The Great Depression

The Great Depression is probably one of the most misunderstood events in American history. It is routinely cited as proof that unregulated capitalism is bad, and that only a massive welfare state, huge amounts of economic regulation, and other interventions, can save capitalism from itself. Among the many myths surrounding the Great Depression are that Herbert Hoover was a laissez faire president and that FDR brought us out of the depression. What caused the Great …

…key insight into the difficulties of managing the economy was made by Robert Lucas. Looking at post-World War II business cycles, he argued that if one could choose between smoothing out the cycles completely and increasing the annual economic growth by 0.1%, the latter would make people better off overall. As we consider the different policy options, it is important to keep this insight in mind as one more trade off that has to be considered.