of the recovery that took place between January 1939 and December 1941.

Concerning those post-Pearl Harbor statistics, Robert Higgs (1992, p. 55) warns against taking them at face value. As soon as the United States declared war on Japan, he says, the government “began imposing such pervasive and sufficiently effective controls that, by the beginning of 1943, the economy became a thoroughgoing command system.” Consequently, the superficially remarkable “wartime boom” of 1942–1945 is in truth little more than a statistical artifact.[4] Before Pearl, on the other hand, relatively few controls were imposed. For that reason, despite being the furthest thing from a Keynesian, Higgs allows “that “[i]n 1940 and 1941 the economy was recovering smartly from the Depression.” Small wonder that Keynesians themselves viewed the wartime recovery as a successful test of their proposed, permanent solution to unemployment!

That, so far as the Keynesians were concerned, was the good news. The bad news was that the very success of this test, and the war more generally, eventually took the wind out of the stagnationists’ sails. They did so, most obviously, by turning the once-urgent problem of unemployment into yesterday’s news, while confronting the government with entirely different, but no less urgent, challenges. But they also did so, paradoxically, by causing many, and conservatives especially, to doubt that capitalism needed to be on life support after all.

Medical Referral

The change in the government’s priorities was evident in Roosevelt’s own rhetoric, beginning with his January 1941 state of the union address, better known as his “Four Freedoms” speech. Here the president stressed “the immediate need…to change a whole nation from a basis of peacetime production of implements of peace to a basis of wartime production of implements of war,” and to “prepare…to make the sacrifices that the emergency—almost as serious as war itself—demands.” Although Roosevelt also insisted that “this is no time for any of us to stop thinking about the social and economic problems which are the root cause of the social revolution,” including unemployment, the preparations that were temporarily putting an end to that problem, if only by drafting millions of young men into the armed services, weren’t aimed at solving it: their purpose was defeating Hitler and the Japanese.

Moreover, the plain truth was that many people had stopped thinking about unemployment and other prewar problems, and that FDR himself eventually seemed to quit thinking about them. Observing, during a December 1943 press conference, that the president had stopped using the term “New Deal,” a reporter asked why. Comparing the prewar U.S. economy to a sick patient, Roosevelt explained, while “Dr. New Deal” had been a perfectly competent internist, the patient had since been “in a pretty bad smashup.” Since Dr. New Deal knew nothing about mending broken arms and legs, “Dr. Win-the-War” had taken over. A “new” New Deal would have to wait until the war ended—assuming it ever saw the light of day.

But would it? The war didn’t just change the government’s priorities. It also changed the public’s outlook for the future. According to Alan Brinkley (1996, p. 171), despite the government intervention that gave rise to it, the spectacle of a fully-employed economy caused a general retreat from the previously widespread belief that capitalism was chronically, if not mortally, ill. Just as the First World War had sent Turner’s original frontier thesis into cold storage, the second deprived Hansen’s new version of its former appeal, undermining support for Keynesians’ ambitious plans for keeping the postwar economy on its feet.

That the Keynesians found themselves fighting an uphill battle was first made clear by the fate of the National Resources Planning Board (NRPB). Established in 1939 as the last of a series of similar boards, all charged with helping to coordinate New Deal policies, when the war broke out its focus changed to domestic postwar planning. Concerning that subject, it produced a stack of reports and pamphlets several feet high, including several by Alvin Hansen, its most prominent advisor. Not surprisingly, these all stressed the need for public works and relief planning on a large scale to avoid a postwar collapse. Hansen took for granted, furthermore, that Congress could be convinced to cede to the administration its power of the purse so as to give it a free hand with which to regulate compensatory spending (Rosen 2005, p. 228).

Such recommendations would have gotten a cold welcome from the conservative coalition under the best of circumstances. But Roosevelt’s decision to publish them in early 1943 was particularly ill-timed: the 1942 mid-term election had given Democrats another thrashing, leaving them with a paper-thin majority only in the House, and a much-reduced one in the Senate. So it was hardly surprising that the 78th Congress turned a deaf ear to the NRPB’s proposals. But that was just for starters. The Senate’s “antistatists,” led by Robert Taft, also planned to reduce the NRPB’s budget to just $200,000, only to be one-bettered by the Appropriations Committee, which quit funding it altogether.

Jobs for All

When the NRPB was officially abolished that August, Roosevelt transferred many of its undertakings to the Bureau of the Budget, which became the Keynesians’ new, if unofficial, headquarters. There, at the Fed, and at several other executive departments, they soldiered on, producing more papers, reports, and forecasts. According to Michael Sapir, one of the economists then working at the Bureau of the Budget, the “whole tone and emphasis” of these productions “was on the drastic primary impact…curtailed government outlays” would have on postwar “income and employment in the private economy.” Demobilization, they argued, would have “strong deflationary tendencies,” and would leave some 8 to 12 million workers without jobs unless the government ran huge peacetime deficits.

One of the Keynesians’ more important documents was a joint Fed-Bureau of the Budget memorandum on “Postwar Employment,” written by Hansen and Gerhard Colm, the Bureau of the Budget’s principal fiscal policy expert, and circulated confidentially in October 1944 (Nourse 1956, p. 194). The memorandum made achieving “full employment,” which it defined as “productive work for all who are willing and able to work,” the administration’s first economic policy priority.

Fearing more Congressional backlash, FDR tabled the memo. But that didn’t stop him from drawing on it for his October 28, 1944 campaign speech at Chicago’s Soldier’s Field. Reminding the crowd of 150,000 that the “Second Bill of Rights” he’d proposed in his State of the Union Address that January included Americans’ “right to a useful and remunerative employment,” he now explained that guaranteeing it would take “close to sixty million productive jobs,” and a corresponding “expansion of our peacetime productive capacity.” He then promised that the Government would “do its part in helping private enterprise” finance the needed expansion.

Having taken Congress’s temperature, Roosevelt doubled-down on his commitment to make achieving full employment a joint government-private market undertaking:

I believe in free enterprise—and always have.

I believe in the profit system—and always have.

I believe that private enterprise can give full employment to our people.

If anyone feels that my faith in our ability to provide sixty million peacetime jobs is fantastic, let him remember that some people said the same thing about my demand in 1940 for fifty thousand airplanes.

What Roosevelt didn’t say was that 50,000 B‑17s in 1940 cost about $10 billion, and that, if the Keynesians’ estimates were right, avoiding mass unemployment after the war would cost at least that much every year, at least for several years, and (if the secular stagnation thesis was correct) perhaps forever. Hansen himself thought that maintaining full employment would cost the government “some $18 billion annually,” or close to four times what Keynes had thought necessary in 1934. Other estimates of the required annual deficits ran the gamut, from Walter Salant’s relatively sanguine range of $10 to $15 billion (Jones 1972, p. 126) to Paul Samuelson’s especially gloomy $25 billion.

Needless to say, such large-scale deficit spending couldn’t be flipped on like a switch. Yet the liberation of Paris that August made it obvious to everyone, apart perhaps from the Führer himself, that Nazi Germany’s days were numbered. If the government was to keep its promise to avoid a severe postwar depression, it had no time to spare to start planning for peace. Alas, the Battle of the Bulge that December put to rest all talk of starting the process of economic reconversion before Germany threw in the towel.

The Full Employment Act

In his January 6, 1945 address to Congress, President Roosevelt once again called for a national program to assure full employment. “The Federal Government must see to it,” he said, “that these rights become realities… . This means that we must achieve a level of demand and purchasing power by private consumers…sufficiently high to replace wartime Government demands.”

FDR, and the Keynesians whose recommendations he was following, found their main champion in Congress in Montana Senator James Murray, a staunch New Dealer who chaired the War Contracts Subcommittee of the Senate Military Affairs Committee. On January 22, 1945, Murray introduced his subcommittee’s Full Employment Bill, based on a draft prepared by several Keynesian economists, as S. 380. A month later, Congressman Wright Patman (D‑TX) introduced the House equivalent as H.R. 2202. The bills’ centerpiece consisted of a National Production and Employment Budget that was to include an estimate of the level of GNP consistent with full employment, the private sector’s expected contribution, and the gap between these that the government would be mandated to fill.

Though the text of both bills was the same, the fates they suffered in their respective chambers couldn’t have been less alike. S. 380 wended its way through the Senate with relatively little opposition. Even so, by the time it passed the Senate, with minor amendments only, by a vote of 71 to 10 (with 15 senators abstaining) on September 28, 1945, Roosevelt—who never got around to endorsing it—had been dead for more than five months, and both Germany and Japan had surrendered.

Yet the conservative-leaning House Executive Expenditures Committee, to which H.R. 2202 had been assigned, was taking even longer, having only begun hearings on it days before S. 380 passed the Senate. During the course of these hearings, anti-Keynesians at last took to the offensive, assailing the very idea of a “right” to employment; exposing the vagueness of the concept of “full” employment; and casting doubt on the Keynesians’ ability to forecast the course of private spending and employment with any reasonable degree of accuracy.[5] Their acerbic testimony led in turn to a clamorous series of “close votes and compromises” (Wasum 2013, p. 99).

When the dust settled, an Executive Expenditures Committee subcommittee found itself drafting a substitute for H.R. 2202. The result scrapped everything beyond the original measure’s preamble. Instead of establishing workers’ “right to employment,” the “Employment-Production Act of 1945” merely had the government “aiding and assisting” the unemployed; and instead of mandating Keynesian compensatory spending, as specified by a National Production and Employment Budget, it merely provided for a strictly advisory “Economic Report of the President.” Finally, instead of assigning responsibility for drafting that report to the Bureau of the Budget, it assigned it to a new Council of Economic Advisers to be appointed by the president. It also created a new Joint Economic Committee, charged with advising Congress on economic affairs. Both the CEA and the JEC were advisory bodies only: neither could “authorize programs, pass laws, or appropriate funds” (Wasum 2013, p. 145). It was this impotent substitute, rather than H.R. 2022, that the House eventually passed, by a vote of 255 to 126.

It remained for the Conference Committee to decide between the House and Senate bills, or something in between. It did so by choosing the House alternative, and weakening it still further by downplaying, or omitting altogether, its references to government spending, public works, and loans. The conference report was accepted by the House on February 6, 1946, by a vote of 320 to 84, and unanimously agreed to by the Senate two days later. At last, on February 20th, more than six months after Emperor Hirohito announced Japan’s unconditional surrender, President Truman signed the Employment Act of 1946 into law.

Shock Therapy

Much as later Keynesians might look upon the Employment Act of 1946 as a triumph for their way of thinking, the fact remains that, even if that act hadn’t been so toothless, it would have come too late to compel Congress to take steps to avoid the mass unemployment Keynesians had long feared. That Congress in the meantime, having gutted their proposed legislation, didn’t put the Keynesians’ recommendations into practice on its own initiative, goes without saying.

The upshot was that postwar economic reconversion went ahead without the benefit of peacetime compensatory spending. Instead, between Fiscal 1945 and Fiscal 1946, government outlays fell by 40 percent, from $92.7 billion to $55.2 billion, while the deficit fell as well, from almost $50 billion, or 21 percent of GDP, in 1945, to just $16 billion, or about 7 percent of GDP, in 1946. In fiscal 1947, federal revenues exceeded outlays for the first time since 1930; and in 1948, the surplus rose to nearly $12 billion! In the meantime, the military returned some 10 million Americans to civilian life.

According to most American Keynesians, fiscal surpluses were the last thing those Americans needed.[6] Instead, as we’ve seen, they believed it would take annual deficits of at least $10 billion, and, according to Samuelson, perhaps $25 billion, to provide for their employment. In offering his estimate Samuelson (p. 51) spoke for most Keynesians in warning that

were the war to end suddenly…were we again planning to wind up our war effort in the greatest haste, to demobilize our armed forces, to liquidate [sic] price controls, to shift from astronomical deficits to even the large deficits of the thirties—then there would be ushered in the greatest period of unemployment and industrial dislocation which any economy has ever faced.

If the Keynesians were right, the U.S. economy was headed for disaster: not only were deficits about to give way to surpluses, but most wartime controls, instead of being removed only gradually as they’d recommended, would be lifted soon after V‑J Day, and the rest would be gone within a year. In short, the U.S. economy was about to receive, at close to the fullest conceivable amperage, what historian Jack Stokes Ballard later called the “shock of peace.”

Keynesian economists were hardly alone in dreading the outcome. Although businessmen tended to be more upbeat, with many actually looking forward to a postwar boom driven by free enterprise (Wasum 2013, p. 47), Newsweek, Time, United States News, and most of the rest of the more liberal press “feared a gradual slide into a major depression” rivaling that of the early ’30s, with between five and seven million former workers and soldiers on the dole before the end of the year (Hinchey 1965, p. 125). Not to be outdone, Business Week put peak unemployment at 9 million, or around 14 percent of the labor force. But that was nothing compared to Senator Harley Kilgore’s (D‑W. Va.) prediction (ibid, p. 126) that the new depression would be far greater than the Great Depression, with 18 million men and women failing to find jobs. Finally, Leo Cherne of the Research Institute of America, and Boris Shishkin, an economist for the American Federation of Labor, each upped the ante yet again, forecasting 19 and 20 million unemployed respectively, or unemployment rates in excess of 35 percent! Now that it was too late for the government to heed their warnings, these pessimists could only wait in helpless trepidation for the Great Depression to return with a vengeance.

Yet, somehow, it never did.

___________________

[1] Although symbolically important, because it was undertaken despite Treasury opposition, on the basis of Keynesian reasoning, and large in absolute terms, Roosevelt’s 1938 spending program did not actually pack a very substantial punch. As David Kennedy points out (1992, pp. 358–9), “In a $100 billion economy, with more than ten million persons unemployed, $3 billion was a decidedly modest sum, not appreciably larger than most earlier New Deal deficits, considerably less than the deficit of 1936, and far short of the kind of economic boost that Keyness envisioned as necessary to overcome the Depression once and for all.”

[2] It bears noting that, at it’s own depression’s trough, in 1936, France’s recently victorious Front Populaire introduced major labor market reforms that, according to Paul Beaudry and Frank Portier (2002), “mirror[ed] the 1933 U.S. New Deal.” These included maximum workweek hours and government-imposed collective bargaining, the last of which quickly led to numerous nationwide strikes. In all, Beaudry and Portier report (p. 73), the reforms boosted the cost of labor in France’s by a remarkable 29 percent.

[3] DeLong and Summers refer to the government’s share of GNP rather than GDP, but these differ only slightly.

[4] Elsewhere Higgs (1992) and Steven Horwitz and Michael McPhillips (2013) ask a more fundamental question concerning the wartime increase in output, and associated drop in unemployment, to wit: whether, setting the accuracy of wartime statistics aside, these constituted “ ‘economic recovery’ in any sense relevant to American households day-to-day experience” (ibid., p. 343). That Americans continued to endure hardship throughout the war, in the shape of severe home-front deprivations, not to mention the horrors encountered by servicemen, including the prospect of dying early, can hardly be gainsaid. Still, the question seems moot, the answer hinging as it ultimately must on whether winning the war was a “public good.” The more important question was whether something apart from war could keep the U.S. economy from lapsing back into a depression.

[5] Concerning the challenge of defining “full employment,” see Nourse (1972). Challenged by critics of his 1942 pamphlets to say what that expression meant, Hansen replied by allowing that “at ‘full employment’ there would be at any one time between 2 and 3 million unemployed” (ibid., p. 194). The unemployment rate in 1946 turned out to be slightly lower than the top of that range.

[6] A remarkable exception was Federal Reserve Chairman Marriner Eccles, who prior to the war had been the Roosevelt administration’s most insistent champion of “Keynesian” countercyclical policies. The war made inflation Eccles’ chief concern; and by 1945 he was convinced that to keep inflation at bay after the war the government would have to have its peacetime budget in balance. Inevitably he and Hansen, who was then serving as a special consultant to the Board of Governors, clashed, causing Hansen to quit that August. Concerning the progress of Eccles’ thinking, see Vernengo (2009).

Continue Reading The New Deal and Recovery:

• Intro
• Part 1: The Record
• Part 2: Inventing the New Deal
• Part 3: The Fiscal Stimulus Myth
• Part 4: FDR’s Fed
• Part 5: The Banking Crises
• Part 6: The National Banking Holiday
• Part 7: FDR and Gold
• Part 8: The NRA
• Part 8 (Supplement): The Brookings Report
• Part 9: The AAA
• Part 10: The Roosevelt Recession
• Part 11: The Roosevelt Recession, Continued
• Part 12: Fear Itself
• Part 13: Fear Itself, Continued
• Part 14: Fear Itself, Concluded
• Part 15: The Keynesian Myth
• Part 16: The Keynesian Myth, Continued
• Part 17: The Keynesian Myth, Concluded
• Part 18: The Recovery, So Far
• Part 19: War, and Peace

[Cross-posted from Alt‑M.org]

Examples of high fees for cryptocurrency transactions are often cited as “evidence” that cryptocurrency is too inefficient to be useful. For example, in a new report, the Bank for International Settlements (BIS) wrote, “[Cryptocurrency] suffers from the inherent limitations of permissionless blockchains, which lead inevitably to the system’s fragmentation, accompanied by congestion and high fees.” But are high fees really a defining feature of cryptocurrencies?

Just like dealing with different banks or payment services, each cryptocurrency can have its own unique fees depending on what you want to do and what features are available. For instance, the fees paid for spending bitcoins can depend both on the size of the transaction and the speed at which one wishes to settle the transaction. In addition, if your bitcoins are held on an exchange (e.g., Coinbase, Kraken, etc.) instead of in a self-hosted wallet, then the exchange may charge a fee for facilitating the payment.

But the options don’t end there. Bitcoin transactions can also occur off the blockchain and return to settle later via the Lightning Network. In doing so, transactions can actually be made both faster and cheaper than they normally might be. And considering the Lightning Network was conceived just 7 years ago, it’s likely even greater improvements are still on the horizon. After all, cryptocurrencies themselves are only 13 years old.

So the fees paid really depend on a variety of factors. To help illustrate these factors, figure 1 includes some examples of bitcoin transactions from the last week that only cost a few cents in fees.

Now that is not to say that critics are completely wrong about high fees. It is indeed possible to experience high fees while exchanging cryptocurrency. Just as driving during rush hour will take longer than driving at mid-day, fees are often higher during peak transaction hours. Combine that with a third-party exchange that has a processing fee, a faster-requested settlement time, and large transaction sizes, and the fees can indeed become quite high (See Figure 2).

But to that end, it’s important to note that one can perform the same exercise with the dollar and traditional banking system. It can be inexpensive to send dollars, but there are many factors that can quickly complicate the process and raise the fees associated with doing so. For example, it can take mere moments to initiate a transaction with your bank, but it can take days for that transaction to actually settle (think of the times you’ve seen a “pending transaction” in your account). If you need to send money from your bank in D.C. to London and have it settled as soon as possible, the quickest—albeit, most expensive—route may very well be by plane. But with that said, waiting is not a panacea for reducing fees either. Mailing a check by priority mail will take longer than a wire transfer, but it will also be more expensive. Figure 3 offers a few different examples of how the fees with dollar transactions can vary.

The dollar transaction system isn’t just important to bring up for comparison’s sake. It’s also important because we need to be clear about whether we are describing when people “cash out” their cryptocurrency holdings versus when people use their cryptocurrency as money without exchanging for a national currency (e.g., the dollar). And in both cases, it needs to be acknowledged just how much government regulations are responsible for the fees experienced.

Returning to the BIS report, it’s also worth considering the evidence used to make the claim regarding high fees. The claim itself featured a footnote pointing to the work of the BIS in 2018 as well as BIS working papers by Raphael Auer in 2019 and 2021. However, the only empirical evidence offered in those papers was in the form of data on the average transaction fee paid across all daily transactions (Figure 4). And due to the wide variety of factors that influence the fees, averages are far too broad of a brush to describe the landscape.

With all of that said, if there is to be a major takeaway, it should be that critics citing high fees should start explaining exactly what they are talking about. In fact, proponents should do much the same. It might be easier to make sweeping claims, but sweeping claims about the so-called shortcomings of cryptocurrency should not be used as evidence for developing policies—especially those policies that make it even more difficult to use cryptocurrency.

As a young man, Winston Churchill took part in the Cuban War of Independence as a military observer and foreign correspondent. But, in 1954, after the coup against Jacobo Arbenz in a land in Cuba’s vicinity, he remarked: “I’d never heard of this bloody place Guatemala until I was in my 79th year.” Boris Johnson, the outgoing British prime minister, is Churchill’s admirer and biographer, but his interest in Latin America has been keener than that of his hero.

In 2018, Johnson became the first British Foreign Secretary to visit Argentina and Chile in over two decades, and Peru in half a century. Latin America, in fact, had received scant attention from frontbench Tories since the Falklands War. Johnson, however, considered that “there are realms of gold on either side of the Atlantic,” a Keats reference that spoke to the potential for free trade between the United Kingdom, the world’s fifth largest economy, and the emerging markets of Latin America.

The potential is due, of course, to Brexit, which Johnson helped to bring about in the 2016 European Union referendum. In turn, Brexit eventually brought Johnson to power and gained him an 80-seat parliamentary majority in the 2019 general election. Once outside the EU customs union, Britain gained the ability to enter, in Johnson’s words, into “unhindered and uncomplicated” free trade deals with nations across the globe. EU membership, on the other hand, had implied layer upon layer of protectionism against the outside world.

For Latin America, Brexit means the prospect of gaining access to a major European market without the rent-seeking restrictions of, say, the EU’s dirigiste Common Agricultural Policy. Latin American leaders have been slow to realize the opportunity at hand. One notable exception has been Uruguay’s current president, Luis Lacalle Pou, who met with Johnson at 10 Downing Street last May as he sought a free trade deal with Britain.

Uruguay, which leads South America in terms of per capita GDP, is a small country of 3.5 million people. Nonetheless, Lacalle’s initiative is significant because Uruguay belongs to the Southern Common Market (Mercosur), South America’s own version of a high tariff customs union that prevents its members— which also include Argentina, Brazil, and Paraguay— from trading freely with other nations on a bilateral basis.

Due to Lacalle’s insistence on liberalizing Mercosur, Argentina’s Peronist president, Alberto Fernández, suggested that Uruguay should exit the bloc. For his part, Lacalle said in 2021 that Uruguay no longer has time to wait for its Mercosur partners to trade with the rest of the world. Potentially, a UK-Uruguay trade deal— like the one Lacalle recently started to negotiate with China— could help break up Mercosur or lead to an improved version. This would provide a much-needed boost to free trade in Latin America, thus extending the Brexit dividend well beyond the Anglosphere.

Besides the British prime minister’s interest in trade with the region, he also has aimed his “Johnsonian wit” at Latin America’s despots and their first-world sympathizers. As Foreign Secretary in 2017, he said the following at the Conservative Party Conference about the then leader of the opposition, unabashed socialist Jeremy Corbyn:

…(his) response to the grisly events in Venezuela is to side with the regime simply because they are fellow leftists. He says he still admires Bolivarian revolutionary socialism. I say he’s Caracas.

In the House of Commons, Johnson mocked Corbyn’s refusal to agree to a general election in 2019 by referring to his adulation of Cuba’s late socialist gerontocrat:

(… ) maybe it’s because he’s been following the precepts of his intellectual mentor, Fidel Castro, whose adoring crowds used to serenade him, Mr. Speaker, with the cry of ‘¡revoluciones, sí, elecciones, no!’

As prime minister, Johnson betrayed many of his more libertarian instincts with lockdowns, furlough schemes, public spending hikes, and tax rises. None of this helped to prevent his recent demise at the hands of the parliamentary Conservative Party. But, as historian Andrew Roberts writes, Johnson was a transformative prime minister despite his brief term, especially for achieving Brexit and soundly defeating Corbyn.

A trained classicist, Johnson is well known for his love of Latin. As he leaves office, he also should be remembered for his open amicitia toward Latin America.

The whole idea of “core” inflation seems phony to most people ­– a poor excuse to make high inflation look better. How could anyone possibly leave costs of food and energy out of inflation measures? Don’t people have to eat and drive?

This objection is understandable and also correct for most purposes. Yet too broad a measure of inflation can be misleading and too ambitious when Federal Reserve officials allude to that statistic as a target and a rationale for manipulating key interest rates.

The trouble is that any “all-items” index of consumer prices will frequently exaggerate the typical or “underlying” trend of inflation – typically by being dominated by extreme swings up and down in global prices of energy and food commodities. This can make apparent “headline” inflation over the past 12 months dangerously misleading as a guide to future policy for the next 12 months.

The first graph compares year-to-year changes in the all-items PCE index (for personal consumption expenditures) with two alternative measures of the less-volatile core inflation rate. One is the Fed’s preferred Core PCE index from the Bureau of Economic Analysis (BEA). The other is the Trimmed-Mean PCE index from the Federal Reserve Bank of Dallas. The Trimmed-Mean index excludes the most extreme price increases and decreases to focus on more typical and less volatile price changes.

In the consumer price index (CPI), for example, airline fares rose 12.9% in May and fell 2.5% in June, though neither number could possibly indicate a trend. The Core CPI includes airline fares and other public transportation as “services less energy” despite their evident connection with global oil prices. But such big monthly swings in airline fares (or anything else) are excluded from the Trimmed-Mean PCE inflation as too volatile to be meaningful. Prices of dental services rose 1.9% in June after falling in April, which might also be too volatile and abnormal to be included.

The note uses two graphs to illustrate the practical necessity of focusing on trimmed-mean or core PCE inflation for timing Federal Open Market Committee (FOMC) decisions to raise and lower the federal funds rate (The FOMC has never raised the fed funds rate without lowering it before long). I plan to write a follow-up, offering more charts with variables that seem to better explain past federal fund rate cycles more clearly than core inflation – namely, employment or unemployment rates and crude oil prices.

The first graph begins with June 1983 and ends with May 2022 because this has been a period of relatively moderate core inflation compared with 1973–82. Specifically: Core inflation as measured by the Trimmed-Mean never exceeded 4% since June 1983 and never fell below 1.5%.

The most important thing to understand is that the long-run average of core or trimmed inflation is no lower than it is for the all-items PCE index. Since mid-1983, all three measures averaged the same 2.4% a year. A proper core price index does not make inflation look lower over time – only less erratic.

As the black line shows, the all-items measure of inflation did not just rise much higher than core measures half a dozen times (when oil prices spiked), it also fell much lower than core inflation in the following year or longer.

The trimmed-mean and PCE core inflation rates iron-out ephemeral peaks and valleys in headline inflation, leaving multi-year averages the same. That is what is meant by using core inflation to reveal the “underlying trend” – which was 2.4% for the last 39 years and most likely for future years as well (since it is such a well-established trend).

The second graph reaches back to 1978. It compares a smoothed 12-month trend of the Trimmed-Mean PCE inflation (the blue line) with the federal funds rate (in red) on the last of those twelve months.

Because each month’s inflation average includes 12 months, Federal Reserve officials knew whether core inflation had been speeding-up or slowing for about a year whenever they raised or lowered the federal funds rate (the core CPI was first reported in 1978).

If the most dramatic of many changes in the federal funds rate had been in response to previous ups and downs in core inflation, then we would expect to see the red line peak before the blue line began slowing down instead of years later, as it did in 1981–84. Also, we would not expect the federal funds rate begin to fall before 12-month core inflation had slowed, as it did in 1980, 1989, 2000 2008 and 2019.

The six rises and falls of the federal funds rate in second graph do not look like reactions to significant changes in core inflation. They look more like ineffective attempts at cyclical fine tuning. That is, the fed funds rate always rose before all recessions – even if core inflation was flat or falling. And the funds rate subsequently fell more quickly than core inflation during all recessions except one (February to June 1982).

The measures of core inflation in these graphs are based on the PCE index rather than the CPI. The CPI suffers fixed weights, which means the relative importance of items does not change with consumer behavior (gasoline remains just as important if people switch to telecommuting or EVs). The Core CPI is also too heavily dominated by lagging estimates of housing rents and rental equivalence which report last year’s contracts as this year’s inflation. And it includes airline fares among non-energy prices, though they are obviously affected by fuel costs.

The only comparative disadvantage of PCE inflation is that it comes out long after the CPI and, unfortunately, a few days after the next FOMC decision on interest rates.

Trimmed-Mean PCE inflation was 4% on a year-to-year basis in May, and PCE core inflation likewise rose at a 4% annual rate from February to May. That may sound low, but it is nearly double the average since June 1983. Trimmed-mean PCE inflation can and should be reduced to 2%, as the Fed suggests.

Much of what is included in core inflation reflects domestic markets and is therefore potentially affected by domestic financial conditions. The all-items CPI, by contrast, is mostly global and therefore dominated by foreign events like war and sanctions.

In May, the average 12-month CPI inflation was 8.8% in the EU and 9.6% for 28 countries in the OECD. The Fed did not cause that global infection and cannot cure it. Most of core inflation, by contrast, is home grown. Improved supply incentives and restrained growth of spending should be able to cut 4% core inflation in half without much problem, as we did from mid-1983 to 1998, with only a brief recession related to the Gulf War and (as always) a higher fed funds rate.

A new lawsuit by the Cato Institute could answer the question of whether the Supreme Court was wrong to accept assertions from former President Trump that his 2017 travel ban was based on security concerns, not animus against Muslims. Despite rescinding the ban, President Biden has still refused to disclose documents that Trump told the Court were the basis of his decision to ban immigrants from certain majority Muslim countries.

In a 5–4 decision, the Court’s majority found that the ban was based not on Trump’s open animus against Muslims, but instead on a Department of Homeland Security (DHS) report that supposedly detailed national security concerns. But the majority simply accepted this report as legitimate without ever seeing it. Indeed, DHS has allowed no one outside the Executive branch to see it.

After President Biden rescinded the ban—which he called “discriminatory”—I filed a Freedom of Information Act (FOIA) request on behalf of the Cato Institute for the DHS report. DHS ignored it, so now Cato is suing. It will be the first time Biden’s DHS will have to either justify keeping the report a secret from the public or else release it. Even if DHS refuses to release the report, the court can order it to do so.

Given that DHS’s new leadership labeled the ban “cruel” and “harmful,” DHS should have been forthcoming with the report that purportedly supported it. But not so far. DHS initially claimed not to be able to find the report. Cato appealed that determination and won, which should have forced DHS officials to look again. They chose not to, so now they will face Cato in court.

DHS has not said why it has not released the report, but it shouldn’t worry about being blamed for misleading the Supreme Court. The blame will fall exactly where it should: on Donald J. Trump. Lest anyone forget, it was Trump who instigated the Muslim ban. It was Trump who, in his words, “morphed” it into a ban on select majority-Muslim countries so he could blunt a constitutional challenge.

How did the Supreme Court ignore this back story and uphold the ban as constitutional? First, it adopted a laughably low bar, the so-called “rational basis test” under which courts would have accepted nearly any justification except perhaps for the one Trump stated initially: “Islam hates us.” And where did Trump find a suitable replacement for his initial justification? From the DHS report that the department still refuses to disclose.

The most discriminatory executive action taken against immigrants by any U.S. president, the Court’s opinion asserted, “reflects the results of a worldwide review.” The ban was purportedly “based on [the President’s] findings—following a worldwide, multi-agency review—that entry of the covered aliens would be detrimental to the national interest.” The justices refer to this review or report at least 16 times in their majority and dissenting opinions.

According to former President Trump, the DHS report reviewed the adequacy of the local vetting systems “in more than 200 countries.” DHS came up with a set of baseline requirements that every country must implement (e.g., having electronic passports), and then it purportedly compared each country against this baseline, banning those that failed the baseline requirements.

In response to a question by Justice Sotomayor during oral argument, Solicitor General Noel assured the Court that the president’s personal feelings had no effect on the process because DHS was able “to construct and apply this neutral standard to every country in the world.” In other words, the ban was just an objective application of neutral security criteria, not a fulfillment of Trump’s discriminatory campaign promise.

But the Supreme Court never verified that the DHS report did any of this, and we have at least two very good reasons to doubt the claim’s veracity. First, President Trump’s proclamation identifying the banned countries lists the nine baseline criteria that DHS’s report supposedly applied equally to every country. Under a neutral application of those criteria, however, dozens of other countries—including many non-Muslim countries—should have failed.

Second, although the justices never saw the actual report, they did know that it was just 17 pages. Did DHS analyze the vetting systems of more than 200 countries in 17 pages across nine security metrics as the president claimed? It certainly did not. Yet the majority justices said that they it would not question DHS’s “thoroughness” because “a simple page count offers little insight into the actual substance of the final report”—the very substance that DHS has sought to hide and Cato’s lawsuit now seeks to uncover.

This is not the first FOIA request DHS has rebuffed on this subject. When the Brennan Center in New York requested the same document in 2017, DHS acknowledged that it existed and was 17 pages. But the department asserted that the report was confidential and exempt from FOIA disclosure. To date, no court has issued a final decision in that case, and the Biden administration has never been made to respond to it. More importantly, now that it has repudiated the ban, DHS has no legitimate reason to continue hiding the requested documents.

If Donald Trump were to become president again, the Muslim ban could be quickly reimposed. Without the benefit of the report, no one challenging the ban—politically or legally—would be able to completely discredit the justification that Trump gave the court last time. DHS should reveal whether the former President misled the Supreme Court and, if so, how he did it, before it’s too late.

Harm reduction advocates, including myself, have long argued for reforming current federal policy regarding methadone medication assisted treatment (MAT) for opioid use disorder. In the U.K., Canada, and Australia, primary care practitioners have been prescribing take-home methadone to treat opioid addiction or dependence since the 1960s, and numerous pilot programs in the U.S. have found that the same approach can work successfully here.

The Drug Enforcement Administration (DEA) and Substance Abuse and Mental Health Services Administration (SAMHSA) regulate methadone outpatient treatment programs (OTPs) in the U.S. and, among the onerous regulations is the requirement that patients present to the clinic each day to receive oral methadone from a clinic staff member and swallow it in front of them. This policy is an outgrowth of the stigma long-attached to people addicted to some drugs—that such people are deceitful and manipulative and might use or sell take-home methadone. (Fortunately, people addicted to nicotine or alcohol do not suffer such distrust.)

It’s not hard to discern a problem with this approach. Methadone clinics can be few and far between and, in many cases, NIMBYism prevents clinics from proliferating. Patients seeking MAT must often travel several miles every day to stay on the program, an often-impossible demand. Yet the DEA has for years allowed primary care practitioners to prescribe take-home buprenorphine (a Schedule III opioid) for MAT.

Because of lockdowns and social distancing requirements during the COVID pandemic, in March 2020 SAMHSA permitted methadone clinics to dispense up to 28 days’ worth of take-home methadone to clinic participants as an emergency measure. In March of this year, citing “sufficient evidence to conclude that this exemption has enhanced and encouraged use of OTP services,” SAMSHA extended the take-home rule, and stated it is “considering mechanisms to make this flexibility permanent.”

Yesterday a National Institutes of Health news release reported on a study published the same day in JAMA Psychiatry by researchers led by the National Institute on Drug Abuse, National Institutes of Health, and the Centers for Disease Control and Prevention. They reported the emergency take-home methadone program “was not associated with harms” and “add[ed] evidence to support take-home treatment for opioid use disorder.”

In a recent blogpost I once again urged lawmakers to enact legislation permitting health care practitioners to prescribe take-home methadone to their patients with opioid use disorder. Such a measure would not only be supported by the evidence, but it would make methadone MAT much more accessible and practical for patients who need and seek help. To that end, Rep. Donald Norcross (D‑NJ) has introduced H.R. 6279, the Opioid Treatment Access Act of 2022, which has bipartisan support. While the measure is a step in the right direction, the bill has flaws.

For example, it only allows board certified addiction specialists to prescribe take-home methadone. In some regions of the country, such specialists are hard to find (there are only two in Wyoming). And primary care practitioners should be able to prescribe methadone—as they have been doing in the U.K., Canada, Australia, and in U.S. pilot programs—if the goal is to meaningfully improve access to MAT. Another drawback of H.R. 6279 is that it adheres to the SAMSHA criteria regarding the amount of take-home methadone that may be prescribed and the benchmarks that patients must meet to receive take-home methadone. Clinicians understand that no two patients are the same—that clinical contexts vary. Lawmakers must not tie their hands when they are treating their patients. Clinicians should be allowed to prescribe take-home methadone according to their best clinical judgment based upon individualized assessments of their patients.

While H.R. 6279 is a welcome step in the right direction, it needs improving. The new evidence showing take-home methadone is safe and effective will hopefully provide the impetus toward that end.