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Want to Beat Secular Stagnation? Try Laissez-Faire Jul 4, 2014

Economists from Larry Summers to Paul Krugman are discussing the new phenomenon of “secular stagnation,” meaning our economy has entered a period of long-term stagnation due to depressed aggregate demand. They claim we need more government spending to fuel demand and jump-start our economy. But these Keynesian policy prescriptions miss the point, and in fact, similar policies pursued for the past decade are what got us here. Going back even further, they were tried before in the Great Depression. In 1929, the market crashed and the federal government, led first by Hoover and then by FDR, tried to stimulate demand to cure the depression. Hoover launched a small stimulus package. FDR’s New Deal spent billions trying to put the entire nation to work to boost demand. But far from ending the depression, government intervention made the situation worse. Professors Cole and Ohanian, writing in the prestigious Journal of Political Economy, argue that, “New Deal labor and industrial policies … prevented a normal recovery.” In FDR’s Folly, Jim Powell argues that the New Deal created business uncertainty and burdensome new regulations, and this together with more government spending kept the economy in a rut. FDR’s anti-business policies kept output low and unemployment artificially high: in...