Blogging the Zombies: Expansionary Austerity – Life

by John Quiggin on November 25, 2011

Another instalment in the new  draft chapter on Expansionary Austerity, which I’m writing for the paperback edition of Zombie Economics. Comments and criticism much appreciated

Despite the advocacy of Keynes, the Treasury View prevailed. When the majority of the Labour government elected in 1929 rejected the austerity policies proposed by Treasury, the government split. The Prime Minister, Ramsay MacDonald and Chancellor of the Exchequer, abandoned Labour and joined the Conservatives in a ‘National Government’, which held office throughout the 1930s.

The effects of austerity were disastrous.  The unemployment rate in Britain. Unemployment rates were above 20 per cent throughout the 1930s, and even higher in the ‘depressed areas’ of the North.

But with the Labour party divided and discredited, and the Liberal Party in terminal decline, there was no alternative. MacDonald was soon pushed aside, along with the remaining pretensions of the National Government to any concern about the poor and unemployed. The Conservatives would remain in office for another decade, before finally being swept aside by a resurgent Labour Party in 1945.

If the effects of austerity were bad in Britain, they were disastrous in Germany and Japan. By 1929, Germany seemed finally on the path to recovery after the destruction wrought by what was then called the Great War of 1914-18, the punitive treaty of Versailles and the hyperinflation of the early 1920s.  The extremists of the Communist and Nazi parties had been marginalized, and a moderately left-of-centre coalition, led by the Social Democratic party, held power.

The Depression hit the government hard, and provoked a demand for austerity policies, most notably a cut in unemployment benefits. The finance minister, Rudolf Hilferding was a leading Marxist theoretician, but in matters of macroeconomic management Marxist orthodoxy coincided with the Treasury view. Hilferding argued that, while crises and depressions would inevitably bring about the downfall of capitalism in due course, in the meantime, there was nothing to do but to follow the dictates of capitalist sound money.

As in Britain, the government split and fell, and was replaced by a conservative government led by Heinrich Bruning. Bruning pushed austerity policies even harder, steadily losing public support and driving the growth of the extreme parties, most notably the Nazis. By the time he fell from office in 1932, Hitler was unstoppable.

Much the same story played out in Japan. As the Depression intensified, the civilian governments imposed austerity measures that produced a sharp deterioriation in living standards. After a period of chaos, with growing political violence and assassinations, the military took over government, using the time-honored policy of international aggression to cement domestic support. The invasion of Manchuria in 1931 was the first in a series leading up to the Pearl Harbor attacks of 1941, and Japan’s entry into World War II.

The policy of austerity did not triumph everywhere. In some countries, including Sweden and New Zealand, social democratic or labour governments came to power in the early years of the Depression, with a commitment to radical reform and a willingness to use the power of the state to promote economic recovery. The Social Democratic idea of the ‘Folkhemmet’ (People’s Home) formed the basis of a consensus that dominated Swedish (and, more generally, Scandinavian) politics for decades, before being eroded by the forces of market liberalism after the crises of the 1970s and 1980s. Similarly, in New Zealand, the Labour government of Michael Joseph Savage transformed the country. Savage’s picture was a staple decoration of working class homes in New Zealand during his lirgetime, and fifty years after his death he remains  the nation’s most admired political leader.

The most important alternative to the politics of austerity, however, was Franklin D Roosevelt’s New Deal. By the time Roosevelt took office in 1933, the Great Depression was nearly four years old, and the banking system was on the verge of collapse. The idea that the economy would return to full employment through market process of adjustment was ad discredited as it had ever been.

 Roosevelt was not a Keynesian. In fact, he came to office promising to restore budget balance. He was, however an instinctive activist who was unwilling to sit by and do nothing when a third of the workforce was unemployed. His National Industrial Recovery Act (NIRA), had two main components. The first, the National Recovery Administration incorporated some positive elements such as union rights, but these were placed in the context of an attempt to overcome deflation through the encouragement of cartels. Fortunately, perhaps, the Supreme Court ruled key parts the NRA unconstitutional in 1935.

The other part of Roosevelt’s program, the Public Works Administration was more in line with the prescriptions of Keynesian fiscal stimulus, as was the Works Progress Administration created in 1935.

The stimulus associated with the New Deal was inadequate to deal with the shock of the Depression, and was intermittent,. Faced with criticism about budget deficits, Roosevelt undertook a major reversal in 1937 which almost precipitated a new Depression.

It was not until the outbreak of World War II in 1939 that fiscal policy was directed to the goal of mobilising all available resources. The resulting upsurge in economic activity, and the contrast with the Depression years, killed the idea of expansionary austerity, seemingly once and for all.



Greg DeLassus 11.25.11 at 11:52 pm

Savage’s picture was a staple decoration of working class homes in New Zealand during his lirgetime, and fifty years after his death he remains the nation’s most admired political leader.

Savage died in 1940. That is more than 50 years ago. Should your claim instead read “and as late as 50 years after his death he remained…” or “and as late as 70 years after his death he remains…”?


bob mcmanus 11.26.11 at 12:03 am

I tried to paste the chart from the Cambridge History, but I was afraid it would come out a mess. That is not quite the story of Japan, although it fits a little better after 1937.

Real Growth % 1913-38
US 1.1
UK 0.7
Swed 2.4
Japan 3.9

GNE 1913-19 (Boom) = 6.2; 1919-31 = 1.6; 1931-37 = 6.2; 1937-44 = -1.3
Private Consumption 1913-19 = 4.7; 1919-31 = 2.2; 1931-37 = 3.2; 1937-44 = -6.9

Wikipedia on the “Great Depression” in Japan

“The Great Depression did not strongly affect Japan. The Japanese economy shrank by 8% during 1929–31. Japan’s Finance Minister Takahashi Korekiyo was the first to implement what have come to be identified as Keynesian economic policies: first, by large fiscal stimulus involving deficit spending; and second, by devaluing the currency. Takahashi used the Bank of Japan to sterilize the deficit spending and minimize resulting inflationary pressures. Econometric studies have identified the fiscal stimulus as especially effective.[65]

The devaluation of the currency had an immediate effect. Japanese textiles began to displace British textiles in export markets. The deficit spending proved to be most profound. The deficit spending went into the purchase of munitions for the armed forces. By 1933, Japan was already out of the depression.”


snuh 11.26.11 at 12:11 am

savage came to power in 1935 (2 years after fdr). calling that “the early years of the Depression” may be a bit of a stretch?


Watson Ladd 11.26.11 at 2:31 am

You should explain more about why the NRA was bad, possibly quoting Friedman on this point. Many people haven’t heard of it: I played quizbowl and would consider a question about its details a bit obtuse. Not much explanation, but enough so that the reader isn’t totally confused by it.


shah8 11.26.11 at 2:46 am

Cosign with McManus about Japan. Also, the military takeover didn’t have that much to do with the Depression, so to speak. To the extent that it did, it drove national priorities towards control of resources and primary industrial facilities, and away from conducting a trade policy that wasn’t based on captive markets and raw exploitation. The defense industry became ever more important and the businesses that the Kwangtung Army ran as well. That led to a very gridlocked, cartelized political system unable to agree on who “loses” assets. As the main players were domestic big industry and defense, the trade peeps who might have cared about the creditors lost out. Therefore, there was nobody with assets in play who could advocate for and benefit from austerity policies. Well, that’s my theory…


shah8 11.26.11 at 3:05 am

Also, it should be added…Japan’s issues were kinda misguided Keynesian…Japan did need tighter economic policies, because it was stuffed with politically connected companies that were economically…insufficient, and crisis is usually the only politically available time to do such a tightening, and this almost always happens at economically or geopolitically disadvantageous times. Reordering industry mix always seems to work best by feeding the best companies in good times and let them kick down, and not by trying to do any tightening during growth periods. However, that makes Keynesian responses to downturns kinda awkward. Places with resources like oil and copper can sorta do it, but places with resources are usually dominated by that resource and highly susceptible to disadvantageous trade circumstances…

some ideas taken from


john c. halasz 11.26.11 at 5:05 am

“lirgetime”- one way to tell a typo is to look at the adjacent letters on the keyboard. Still it’s an interesting neologism.

The U.S. unemployment rates during the Great Depression are backward constructed, but it is usually held to have peaked at 25%. (there may be some confusion between non-farm and farm rates).

The NRA was something of a successor to the RFC, not quite a new initiative. The “spontaneous” tendency to cartelize, which occurred in Germany as well as the U.S.A., was due to the fact that capital-intensive industries would experience a sharp rise in unit costs with collapsed demand, and thus price-cutting market adjustments would have made matters worse. (I don’t think Keynes mentioned this, except as “the declining marginal efficiency of capital” and “animal spirits”, but it is in line with his arguments that wage-cutting would be subject to “monetary illusion” under a deflating price-index and only serve to further reduce READ).

The WPA (gov. employment) was far more effective than the PWA (infrastructure projects) in reducing unemployment and raising READ. HOLC, among other re-financings, also deserves a mention.

The budget cut-back in ’37-38 also involved Eccles and monetary tightening. That there was an anticipated wave of CIO strikes in the offing might not have been coincidental.

The Wieimar coalitions were between the SDP and the RC center-right Center Party. The Nazis weren’t marginalized but entirely marginal, with right-populist parties taking on an increasingly anti-governmental, then “anti-constitutional” position. Only after the Depression struck did they begin to draw off support from the right-populist parties in parliament.

“By the time he fell from office in 1932, Hitler was unstoppable.”- That’s a bit too potted a history. The Nazi vote share actually declined in the last vote and Hitler was assisted in his rise to the chancellorship by traditional conservatives around the presidential rule of von Hindenburg, supported in turn by industrialists interested in cartelization. And, among other things, it shouldn’t be denied that Nazi reflation policies, in purely economic terms, largely worked, until spending turned in a largely militaristic direction after 1936, which helped to consolidate Nazi rule, despite the ideas of the conservatives and others that he would be just a useful idiot.

If you lack an umlaut on your keyboard, add an “e” after: “Bruening”.


Peter T 11.26.11 at 5:58 am

My problem with this set of stories is that they are all about finance. OK, so it’s an economics book, but surely other factors were in play – and surely getting out of the Depression involved a lot more things than just Keynesian spending? For instance, the social pathologies (high levels of political violence, entrenched and intransigent conservative/reactionary elites, a tendency to by-pass the constitution or the law and so on) were all well on display in Germany throughout the Weimar period. Much of Europe was deadlocked politically through the 20s and 30s, where it wasn’t in civil conflict. And large parts of the US economy were distinctly anaemic through the 20s – agriculture in particular.

Other people have commented on Japan. And one reason the war was so effective an escape was that it was a massive state-directed investment in NEW technologies (electronics, light engineering, vehicles, aircraft), all of which were leading sectors after the war. It was also a massive investment in training, and in building social solidarity.

Which suggests that, left to itself, the market will fail to make the leap to new forms of production, and that the inequalities and other social stresses it produces will lead to social and political deadlock or worse unless tackled politically (just to be clear, I am not advocating another war, or suggesting the Second World War was a good thing).


Walt 11.26.11 at 9:40 am

Peter, the chapter is about “expansionary austerity”, not a complete treatise on the interwar period.


Peter T 11.26.11 at 10:49 am


Point acknowledged. But if the remedy is Keynesian stimulus, then the argument has to be as much political as economic. The precedents suggest that financial stimulus alone is not the answer (although it certainly might help in the short term), and that the underlying issues are recurrent socio-political ones together with the inability of private enterprise as a system to invest in the right places.


J. Otto Pohl 11.26.11 at 12:37 pm

I am not sure what the scope of this work is supposed to be. Obviously since it makes references to the UK, New Zealand, Germany and Japan as well as the US it is not a national history. Nor is it a European history. If the history is supposed to be international then I think it should probably cover some more places than those mentioned. I think looking at the USSR as a non-capitalist state might be a good contrast. During 1932-1933 there was a devastating famine centered around Ukraine, but the years from 1934 to 1941 saw rapid industrialization and economic growth. Also what was going on in the colonies, South America, South Africa, and China would give the work a broader scope. Unless of course it is meant merely to be a history of industrialized capitalist states in the northern hemisphere plus New Zealand. Even if it is just on austerity measures in these countries I still think a comparison with the Soviet Union during the same time would be instructive. Also since the UK ruled places like India and much of Africa at the time an examination of British austerity measures on these territories could also provide some insight. But, since I am just a troll according to most CT commentators please feel free to ignore my advice.


Manoel Galdino 11.26.11 at 1:18 pm

In Brazil, Getulio Vargas, lose elections (there were frauds, many people agree) and then took power with a coup in 1930. And then he implemented Kaynesian policies (Then, Brazil main exports were based on coffee. The government bought the stockpile of coffee and burnt it, increasing the demand) . Brasil recovered before the war.


Manoel Galdino 11.26.11 at 1:19 pm

I apologize for my english… I shoud have reread before posting…


bert 11.26.11 at 1:57 pm

In one of the other threads on this I argued against including monetary policy.
But it is of course part of the context for fiscal repression in this period. DeLong has a chart. If you wanted to discuss what’s happening inside the eurozone, this might be a useful comparison.
That said, the arguments from then and now against currency devaluation are different from the expansionary austerity arguments we’re currently hearing, which seem to be more of a US/UK thing.
Even the German view of the way forward for the eurozone isn’t really expansionary austerity. It’s far more a Weisse Band type of moralising: to help you achieve virtue I will tie you to your bed.


Jasiek aka Jan 11.26.11 at 2:27 pm


While I agree with you in general, I find you rather misinterpreting the then Japan. But, at the same time I find bob mcmanus also rather misinterpreting the then Japanese economy.

Need to start with telling you of the historical background. The Manchurian Incident and the subsequent Second Sino-Japanese War were not as simple as you may have understood. Faced with the menace of the Soviet Union, those were actually an anti-Communist war in a broad sense, which was the same as the Vietnam War in this regard. The war that broke out between the Chinese military cliques in Manchuria immediately after Sun Yat-sen died in 1925 turned the land into a bloody battlefield (between the Chinese, and not with the Japanese at all then). While the Chinese were thinking Manchuria was China’s, the Russians were certain it had long been Russia’s and was partly Japan’s (i.e. The South Manchuria Railway) until the 1917 Russian Revolution. (The Manchurians, who used to rule China, had banned the Han Chinese to move into Manchuria since the 17th century. Russians had been trying to gain the entire Manchuria for the same period of time. It was not until Russia acquired Outer Manchuria in 1860 that the Manchurian dynasty allowed the Han Chinese to live in Inner Manchuria for the first time in history. Now, I suspect that you are thinking of Manchuria as having been belonging to the Han Chinese nation for centuries). Thus, the Soviet communists were looking for a chance to regain their control of Manchuria and contriving tricks to estrange the Chinese from the Japanese so that the Japanese would be completely swept out of the land first of all. (The Soviets would win the entire Manchuria two decades later. It was not until 1955 that the communist China was able to put Manchuria in its complete control). The then (Han) Chinese government came to neglect treaties that had been signed with Japan, but ‘somehow’ the US State Department refused to cooperate with the Japanese in calling for the Chinese to esteem the treaties, making the situation increasingly favourable to the Soviets and increasingly dangerous to the Japanese. It is highly probable that the then trade conflicts between Japan and the United States affected the relationship between them. Then, you will come to understand the following paragraph.

Korekiyo Takahashi was shot dead by young military officers in 1936 because he had been implementing contractionary policy-package since 1934, which included drastic cuts in military spending, in an attempt of taming inflation. The then Japanese forces, especially the army, had been full of young soldiers who had had to join up due to the then economic devastation caused by Takahashi’s radical expansionary policy-package that he had implemented during the preceding era of the Great Depression in an apparently successful attempt of boosting the aggregate demand of the Japanese economy. In practice, his expansionary policy only pushed down the market rate of interest while at the same time the marginal efficiency of capital remained extremely low. Hence, his expansionary policy mostly aggravated what Keynes calls semi-inflation, and thus Japan’s employment became increasingly ‘crooked’. It increased the aggregate demand indeed, with which Japan was the first economy that was able to put an end to the then recession, and thus increased employment in urban and industrial areas while in rural areas, especially in the Tohoku region, there were so few job opportunities there that a lot of young boys had to enlist into military services as a public project for employment just in view of outcome and a lot of young girls had to become prostitutes to work in booming urban and industrial areas. There was no other choice! Takahashi’s inelastic monetary policy, which we of today would regard as ‘American-Keynesian’ or ‘Bastard Keynesian’ (by Joan Robinson) as opposed to ‘Cambridge-Keynesian’, caused the ‘1 versus 99’ situation. Takahashi’s exit strategy, which had to be radical as a consequence of the preceding radical monetary expansion or too simple aggregate-demand control, was to create further devastating economic effects on rural areas, and, furthermore, you will easily know what drastically cutting the then military spending meant to the boys who, a few years after enlisting in the military services due to the above reason, had become young officers by then. Instead of occupying Wall Street, they shot Takahashi.

Then, the military authorities found their ‘anti-Soviet war against the Chinese military cliques’ in Manchuria or, later, China in perfect harmony with saving their families at home, including their sisters who had to abandon their principles in urban and industrial areas in exchange for money that bubble-gentlemen and factory-workers used to pay to them.


Jasiek aka Jan 11.26.11 at 2:39 pm

Takahashi’s failure came from slighting the dynamics of the quality-side of capital as opposed to that of the quantity-side. Unmeasurability of real capital or dynamic disequilibrium, that is.


Sufferin' Succotash 11.26.11 at 2:51 pm

One issue that might need discussion is the relationship between abandonment of the gold standard and the timing of economic recovery in Britain, France and the US. Isn’t it true that the sooner a country went off gold the sooner its economy began to recover?


Peter K. 11.26.11 at 6:28 pm

@17 yes the whole issue of monetary policy may require a separate chapter. My view is that it is important like fiscal policy or a lack thereof.

As I understand it the U.S. was effectively setting monetary policy for the world in the mid-twenties. Benjamin Strong of the Fed allowed a slightly looser monetary policy to help the U.K. adjust to going back on the gold standard (as Germany should do for Italy and the GIIPS). Then Strong died and the Fed did little to help after the crash of 1929. I recently reread Ahamed’s Lords of Finance about this period seeing as we seem to be repeating history.

Post-WWII inflation helped with deleveraging wartime debts. There was also Cold War military Keynesianism.


StevenAttewell 11.26.11 at 11:59 pm

Halasz is quite right about WPA vs. PWA. The WPA created 3.5 million jobs at a cost of 55 cents per man-hour created, the PWA created only 1 million jobs at $1.12 per man-hour.

And I think we need to be more nuanced about how we portray New Deal spending. It was sufficient to bring unemployment from ~25% to 9% in four years, and to create average GDP growth of at least 8% a year. Yes, there was a ’37 recession, but we need to acknowledge the incredibly dramatic recovery on either side of it.


Jasiek aka Jan 11.27.11 at 12:26 am

@17-18: I suppose expansionary austerity is a result of the Triffin paradox coming from using the US dollar as the de facto reserve currency. The paradox is theoretically evitable by means like introducing Bancor but, as Kalecki differs with Keynes’ optimism, politically inevitable in this real world. (@17: Japan, which later (nominally) recovered the fastest in the world, abandoned gold standard in December 1931, earlier than the other economies but Britain which abandoned gold standard in September 1931).


John Quiggin 11.27.11 at 2:42 pm

For those who came in late, this is a draft chapter from the new edition of my Zombie Economics book, which is about ideas that should have been killed by the Global Financial Crisis, but have in fact been revived.

It’s not intended as a comprehensive history of anything, or as a complete analysis of macroeconomic policy, but of course I want to get the history right as well as the economics. So, thanks to everyone for the very valuable comments and suggestions they’ve made.

I don’t mean to discourage people from pointing to issues that need more coverage, but in practice many of them will have to wait for another book.

Given the constraints, discussion of monetary policy is going to be limited and somewhat shoehorned into this chapter, primarily in discussion of the current role of the ECB.


Alex 11.27.11 at 8:31 pm

I think there should be more on the monetary side; Philip Snowden may not deserve his hilltop monument, but it is true that the UK was the first off gold and the first out of the Depression. Similarly, Roosevelt took the plunge and of course went further with George F. Warren’s policy of dollar devaluation.

On the other side, of course, Germany didn’t officially go off gold but they did render it irrelevant administratively and use that to implement Schacht’s policy. (Oddly enough, that’s rather what the UK did in the first world war – didn’t officially go off gold, did make it very very difficult to operate in gold standard terms.)


shah8 11.27.11 at 11:40 pm

Hey Quiggin,

mix and match this interview…

With all those expansionary austerity peeps back in the thirties. Also, I think the Young and Marshall Plans might be of interest in thinking about what a unified fiscal policy might be like, or not.

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