Tuesday, September 07, 2010


My comments are in italics. This is bad comedy.

Published: September 5, 2010

Here’s the situation: The U.S. economy has been crippled by a
financial crisis. The president’s policies have limited the damage,
but they were too cautious, and unemployment remains disastrously
high. More action is clearly needed. Yet the public has soured on
government activism, and seems poised to deal Democrats a severe
defeat in the midterm elections.

The policies have not limited the damage. The 1.2 Trillion in "Stimulus" and directed ZIRP policy to the Fed was not cautious. I agree the public has soured on the government's actions, and rightly so.

The president in question is Franklin Delano Roosevelt; the year is
1938. Within a few years, of course, the Great Depression was over.
But it’s both instructive and discouraging to look at the state of
America circa 1938 — instructive because the nature of the recovery
that followed refutes the arguments dominating today’s public debate, discouraging because it’s hard to see anything like the miracle of the 1940s happening again.

Ah, very good, a historical curve ball. But do the events that dominate the 1940s qualify as a "miracle" in the Theological sense of the word?

Now, we weren’t supposed to find ourselves replaying the late 1930s.
President Obama’s economists promised not to repeat the mistakes of
1937, when F.D.R. pulled back fiscal stimulus too soon. But by making his program too small and too short-lived, Mr. Obama did just that: the stimulus raised growth while it lasted, but it made only a small dent in unemployment — and now it’s fading out.

There were "significant events" during FDR's administration (covered below) that made "fiscal stimulus" a necessity.

And just as some of us feared, the inadequacy of the administration’s initial economic plan has landed it — and the nation — in a political trap. More stimulus is desperately needed, but in the public’s eyes the failure of the initial program to deliver a convincing recovery has discredited government action to create jobs.

What causality are we talking about? The public's perception leads to job creation by fiscal stimulus? The public would not presumably be against large tax cuts that would stimulate the economy grom the bottom up.

In short, welcome to 1938.

The story of 1937, of F.D.R.’s disastrous decision to heed those who
said that it was time to slash the deficit, is well known. What’s less well known is the extent to which the public drew the wrong
conclusions from the recession that followed: far from calling for a
resumption of New Deal programs, voters lost faith in fiscal

The Kyhber Pass approach to economic policy. Perhaps the public's rejection of New Deal programs was because top-down stimulus efforts are far, far less efficient than bottom up Fiscal Stimulus via tax cuts, putting more funds in the pockets of individuals to choose where to properly allocate resources via price mechanisms.

Consider Gallup polling from March 1938. Asked whether government
spending should be increased to fight the slump, 63 percent of those
polled said no. Asked whether it would be better to increase spending or to cut business taxes, only 15 percent favored spending; 63 percent favored tax cuts. And the 1938 election was a disaster for the Democrats, who lost 70 seats in the House and seven in the Senate.

My goodness...what will the unwashed masses think of next?

Then came the war.

From an economic point of view World War II was, above all, a burst of deficit-financed government spending, on a scale that would never have been approved otherwise. Over the course of the war the federal government borrowed an amount equal to roughly twice the value of G.D.P. in 1940 — the equivalent of roughly $30 trillion today.

I am speechless. If only we had an immense war, public opinion regarding fiscal stimulus would shift towards enormous government spending, and that is the best policy?

Had anyone proposed spending even a fraction that much before the war, people would have said the same things they’re saying today. They would have warned about crushing debt and runaway inflation. They would also have said, rightly, that the Depression was in large part caused by excess debt — and then have declared that it was impossible to fix this problem by issuing even more debt.

Once again, if only the unwashed masses could understand that Government should be given carte blanche to spend and do as it wishes without compunction, check, or limitation.

But guess what? Deficit spending created an economic boom — and the
boom laid the foundation for long-run prosperity. Overall debt in the economy — public plus private — actually fell as a percentage of
G.D.P., thanks to economic growth and, yes, some inflation, which
reduced the real value of outstanding debts. And after the war, thanks to the improved financial position of the private sector, the economy was able to thrive without continuing deficits.

Yay war!

The economic moral is clear: when the economy is deeply depressed, the usual rules don’t apply. Austerity is self-defeating: when everyone tries to pay down debt at the same time, the result is depression and deflation, and debt problems grow even worse. And conversely, it is possible — indeed, necessary — for the nation as a whole to spend its way out of debt: a temporary surge of deficit spending, on a sufficient scale, can cure problems brought on by past excesses.

Ah, the real reason for this article. This is no different from Hegal and Machiavelli genuflecting and legitimizing the actions of Frederich Willliam III and King Ferdinand, respectively. This article is an advertisement for top-down deficit spending, the preferred method of Fiscal stimulus as Government holds the purse strings. Tax cuts and mortgage forgiveness would be much better policy options to combat austerity, but have the unfortunate property of rendering Government action moot.

But the story of 1938 also shows how hard it is to apply these
insights. Even under F.D.R., there was never the political will to do what was needed to end the Great Depression; its eventual resolution came essentially by accident.

The unwashed massed are wrong, the cloistered elite are right. Arrogance.

I had hoped that we would do better this time. But it turns out that
politicians and economists alike have spent decades unlearning the
lessons of the 1930s, and are determined to repeat all the old
mistakes. And it’s slightly sickening to realize that the big winners in the midterm elections are likely to be the very people who first got us into this mess, then did everything in their power to block action to get us out.

Then write a book, run for election, declare yourself chancellor, and start a war! Just ignore those pesky plebians who lack the "triumphant will" to do what is necessary.

But always remember: this slump can be cured. All it will take is a
little bit of intellectual clarity, and a lot of political will.
Here’s hoping we find those virtues in the not too distant future.


(ADDENDUM) The Deficit spending during WWII that created the Krugman "miracle" had the advantagous condition of an untouched supplier of post-war industrial and consumer goods (the U.S.) coupled with large swathes of populations that required these goods (The rest of the developed world). Where is this corresponding relationship in Krugman's analysis?

1 comment:

The Arthurian said...

Do me next! Do me next!