Governments Mess With the Economy

Sometimes it can turn out well; see what Johannes Wieland has to say about President Roosevelt’s decision to devalue the dollar in 1933 in the February 2019 American Economic Review.

Government involvement in manipulating the macro economy is nothing new, and there is a lot to be learned about how this can work from revisiting historical episodes. Wieland and his co-authors were interested in the role played by the agricultural sector in the U.S. recovery from the Great Depression. Lessons learned from the Great depression, good and bad, have been useful in understanding the recovery process from the 2007 financial crisis and resulting recession. Wieland and coauthors conclude that President Roosevelt’s 1933 decision to devalue the dollar relative to gold raised farm prices, farm incomes, and consumption, which in turn stimulated industrial production.  The paper shows that per capita spending on items such as cars and refrigerators increased more in U.S. counties and states that had more farmers per capita.

Wieland and coauthors further linked an area’s growth to whether an area’s crops were internationally traded. They showed that sales at rural general merchandise stores increased relative to urban department stores. Moreover, an area’s exposure to farm mortgage debt overhang predicted economic improvement when specific crop prices increased. The paper also includes a theoretical model and relates the size of effects implied by this model to the actual changes observed in the data, concluding that one-quarter to one-half of the growth in aggregate U. S. GDP in the spring of 1933 can be attributed to the increase in nominal farm income resulting from Roosevelt’s devaluation.

So how does this inform us about today’s economy. Johannes Wieland says that “the distributional consequences of macroeconomic policies can have large aggregate effects. Leaving the Gold Standard was an effective stimulus in no small part because it redistributed to those individuals most likely to spend. By contrast, Japan’s large devaluation during the Abenomics experiment does not appear to have redistributed to individuals or corporations with high propensity to spend, which may help explain why it was less stimulative than leaving the Gold Standard.”