Sunday, November 02, 2008
Don't just do something. Stand there.
On at least a dozen occasions, I've alerted Creeder Readers that B. Hussein Obama's policy prescriptions for our ailing economy, i.e, higher marginal and cap-gains taxes, protectionism, ankle-grabbing on behalf of unions, trillions in new spending, etc., mirror what Herbert Hoover did in 1932 to turn a deep recession into the Great Depression, and what FDR did from 1933-37 to trigger a depression within the Depression.
In Friday's Wall Street Journal, Professor Russell Roberts tells us 'bout the blunders of '32 and '33-37, and tells us why the best course of action at this point might be a little inaction (fat chance that'll ever happen with the Second Coming in the White House). To wit:
People ask me if the current mess feels like 1929. But the right comparison is 1932, when Herbert Hoover was desperately trying anything, anything at all, to get the economy going. The stock market had crashed. The economy was starting to follow it down. So what did Hoover and his fellow policy makers do?
In 1930, Congress passed a massive tariff increase, in hopes of protecting American jobs. Hoover signed it. But it simply accelerated the economy's slide. The Federal Reserve contracted the money supply, taking a recession and making it into a depression. By 1932, real GDP was 25% lower than three years earlier.
Hoover increased federal spending steadily, including an increase in real terms of about 40% in 1932. At the same time, fearful that deficits were harmful, Hoover raised income taxes.
Nothing worked. So Franklin Roosevelt came into office pledging stronger medicine. Enter even bigger increases in government spending. Government nationalization. Bigger deficits. Destruction of crops and livestock in the name of raising prices. Government-organized cartels. A greater empowerment of unions. It was a whirlwind of activity without any real plan.
It worked for a while, but then, in 1938, the economy turned sour again. Unemployment, which had been falling, spiked again, reaching 19%. Consumption didn't recover to its prewar levels until 1945. ...
A recession is coming (or has already arrived) no matter what happens in Washington. The question is whether the attempt to forestall it is going to make it worse and turn it into another Great Depression.
By acting without rhyme or reason, politicians have destroyed the rules of the game. There is no reason to invest, no reason to take risk, no reason to be prudent, no reason to look for buyers if your firm is failing. Everything is up in the air and as a result, the only prudent policy is to wait and see what the government will do next. The frenetic efforts of FDR had the same impact: Net investment was negative through much of the 1930s.
The next administration is unlikely to do any better. Mr. Bernanke is perhaps the greatest living authority on the Great Depression, yet he has failed to stem the damage. Messrs. Paulson and Bernanke are confronted with a sick patient. They have antibiotics. They have a scalpel. But is there any evidence from the last seven months that they understand the underlying cause of the illness, or how to cure it?
Worst of all are the political incentives that are unleashed when Washington promises to spend a trillion dollars (and counting). No one can spend such money wisely even if they want to. The information about who needs to be bailed out and who needs to fail is too complicated. Inevitably, such decisions will begin to be more about politics than economics.
The banks were first. Then the insurance companies. The car makers are getting a cut. Who's next? The governors, probably. Homeowners are waiting. Then there will be the hedge funds. Once the line forms, companies will stop trying to save themselves and focus on being saved by Washington. The resulting spiral will be devastating.
Unfortunately, there is no consensus about a preferable alternative. The economists are almost as clueless as the politicians. At such a time, inaction may be the wisest course of action.
Read the entire op-ed here.
In Friday's Wall Street Journal, Professor Russell Roberts tells us 'bout the blunders of '32 and '33-37, and tells us why the best course of action at this point might be a little inaction (fat chance that'll ever happen with the Second Coming in the White House). To wit:
People ask me if the current mess feels like 1929. But the right comparison is 1932, when Herbert Hoover was desperately trying anything, anything at all, to get the economy going. The stock market had crashed. The economy was starting to follow it down. So what did Hoover and his fellow policy makers do?
In 1930, Congress passed a massive tariff increase, in hopes of protecting American jobs. Hoover signed it. But it simply accelerated the economy's slide. The Federal Reserve contracted the money supply, taking a recession and making it into a depression. By 1932, real GDP was 25% lower than three years earlier.
Hoover increased federal spending steadily, including an increase in real terms of about 40% in 1932. At the same time, fearful that deficits were harmful, Hoover raised income taxes.
Nothing worked. So Franklin Roosevelt came into office pledging stronger medicine. Enter even bigger increases in government spending. Government nationalization. Bigger deficits. Destruction of crops and livestock in the name of raising prices. Government-organized cartels. A greater empowerment of unions. It was a whirlwind of activity without any real plan.
It worked for a while, but then, in 1938, the economy turned sour again. Unemployment, which had been falling, spiked again, reaching 19%. Consumption didn't recover to its prewar levels until 1945. ...
A recession is coming (or has already arrived) no matter what happens in Washington. The question is whether the attempt to forestall it is going to make it worse and turn it into another Great Depression.
By acting without rhyme or reason, politicians have destroyed the rules of the game. There is no reason to invest, no reason to take risk, no reason to be prudent, no reason to look for buyers if your firm is failing. Everything is up in the air and as a result, the only prudent policy is to wait and see what the government will do next. The frenetic efforts of FDR had the same impact: Net investment was negative through much of the 1930s.
The next administration is unlikely to do any better. Mr. Bernanke is perhaps the greatest living authority on the Great Depression, yet he has failed to stem the damage. Messrs. Paulson and Bernanke are confronted with a sick patient. They have antibiotics. They have a scalpel. But is there any evidence from the last seven months that they understand the underlying cause of the illness, or how to cure it?
Worst of all are the political incentives that are unleashed when Washington promises to spend a trillion dollars (and counting). No one can spend such money wisely even if they want to. The information about who needs to be bailed out and who needs to fail is too complicated. Inevitably, such decisions will begin to be more about politics than economics.
The banks were first. Then the insurance companies. The car makers are getting a cut. Who's next? The governors, probably. Homeowners are waiting. Then there will be the hedge funds. Once the line forms, companies will stop trying to save themselves and focus on being saved by Washington. The resulting spiral will be devastating.
Unfortunately, there is no consensus about a preferable alternative. The economists are almost as clueless as the politicians. At such a time, inaction may be the wisest course of action.
Read the entire op-ed here.
# posted by Joltin' Django @ Sunday, November 02, 2008 
