Economist and noted stimulus skeptic Robert Barro is interviewed about what his research has taught him about the federal government's role of getting the US out of the Great Depression. An excerpt:
For example, some of the things he did was try to organize labour unions and also businesses essentially promoting monopoly – I don’t think that was a plus. He was trying really hard to keep wages and prices from falling with direct influence and that was a negative. The effect of the expenditure programs is less clear. In the mid-1930s with the New Deal there was an unusual amount of infrastructure-type of expenditures. But it’s not actually big enough to sort out in a statistical sense – to figure out how much it mattered in terms of the recovery after the trough in 1932-33. I don’t think we know that that was a mistake, but it’s not clear that it was all that important.
Barro goes on to describe some of his research findings, including his findings that the government expenditure multiplier is less than one. In other words, if the multiplier is, say 0.6, a $1,000,000 injection into the economy by the government causes total income to increase by $600,000. In other words, the injection, after all is said and done, actually caused the economy to shrink by $400,000.
But what about the monopoly-encouraging policies? Why were they a bad thing for the national economy? A market is a collection of buyers and sellers and economy is a colletion of inidividual markets. An industry grows in real terms when buyers and sellers make more voluntary trades and economies grow in real terms when industries grow and when new industries develop. Of course when new industries are growing and developing, other industries are simultaneously shrinking - Schumpeter's notion of "Creative Destruction."
The reason why such policies that encourage monopolistic practices drive slower growth is because monopoly firms, relative to competitive industries, restrict trades and charge higher prices. In other words, the policies actually drove people to trade less at a time when government, if it should be doing anything, should be encouraging more voluntary trades. A similar thing can be said in labor markets when unionism is encouraged.
Moreover, the policies lead to an inefficient use of resources because there are some trades that would occur in competitive markets that don't occur in monopoly markets, and resources are therefore driven to second-best uses.
Lastly, the interview touches on three books: Friedman and Schwarz's "A Monetary History of the United States, 1867-1960
