We are making some of the same economic policy mistakes today that caused the Great Depression of the 1930s.
The Japanese Disease
There is a proxy battle going on in the media and blogosphere between a Nobel winning economist and a writer on economics about the most important issue we face about the economic crisis: will government fiscal stimulus work? The argument is phrased around the idea that it worked for the Great Depression and it will work now.
It didn’t work then and it won’t work now.
On one side is Nobel economics laureate, NYU Professor Paul Krugman who has the New York Times on his side–he writes a column for them. On the other side is Amity Schlaes, a writer about economics, and the author of The Forgotten Man, a new history of the Great Depression.
By proxy, I mean that the war is being fought not only by TV appearances and articles published by both parties, but by their supporters through blogs, news articles, and letters to the editor. The fight seems to be mainly from the Krugman side. Schlaes is characterized as being a lightweight, tendentious, sloppy, a tool of the right wing, and, because of Krugman’s stature, that it’s not even a fair fight. She’s being smeared. And by smearing her, ridicule is given to the idea that FDR didn’t save us from the Depression.
The liberal argument is that FDR saved us from the Great Depression by, among other things, fiscal stimulus. By stimulus these advocates mean massive government deficit spending to “kick start” the economy. Damn the cost and the consequences. The metaphor is “let’s save the patient first; then we can talk about the rest.” Most economists today adopt this Keynesian concept, including economists advising Bush and Obama.
Schlaes, and many others, argue that such stimulus didn’t get us out of the Great Depression. Schlaes illustrates in her book how Hoover and Roosevelt took a garden variety market crash and recession and made it a decade-long depression. Furthermore, there’s no evidence that massive government spending will work. Many argue that it will make it worse.
Schlaes, in her well written and documented book argues successfully that Hoover’s and FDR’s policies didn’t end the Depression. FDR doubled federal spending, yet, despite his massive intervention, by 1938 unemployment shot back up to almost 20%. FDR’s hatred of business and his power grab led to a mishmash of policies that were admittedly experimental. His government-run industries, oppressive regulation, anti-competitive cartels, central planning, erratic tax policy, and war against businesses and businessmen, kept everyone off base as he consolidated his power. It destroyed business, profits, and incentive, and caused massive unemployment and poverty.
Most of the argument that fiscal stimulus works comes from economist J. M. Keynes. Krugman is a leading Keynesian proponent. They have yet to provide any evidence of that. Krugman says:
“F.D.R. did not, in fact, manage to engineer a full economic recovery during his first two terms. This failure is often cited as evidence against Keynesian economics, which says that increased public spending can get a stalled economy moving. But the definitive study of fiscal policy in the ’30s, by the M.I.T. economist E. Cary Brown, reached a very different conclusion: fiscal stimulus was unsuccessful ‘not because it does not work, but because it was not tried.’”
While he’s right about FDR’s failures, he offers no credible evidence of efficacy of massive deficit spending. He’s just engaging in polemics to sway his audience. Perhaps as Nobel laureate he believes his pronouncements are the final word on a subject. Brown in this 1956 paper said FDR’s fiscal stimulus didn’t work. Brown offers no empirical evidence for his conclusion that if there had been more spending it would have worked. If this is the “definitive” empirical work on the subject, their argument is bogus. Apologists for failed policy always say the policy wasn’t implemented the right way.
However there is very good evidence that such policies don’t work. The Great Depression aside, there is the “Japanese disease.” The Japanese descended into recession in 1991 after an inflationary real estate bubble burst and, despite massive deficit spending on infrastructure, the propping up of banks and insurance companies, and a nearly zero “fed funds” rate, their economy languished for 10 years. Sound familiar?
The stakes are too high to let this go unchallenged. We can’t assume that just because these leaders are in the majority they are right. There are many economists who believe the programs now being pursued by the Bush Administration and proposed by Obama are very wrong. Just because “everyone” believes the fairy tale doesn’t make it true.
The cures now being proposed by our political and economic leaders have enormous consequences for all of us if they get it wrong. The most likely scenario will ultimately be the Japanese disease: recession and economic stagnation.
Considering the immense damage already done to the economy as a result of the actions of our economic and political leaders, why should we listen to them now?
[...] Japanese DiseaseWhat's Wrong With Mark-to-Market?Why the 'Do Something' Stimulus Bill Won't WorkThe Most Important Economic Issue of the CenturyWhy You Should Ignore EconomistsWhat Is Money ? Part IWhat Is Money? Part II–A FableThe Economy in [...]
We shouldn’t listen to economists now in place to advise BHO because they do not work for the President, or the People they’ve sold their loyalty to the International Banking Cartel, (Bank of International Settlement-BIS, Rothschild of Germany, Switzerland and England and in this country Goldman Sachs.)
The most important economic issue of this or any other century is the control of monetary policy. As you know, since 1913 control of monetary policy, for the U.S.,was arguablly legislated in favor of the private sector rather than remain as a Consitutional right of the Congress–therefore, the People.
In that year the persuasive central bank acolytes: mainly Bernard Barauch,convinced Woodrow Wilson that a central bank would stabilize the economy, eliminating the vagaries of speculator impacts on the supply of money and the manipulation of interest rates. President Wilson bought into the false rationale. Wilson regretted his acquiesence.
All fiscal policy, particularly in the U.S. today, is governed by monetary policy. As such, Congress and the Executive must go hat in hand to the Central Bank for approval of strategies to finance the commons. While it is unrealistic to expect the a legislative or Presidentially mandated elimination of the central bank, it is not beyond the realm of possibility that it’s influences can be substantially reduced.
The primary example is the State Bank of N. Dakota. For more please visit: http://www.truthout.org/1031091
No other organization or set of economic policies has done more harm to the economic prosepects of Americans than the Federal Reserve’s control of liquidity. Even Bernanke admits that the Fed could have released more money to avoid the consequences of the Great Depression. Ironically, while the Fed is flooding the economy with credit again, banks and consumers are extremely reluctant to lend and borrow. Deflation is on the horizon and the almighty Fed can do absolutely nothing about it.
However, if every state had its own Chartered State Bank, there would be no threat of inflation/deflation because not only would State Banks be accoutable, they would also be a great deal more conservative in all of its operations.
PLEASE SEE THE COMPLETE DISCUSSION ON THE EFFICACY, LEGAL ORIGINS, AND OTHER ISSUES CONCERNING STATE BANKS: http://www.truthout.org/1031091
The ONLY example is the State Bank of N. Dakota chartered over 90 years ago.
Rob:
I couldn’t disagree more. I don’t like the Fed, but I am familiar with line of thinking and basically it’s junk economics, in my humble opinion. FYI, studies show that the Fed almost always goes along with the current administration. And, are you saying you want Congress to directly control the money supply? You think they represent the people. Not likely. Do away with private banks? That’s not a very free market position. See my articles on money. I’ve met Ellen Johnson and I don’t think she makes a lot of sense.
[...] Japanese DiseaseWhat's Wrong With Mark-to-Market?Why the 'Do Something' Stimulus Bill Won't WorkThe Most Important Economic Issue of the CenturyWhy You Should Ignore EconomistsWhat Is Money ? Part IWhat Is Money? Part II–A FableThe Economy in [...]
Ok. What’s junk about the approach Dr. Brown, not Johnson proposes? Remember, the Constitution. The Constitutional monetary system only controls the government’s use of money.
Article I, Section 8 says “Congress shall have Power…To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures”.
Does this not imply that our money shall be of fixed value, not subject to regulation by an entity such as the Federal Reserve?
Neither I nor Dr. Brown in anyway suggest that private banks be eliminated. On the contrary, private banks are absolutely necessary. However, a single State owned bank that functions like the State Bank of N. Dakota, would be progress for all the other states where the State bank works collaboratively with the commercial banks to buy down interest rates, etc.
The problem with banking is that it and the money supply is controlled by the government and by that I include the Fed. Why anyone would want more government run enterprise in the form of banking, I don’t know. The problem is the lack of a gold standard and fractional reserve banking. I suggest you read Rothbard, What Has the Government Done to Our Money? and The Case against the Fed. And, the Fed is not really an independent institution; it has always followed the wishes of the administration in power.
I’m wondering what Jeff thinks about the Japan analogy a few months later.
Jeff thinks it still holds. I’ve written about this quite a bit: The Japanese Disease, Will We Have a Lost Decade Like Japan? (which compares the U.S. and Japan), and Japan’s Government Encourages Unemployment. You may also wish to read my year end economic review: State of the Economy 2010.