Chris Gibson is correct about the Depression: They do still teach economics in Albany, right?

By Sam Foster
Via Capital Confidential

Time to put my economics hat on and for many of my readers to take a nap.

Jimmy Vielkind, an excellent writer/blogger for the Albany Times Union, seemed a bit flummoxed at Chris Gibson's statement following last week's debate (Chris Gibson is running against Democrat incumbent Scott Murphy for NY's 20^th Congressional District).  I must stress that writer, Jimmy Vielkind, admitted that he was not very familiar with economics.  So, I thought I'd help Mr. Vielkind with his economics history and give him a little advice…Don't source Wikipedia…please.

During the debate, Chris Gibson provided a narrative on how government intervention prolonged the Great Depression.

During their first debate on Thursday evening, Gibson said that "this is not the time to raise taxes, not in the middle of a recession" in response to a question about letting the Bush-era tax cuts (Gibson referred to them as "the people's tax cuts" and Murphy, D-Glens Falls, referred to them as "the Bush tax cuts") expire. Gibson then added (it's about 28 minutes into this video):

"It's not a good idea. You know what happened in 1929? They raised taxes twice and went from 6.5 percent unemployment to 13 percent unemployment, and then to 25 percent unemployment. That's the real truth of what happened. All that, by the way, was a year after the crash of the stock market."

To which Mr. Vielkind questioned Gibson's narrative in a piece called "The Gibson theory of the Great Depression."  Confused by Gibson's "theory" Mr. Vielkind wrote:

I won't pretend to be an economics authority of any sort (I've got a college transcript to prove why not) but my recollection is that most economists focus more on monetary policy, an inflated stock market and other factors as causes for the Great Depression. There's a good Wikipedia article (comprehensive, well-cited) about this here. It doesn't include the tax increases as a major contributing factor.

I asked Gibson about this after the debate. Here's what he said:

"I think that government intervention had a lot to do with exacerbating the situation. You know, there's some great books if you want to take a look at. "The Forgotten Man" by Amity Shlaes [who also blogs] and actually, Thomas Sowell has got a book on intellectuals in society. These are two wonderful books but take a look at what actually happened, because there needs to be some clarity as far as the history as to what occurred. So I point you to those. I think that exacerbated the situation in that government intervention actually created the situation. You know, it's not well known."

A distinction must be made.  Chris Gibson clearly does not make the case that raising taxes caused the Great Depression, but that it "exacerbated" the economic conditions.  Apparently, Chris Gibson is a scholar of economics; instead of relying on the wisdom of Wikipedia, I went to the FED publications and searched through their professional research.  Low and behold, the Richmond FED had a publication called "What Prolonged the Great Depression?" by Matthew Conner, wherein he highlights work by a Minneapolis economist who found that increasing taxes played a significant role in extending the Great Depression.

From his article:

McGrattan discovers that a large fraction of the observed declines in real GDP between 1929 and 1933 is explained by her tax-inclusive model. Additionally, the decline in production hours per capita during this period also can be explained by her model.

In other words, increasing taxes has a negative effect on GDP growth or in a summary of Keynes, contractionary fiscal policy, yes increasing taxes is included, decreases GDP.

Any other economics questions Mr. Vielkind?

Discussion at Memeorandum

Update:

Future of Capitalism has perhaps the most important observation of Chris Gibson's statement.

I don't know much about Mr. Gibson (his campaign Web site is here), but it's a good sign for the Republican Party when its candidates are going around quoting Miss Shlaes and Mr. Sowell.

Update x2:

Jimmy Vielkind of the Times Union responds below:

Thanks for reading my post about Mr. Gibson's views and providing further context.

While I was happy to point out that I am no economics expert, I did study a fair amount of the stuff in college. (And yes, in Albany, where I learned from a wonderful man at Shenendehowa named Mr. Beson.) My knowledge of the field and other reporting indicate one central point that I felt our post captured but yours, in describing me as "flummoxed," "not very familiar with economics" and "confused" was this: there remains debate among economists about the causes of the Great Depression as well as the effect of government intervention.

Let me test this by going to the same Web site you used and searching "Great Depression" as a key word. The first article that comes up is titled "Comparing the Federal Reserve’s Responses to the Crises of 1929-1933 and 2007-2009," by David Wheelock, and states in the abstract (before going into much further detail) that "The Great Depression experience showed that central banks should respond aggressively to financial crises to prevent a collapse of the money stock and price level."

I read the article you cited, which is actually a synopsis of articles. The synopsis the article you cited acknowledges that there is disagreement among economists, and that many believe that monetary inaction was a major factor in the Depression.

I suspect we could go back and forth like this for some time. Yes, I cited a Wikipedia post. I cited it to show what lots of people with lots of different views on this subject have said about the Depression. I believe that was clear from the context. You are, of course, entitled to interpret my words as you see fit.

So no, Mr. Foster. I have no economics questions for you. I don't know what your bona fides are or what kind of credential your "economics hat" is. But I do have two requests: first, please feel free to call me Jimmy. Second, please be courteous enough to reach out if you choose to write about me in such a personal way again.

Cheers,
Jimmy