Economic Contractions in the United States: A Failure of Government.

• Author: Calabria, Mark
• Position: Book review

Economic Contractions in the United States: A Failure of Government

Charles Rowley and Nathanael Smith

Fairfax, Va.: Locke Institute, 2009, 124 pp.

Charles Rowley and Nathanael Smith have put together a brief, yet extensive, study comparing America's Great Depression and the recent financial crisis. Their focus is on both the economics and the politics behind these events. With both, they demonstrate how each was a failure of government, not of the market. The book concludes with several recommendations for addressing our nation's current economic and fiscal situation. The most original contribution of their work is in bringing a Public Choice framework to evaluating the financial crisis.

After a short introductory chapter, the book's second chapter provides a selective overview of the economics literature on the Great Depression. Topics covered include the role of monetary policy, both in contributing to the stock and real estate bubbles of the 1920s, and in driving the deflation of the 1930s. Also reviewed is Ben Bernanke's well-known research on debt deflation and the financial accelerator. The role of fiscal policy is also evaluated, focusing on Hoover's efforts to balance the budget and its impact on aggregate demand.

Rowley and Smith's analysis of the Great Depression does not stop with a review of the macroeconomic literature but also discusses microeconomic contributions as well as constitutional and legal issues related to the New Deal. The well-blown research by Harold Cole and Lee Ohanian on the National Industrial Recovery Act, as well as William Shughart's research on the Agricultural Adjustment Act, are briefly discussed here. Additionally this chapter provides an overview of several of the key Supreme Court decisions that allowed the New Deal to proceed. The chapter concludes that the Great Depression was the result of failed government policies, a view that frames the remainder of the book.

Chapter three explores the causes and consequences of the financial crisis. The analysis begins with a description of the 1990s economic boom, and how that boom laid the foundation for the financial turmoil of the 2000s. The Keynesian foundation of the Bush fiscal and monetary polices are exposed as well as linked to the resulting housing bubble. A concise overview of the impact of rising productivity, globalization, and capital flows on restraining consumer price inflation is also presented and linked to the monetary policies of Fed...