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September 26, 2008
Hopeless
Don Boudreaux
Here's a letter that I sent on Wednesday to the Wall Street Journal:
You introduce several letters on Amity Shlaes's interpretation of the New Deal with this headline: "New Deal Brought Hope, but Not End of Depression" (Sept. 24).
Some "hope." The New Deal - as convincingly argued by Ms. Shlaes, by professional economic historians such as Robert Higgs, and by most of your letter-writers - deepened and prolonged the Depression. Any "hope" that ordinary Americans found in the New Deal was as justified as the hope that the Trojans found in the apparent retreat of the Greek army and its gift of a large wooden horse.
Sincerely,
Donald J. Boudreaux
Posted by Don Boudreaux in History, Myths and Fallacies, The Economy | Permalink
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I was making this argument to a socialist friend, who pointed me to this graph of GDP in the period:
http://upload.wikimedia.org/wikipedia/commons/d/da/Gdp20-40.jpg
and was basically saying it showed the New Deal at least did no harm.
Unemployment figures notwithstanding, how would Ms. Schlaes, or you, answer a hostile question about this graph?
Posted by: Ben Clark | Sep 26, 2008 6:41:01 PM
Ben,
GDP is a flawed Keynesian, consumption statistic. Read some of these.
george reisman
Peter Boettke
Frank Shostak
DW MacKenzie
Posted by: Oil Shock | Sep 26, 2008 7:11:49 PM
The graph also does not show the counter factual, which, of course, does not exist.
Posted by: dave smith | Sep 26, 2008 7:28:32 PM
This is why I love the web. Everyone is on record and their future predictions and advice can be judged against a backdrop of their past writings.
Amity Shlaes is a a good Monday morning quarterback regarding the Great Depression but her writings don't show much foresight into predicting this one. She seems a committed supply sider in spite of our current turmoil but I must say she does deserve credit for pointing out the complicity of Fannie and Freddie here as early as 2001.
However, most of her writings are dismissive of others concerns regarding sub-prime lending and predatory lending. It's pretty much let the market rip and be dammed with the consequences.... and indeed now we are.
Posted by: muirgeo | Sep 26, 2008 7:28:45 PM
Bill Bonner has an inimitable writing style. He is all doom and gloom, and humorous at the same time. Here is a snippet of an essay I read a couple of years ago. Found it very hilarious. Bonner is the author of "Empire of Debt: Rise of an Epic Financial Crisis", and "Financial Reckoning Day: Surviving the Soft Depression of the 21st Century".
In the early 20th century, John Maynard Keynes came up with a new idea about economics. The politicians loved it; Keynes explained how they could meddle in private affairs on a grand scale - and, of course, make things better. Keynes argued that a government could take the edge off a business recession by making more credit available when money got tight...and by spending itself to make up for the lack of spending on the part of consumers and businessmen. Keynes suggested, whimsically, hiding bottles of cash all around town, where boys might find them, spend the money, and revive the economy.The new idea caught on. Soon economists were advising all major governments about how to implement the new “ism.” It did not seem to bother anyone that the new system was a fraud. Where would this new money come from? And what made anyone think that the economists’ judgment of whether it made sense to spend or save was better than individuals? All the Keynesians had done was to substitute their own guesses for the private, personal, economic opinions of millions of ordinary citizens. They had resorted to what Franz Oppenheimer called “political means,” instead of allowing normal “economic means” to take their own course.
The economists wanted what everyone else wants - power, prestige, women (except for Keynes himself, who preferred men). And there are only two ways to get what you want in life, dear reader. There are honest means, and dishonest ones. There are economic means, and there are political means. There is persuasion...and there is force. There are civilized ways...and barbaric ones. The economist is a harmless crank as long as he is just peeping through the window. That is what we do here at The Daily Reckoning. But when he undertakes to get people to do what he wants - either by offering them money that is not his own...by defrauding them with artificially low interest rates...or by printing up money that is not backed by something of real value (such as gold)...he has crossed over the dark side. He has moved to political means to get what he wants. He has become a jackass.
Keynesian improvements were applied in the ‘20s - when Fed governor Ben Strong decided to give the economy a little “coup de whiskey” - and later in the ‘30s when the stockmarket was recovering from the hangover. The results were predictably disastrous. And along came other economists with their own bad ideas. Rare was the man, like Robert Lucas or Murray Rothbard, who pointed out that you could not really improve economic results with political means. If a national assembly could make people rich simply by passing laws, we would all be billionaires, because assemblies have passed a multitude of laws and seem capable of enacting any piece of legislation brought before them. If laws could make people wealthy, some assembly somewhere would have found the magic edicts - simply by chance.
Posted by: Oil Shock | Sep 26, 2008 7:43:22 PM
According to the article, Ms. Shlaes, looks more like Nostradamus than the Monday morning quarterback (not that I put much stock in the historical figure—there will be a war in the future with people in turbans (oh thank you Michelle!). Anyway, the facts remain, this is stupid. FDR had four terms to make the Depression right and he failed across the board, while abridging civil, economic, and personal liberties. I can never forgive him for threatening to pack the Supreme Court. Thank you for your fireside chats, your insistence on limiting production did nothing but impoverish the American people. I would compare you to another American President, but you only remind me of Cromwell.
Posted by: The Albatross | Sep 26, 2008 7:57:02 PM
According to the prevailing Keynesian dogma, consumption is the main form of spending in the economic system, while saving is mere nonspending and thus a "leakage" from the spending stream.
I suppose most spending is "investment" from someone's perspective. After all, the same dollar I spend on the consumption of food is first my employer's investment in my labor.
Regardless, Keynes never said that saving and investment are "mere nonspending" or "'leakage' from the spending stream". He spends two chapters defining "saving and investment" in The General Theory and defines the terms more or less as Reisman does, so I have no idea what Reisman is talking about.
Posted by: Martin Brock | Sep 26, 2008 7:58:25 PM
If a national assembly could make people rich simply by passing laws, we would all be billionaires ...
National assemblies pass laws making people rich all the time without making everyone billionaires. Making everyone rich is precisely what they cannot do, but they can certainly make a few people rich.
Posted by: Martin Brock | Sep 26, 2008 8:06:52 PM
Keynes argued that a government could take the edge off a business recession by making more credit available when money got tight...
A business recession occurs when productive resources organized unprofitably disassociate from the unprofitable organizations and float around in the sea of liquid capital until they interact and bond with more profitable organizations that can make more productive use of them. Credit is often part of this reorganization and well it should be.
This reorganization is precisely what we want, but simply extending credit does not guarantee a profitable organization. We don't want to guarantee yields by substituting entitlement to tax revenue for the yield of credit that hasn't resulted in profitable organization. Some credit will always fail in this way. We must expect these failures. The solution to this problem is another liquidation of resources followed another recrystalization catalyzed be creditors.
Financial organizations extending credit unprofitably must also dissolve and reorganize. We're not trying to prevent this liquidation to protect established entitlements. The corporate officers now entitled to extend credit want to keep their offices despite their failure to profit. We instead want their organizations to dissolve, and we want their resources to join other organizations or to form new organizations to extend credit.
Posted by: Martin Brock | Sep 26, 2008 8:27:35 PM
We're now trying to prevent this liquidation ...
Posted by: Martin Brock | Sep 26, 2008 8:28:52 PM
Unemployment figures notwithstanding, how would Ms. Schlaes, or you, answer a hostile question about this graph?
Here's how I would answer it: Something is fishy with that graph. I collected a similar graph available here:
http://www.studybuddy.org/picture.asp?picture=39
First point: Anyone claiming to adjust for inflation that far back should know that the adjusted values should be taken with a grain of salt.
Second point: The graph from your friend shows the economy to have recovered its 1929 peak as early as 1937. According to my graph, it didn't recover that point until 1941. I got my numbers from BEA.
So it comes down to whether you believe the dollar was worth more in 1937 than in 1929.
Here's a graph that tries to capture the century from 1910, but the depression-era numbers are too small to show up:
http://www.studybuddy.org/picture.asp?picture=155
Posted by: Henri Hein | Sep 26, 2008 8:51:04 PM
Also, any Keynesian claiming that the war expenditures were the end of the depression should be corrected. The economy started growing at its former pace in 1939. The war expenditures didn't start until 1941.
http://www.studybuddy.org/picture.asp?picture=40
Posted by: Henri Hein | Sep 26, 2008 8:56:49 PM
I suppose most spending is "investment" from someone's perspective. After all, the same dollar I spend on the consumption of food is first my employer's investment in my labor.
Labor costs are not an employers investment.
Posted by: I_am_a_lead_pencil | Sep 26, 2008 9:28:07 PM
I don't see how my labor could not be my employer's investment, since he pays for it, and it needn't yield him anything.
Posted by: Martin Brock | Sep 26, 2008 10:18:53 PM
Politics.
Just watched the most TV I have in years by watching the so-called presidential debate.
How the fuck did America wind up with two yahoos like Obama and McCain as the only two realistic prospect for president for the next four years?
We are in serious trouble.
Posted by: vidyohs | Sep 26, 2008 10:59:42 PM
Labor ultimately is the cost of production of anything, but yes, the cost of labor can be considered as part of a business investment.
For many entrepreneurs, their labor is the main investment.
Posted by: Sam Grove | Sep 27, 2008 12:48:27 AM
For many entrepreneurs, their labor is the main investment.
Agreed. They often require credit, like home mortgages. Employers often require shorter term credit to pay employees. I have no problem with extending them credit. I do have a problem with entitling unprofitable organizations to repay their credit with tax revenue, particularly when these organizations are in the business of extending credit themselves. Failure or downsizing of these organizations is not a systemic catastrophe.
Posted by: Martin Brock | Sep 27, 2008 2:36:30 AM
I do have a problem with entitling unprofitable organizations to repay their credit with tax revenue,
You could be talking about the government.
Posted by: Sam Grove | Sep 27, 2008 10:33:40 AM
Most of this video is true. Of course a lot of the blame belongs to the Fed and Bush administration as well. But it is a very interesting video on CRA.
Posted by: Oil Shock | Sep 27, 2008 10:58:56 AM
This is a letter I wrote and that they published in the Financial Times, August 23, before FT silenced me. I bring it forth not so much as speaking against any assistance to be provided to the market but as a reminder that there are always two sides to a story.
Long-term benefits of a hard landing
Sir, While you correctly argue (“Hard edge of a soft landing for housing”, August 19,) that “even if gradual, a global housing slowdown would be painful” you do not really dare to put forward the hard truth that the gradualism of it all could create the most accumulated pain.
Why not try to go for a big immediate adjustment and get it over with? Yes, a collapse would ensue and we have to help the sufferer, but the morning after perhaps we could all breathe more easily and perhaps all those who, in the current housing boom could not afford to jump on the bandwagon, would then be able to do so, and take us on a new ride, towards a new housing boom in a couple of decades.
This is what the circle of life is all about and all the recent dabbling in topics such as debt sustainability just ignores the value of pruning or even, when urgently needed, of a timely amputation.
Posted by: Per Kurowski | Sep 27, 2008 11:05:12 AM
Sorry for the bad link in the earlier post.
Posted by: Oil Shock | Sep 27, 2008 11:09:20 AM
I can never forgive him for threatening to pack the Supreme Court.
Posted by: The Albatross
Again the economy grew much faster after FDR then Reagan. And no Great Depression occurred like the last two that have followed Republican rule of a bit too long. I guess we're gonna have to repeat this cycle a third time before the "believers" see the light of reality.
And he wasn't packing the court he was unpacking the court. You need to review the history a little more.
Posted by: muirgeo | Sep 27, 2008 7:47:03 PM
Are those our only two options, FDR style or Reagan style? If all you have is a false dichotomy, no wonder the same cycle is repeating itself.
Posted by: Nathan Byrd | Sep 27, 2008 8:35:44 PM
muirgeo says:
"And he wasn't packing the court he was unpacking the court. You need to review the history a little more."
Who's version of history?
Posted by: Babinich | Sep 27, 2008 11:30:54 PM
That's like unpacking your suitcase by adding more clothes.
Really, George, I'm almost literally on the edge of my seat waiting to hear you explain this one. Don't disappoint me. Let's hear it.
Posted by: Hans Luftner | Sep 28, 2008 12:02:22 AM
The claim is that he threatened to pack the court.
Facts can be slippery things. History, and even current events are subject to interpretation.
Muigeo brings us the progressive interpretation, our school books give us "approved" interpretations, and of course, conservative give us theirs as well.
The libertarian interpretation is at variance with the above.
The progressive interpretation is: business bad, government good...when we run it.
The conservative interpretation:
business good, government bad...except when we run it.
Now we all acknowledge that humans must have some mechanism for co-ordinating certain activities.
Liberals and conservatives agree on the coercive mechanism of the state, but for different ends.
Libertarians take issue with the coercive mechanism of the state for 'regulating' society.
We hold that society does not need regulating for progressive or conservative ends, but that society should be allowed to operate in free flux regulated only by recognition and defense of the equal rights of all individuals, that terms like "society" and "nation" are but abstractions, and that all that exists in the world are individuals and their behaviors.
Posted by: Sam Grove | Sep 28, 2008 12:32:19 AM
Albatross -
Being Irish, it pains me to say this, but: I believe you have unfairly maligned Cromwell.
Posted by: Valens | Sep 28, 2008 1:06:10 PM
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